Why do we put money aside in our Thrift Savings Plan? So that we can take it out of the TSP throughout our retirement, that’s why. While we are working, our focus is on accumulating as much as we can in the TSP so that it can supplement our federal annuity and our Social Security. If we are diligent savers, we might have accumulated a substantial nest egg by the time we need the money. In addition, our TSP funds usually continue to receive earnings even though we are no longer contributing. (While I’ve read about “TSP Millionaires” – I must admit that I’ve never actually met one.)
At some point, we will begin hitting our TSP for income. When we start withdrawals, we do an about face, and instead of accumulating money, we engage in preserving money so that it will last for as long as we expect to need it. In good years, our TSP balance might actually grow even though we are taking distributions. In bad years, it will shrink more than we expected.
Some retirees will focus on the value of their TSP at retirement and will get nervous when the balance goes down. Unless you plan to leave your Thrift Savings Plan account to your heirs, it’s supposed to go down over time. Your ultimate goal should be to have money (but not too much money) in your TSP at the time you draw your last breath.
Having a withdrawal strategy after retirement is every bit as important (some might say it is more important) as having a contribution strategy while working. There are many strategies that folks use to guarantee (or come close to guaranteeing) that they will not run out of money while we need it.
Three of them bear mentioning:
1. Following the IRS life expectancy table. This is one of the installment payment choices that the TSP offers. If you roll your TSP over to an IRA, you can also follow a life expectancy based strategy. Each year your distributions are determined by your age and your account balance. In good years, when you have a high account balance, you’ll get more and in poor years, when your balance is not as robust, you’ll get a smaller amount. The uniform life expectancy (used by the TSP) extends to the age of 115, so very few of us have to worry about exceeding it.
2. Purchasing a life annuity. The TSP offers this choice too, but not many individuals take it. A TSP life annuity (underwritten by MetLife) will pay you for as long as you live, but it locks you in to a fixed payment schedule. Today’s low interest rates result in lower annuity payouts than have been seen in the past. You may also purchase annuities outside of the TSP.
3. The “4% Rule”. Many financial planners are fond of suggesting that one begin withdrawing from their TSP (or any other similar account) at a 4% rate and then adjust their annual withdrawals by inflation. “Monte Carlo Simulations” show that there is a better than 90% chance of still having money after 30 years for those who follow this strategy.
Some individuals suggest that it’s OK to withdraw from your account at a higher than sustainable rate early in retirement if you will slow down your withdrawals as you age and spend less money. Will you spend less than you thought in the later years of your retirement? Quite possible, ultimately we all will slow down and not be pursuing those items on our bucket list that require vim and vigor. My Aunt Dorothy did an around the world trip early in her retirement. Towards the end of her long and fulfilling life she took trips in and around Champaign and Urbana, Illinois where she lived; her spending dropped considerably.
If you’re not yet retired and ready to start spending down your TSP, now might be a good time to give your post-retirement spending strategy some thought.
TSP C Fund: Technicals Are Deteriorating (Sept 22)