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. And most of us are looking at our TSP as a source of monthly income to supplement our FERS (or for some, CSRS) annuity and our Social Security.
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 if we rely only on our annuity and Social Security. In fact, about 55% of separated employees make a withdrawal choice that provides monthly income from our TSP. That choice is either monthly payments or a TSP life annuity. Once the TSP Modernization Act is implemented this September, installment payments will be available monthly, quarterly or annually; not just monthly as they are today. I suspect most of those who will elect installment payments after September, will still choose the monthly option; after all, federal annuities and Social Security are both monthly payments. The contract for TSP Life Annuities is up for bid this year and a new contract will be awarded by the end of the calendar year.
So, what’s the difference between monthly payments and a Life Annuity? Though both 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 monthly payments can be changed frequently. Even if the new annuity contract allows changes in the annuity (not a certainty), any TSP annuities entered into under the current rules won’t allow changes. Even before the TSP Modernization Act is implemented, there is significantly more flexibility in monthly payments. Once the Act is implemented, an individual will be able to start and stop payments at any time and change the amount of the payments multiple times a year. Those who chose monthly payments in the past will gain the new flexibility upon the Act’s implementation.
With installment payments, your money will remain invested in the TSP. If you elect a TSP Life Annuity, the money you use for the purchase of the annuity does not remain in the TSP; it is given to MetLife.
The 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 manage your withdrawals to ensure that you will continue receiving payments.
Using the Retirement Income Calculator on the TSP website, I came up with the following numbers. In my calculations, I assumed that a 57 year old retiree had $350,000 in their TSP when they began withdrawals. 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 2.625% – the June 2019 rate for TSP annuities.
Monthly payments of $1,500 would last until age 90 and there would still be a balance of over $240,000 in the TSP account
A basic level payment monthly annuity would generate $1,600 and would continue to pay for as long as the individual lived. There would be no money left at death.
Monthly payments based on the IRS life expectancy table would begin at $1,045 and would have reached $2,355 at age 90. Over $300,000 would remain in the TSP account.
A basic increasing payment annuity would begin at $1,018 and would have reached $2,699 at age 90. There would be no money left at death.
Which choice is most popular among separated feds? Monthly payments is far more popular. 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.
Read more about TSP withdrawals, lump-sum and annuity payments at ask.FEDweek.com