TSP

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The main reason we contribute to our Thrift Savings Plan account is so that we can, at some future date, begin taking withdrawals from it. Most of us are looking at our TSP balance as a source of monthly income to supplement our federal annuity and our Social Security (both of which are also paid monthly).

If we are striving to replace 80% of our pre-retirement income (a goal many financial planners suggest), the vast majority of us will come up short of 80% if we rely only on our annuity and Social Security. That leads to many retirees choosing to take TSP payments on a recurring basis.

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In fact, well over half of separated employees make a withdrawal choice that provides for recurring income from their TSP. There are two available withdrawal choices that provide a stream of income; installment payments and a TSP life annuity. Installment payments are available on a monthly (most popular), quarterly, or annual basis. With installment payments, your money will remain invested in the TSP where it will (hopefully) continue to grow. With a TSP life annuity money from your TSP account is withdrawn and used to purchase a single premium immediate annuity (paid monthly) from MetLife; you could use all, or a part of your TSP balance to purchase the annuity.

So, what’s the difference between installment payments and a life annuity? Though both choices allow us to receive payments on a recurring basis, the rules are quite different. Perhaps the biggest difference is that a TSP Life Annuity is an irrevocable choice, while installment payments can be changed frequently. With installment payments, an individual can start and stop payments at any time and change the amount of the payments multiple times a year.

The TSP life annuity guarantees that you will not run out of money during your lifetime; you won’t have to pay attention to your investments. There is no such certainty with installment payments, and you’ll have to pay attention to your withdrawals to ensure that you will continue receiving payments.

Both installment payments and the life annuity allow you to choose payments based on a specific amount of money (level payments) or based on your life expectancy (increasing payments).

The Thrift Savings Plan has several calculators, including the TSP Payment and Annuity Calculator, which I used to come up with the following examples. Note that this calculator is not available on the TSP website (as of July 11,2022) due to continuing fallout from the Thrift Plans new system. In my calculations (done in April before the new system was implemented), I assumed that a 57 year old retiree had $350,000 in their TSP when they began withdrawals upon their retirement. I also assumed that they would live to age 90 and that money left in their TSP account would grow at an average of 5% per year. The annuity interest rate index was 2.075% – the February 2022 rate for TSP annuities.

Level monthly payments of $1,750 would last until death at age 90 and would leave a balance of $4,244 in the TSP account

Monthly payments based on the IRS life expectancy table would begin at $1,045 and would have reached $2,247 at age 90. $295,069 would remain in the TSP account.

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A basic level payment monthly annuity would generate $1,394 and would continue to pay that amount for as long as the individual lived. There would be no money left at death.

A basic increasing payment annuity would begin at $998 and would have reached $1,887 at age 90. There would be no money left at death.

Which choice is most popular among separated feds? Monthly payments are far more popular than the life annuity. Separated employees seem to like the possibilities for continued growth and the flexibility to change their distributions that they get with monthly payments, more than the certainty they get with the Life Annuity.

Random Fact: A recent study showed that there are 1.2 million less workers that there were before the pandemic. It also noted that, if the pre-pandemic rate of increase in workers had continued, there would now be 3.5 million more workers in the workforce.

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