The installment payment choice gives the participant control, while the annuity choice cedes all control to MetLife. Image: IhorL/Shutterstock.com
By: John GrobeThe TSP will soon be re-competing the annuity contract (currently held by MetLife). In a recent article we outlined the options available in the current annuity contract and speculated what, if any, changes will appear in the new contract.
Historically, a life annuity has been the least popular choice made by TSP participants when they begin withdrawing from their accounts.
Annuities are designed to provide you (and a joint annuitant in some cases) with monthly payments for exactly as long as you live. Annuities are not, however, the only way to receive monthly payments from your TSP. Installment payments are a far more popular method of receiving monthly income. In fact, installment payments of a fixed dollar amount are the most popular method of withdrawal.
What’s the difference between installment payments and the annuity option; after all, both pay you a specified amount each month?
The biggest difference is who’s in charge. The installment payment choice gives the participant control, while the annuity choice cedes all control to MetLife. With installment payments (available monthly, quarterly, or annually), you can choose between two withdrawal methods (a fixed amount, or the IRS life expectancy table), and you can change the number and amount of your payments whenever you want to. You can choose to stop installment payments if you wish to do so. You can also cash out at any time by taking a single payment of your remaining account balance. Purchasing a TSP life annuity is an irrevocable choice that cannot be changed, even if your situation changes.
Another difference is how long your monthly payments will last. If you elect monthly installment payments and choose a fixed dollar amount, rather than the IRS life expectancy table, you can pick any dollar amount you want. If you choose a large amount, it’s possible to run out of money before your death; if you choose a small amount, there may be money left over for your heirs after you die.
If, on the other hand, you elect installment payments based on the IRS life expectancy table, your payments are likely to last as long as you do, and there is likely to be money left over for your heirs after your death. With the life annuity option, your monthly payment amount is determined by a formula and will last exactly as long as you (or the joint annuitant) live, no longer. There are three types of TSP life annuities; single life, joint life with spouse, and joint life with someone who has an insurable interest in your life.
Why do so many people choose installment payments rather than annuities?
Perhaps the main reason is that our FERS annuity and Social Security are guaranteed lifetime income; so why tie up our Thrift Savings Plan, another major source of income, in inflexible, lifetime payments?
Taking installment payments leaves us with the flexibility to take individual withdrawals for other reasons (e.g., bucket list items, gifts to grandchildren, etc.).
The annuity is an irrevocable choice and you’re locked into specific payments regardless of how your circumstances might change. Another reason installment payments are more popular is that we feel (generally) optimistic about the performance of our TSP investments and expect to have enough money for the rest of our lives and still have money left over for heirs.
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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See also
Alternative Federal Retirement Options; With Chart
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