The annuity choice is 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.
So, 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. With installment payments, you can choose two 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.
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.
Within the single life and joint life with spouse types, you can elect either level payments or increasing payments.
If you choose a joint life annuity with someone who has an insurable interest in your life, you can only choose level payments.
With level payments, the amount of your monthly payment will never change; it will be the same in your last payment as it was in your first payment. With increasing payments, your payments start out at a lower level and receive annual increases (of no more than 2%) based on inflation. If you elect level payments, you will lose ground annually to inflation. If you choose increasing payments, the payments that you receive in your earlier (generally higher spending) years of retirement will be smaller, though you will only lose ground to inflation in years when inflation is higher than 2%.
If you elect one of the joint life annuities, you get to choose the level of payment that the survivor will receive upon the death of the first joint annuitant.
The choices are 50% or 100%. If you choose the 50% survivor annuity, the amount of the TSP life annuity will be cut in half when the first joint annuitant dies. If you choose the 100% survivor annuity, the amount of the TSP life annuity will remain the same after the death of the first joint annuitant. Be aware that, during the period of time both joint annuitants are alive, the monthly payment from the 50% option will be larger than the monthly payment from the 100% option.
There’s another area in which you will have a choice if you elect a TSP life annuity; whether or not you want to elect any type of “money back” feature.
If you do not elect one of these features, there will be no money payable to a survivor after your death. If you do elect one of these features, and are fortunate enough to have a long life, there still will be no money payable to a survivor after your death.
These features are, however, beneficial for those who don’t live long after starting to receive their TSP life annuity. A “ten-year certain” feature is available only with single life annuities and provides that, if the annuitant dies before ten years are up, a beneficiary will continue to receive payments for the remainder of that ten-year period.
A “cash refund” feature is available to both single and joint annuitants and provides that, if the annuitant (and joint annuitant) die(s) before receiving the purchase price of the TSP life annuity back in monthly annuity payments, a beneficiary will receive the balance of the purchase price. These features reduce the monthly payment slightly.
FERS and Social Security Considerations
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; 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. The annuity is an irrevocable choice and you’re locked in to 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.
Report: Understanding TSP Withdrawals