Federal retirees have an advantage over most other folks when it comes to dealing with longevity risk. Image: Pla2na/Shutterstock.com
By: John GrobeWhen we invest in the Thrift Savings Plan or other investment vehicles, we realize that we must accept some level of risk. The two most common risks are:
• Market risk. The risk that the entire market may go down; think 2001 and 2008.
• Inflation risk. The risk that your investments may lose purchasing power even as they “grow”. Think 2022.
Lately I’ve read about another risk – longevity risk. That font of knowledge, Artificial Intelligence (AI for short), defines longevity risk as “the possibility that one will outlive their savings and income, potentially leading to poverty or financial strain on loved ones due to increased life expectancies.”
Federal retirees have an advantage over most other folks when it comes to dealing with longevity risk.
Unlike most retirees, who have only one source of guaranteed lifetime income (Social Security), federal retirees have two (both Social Security and FERS). We also have the TSP, which is not guaranteed to last for our lifetime, and this is where longevity risk would come in for us.
If we want to be sure that we won’t run out of money from our TSP if we live a long time, there are things we can do.
• If you’re not yet retired, feed your TSP. In 2025 you can contribute up to $23,500 to the Thrift Savings Plan; even more if you’re 50 or older.
• Once you’ve retired, you can set up withdrawals to minimize the chance of running out of money before you run out of time.
– Choose installment payments based on the IRS life expectancy table. They’re designed to stretch out your balance.
– Follow a strategy such as the 4% rule where you begin withdrawals at a 4% rate and adjust them each year for inflation.
Bankrate makes the following suggestions to minimize longevity risk (keep in mind that these suggestions are not specifically directed to federal retirees).
• Delay applying for Social Security so that you will receive a larger guaranteed income from this source.
• Consider annuitizing some of your retirement account (not as good an idea with the TSP’s annuity choices).
• Stick to the 4% rule when it comes to withdrawals.
• Consider a reverse mortgage.
• Find part-time work (preferably work that you enjoy).
Hopefully we will have all made plans that shield us from the dangers of longevity risk.
John Grobe, President of Federal Career Experts, is an expert in the area of federal employee retirement and benefits. This expertise comes from his 26 year federal career in which he managed the retirement program in a 3,500-employee office of a large federal agency.
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