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Do you have a withdrawal strategy for your Thrift Savings Plan (TSP) and Individual Retirement Arrangements (IRAs)? A withdrawal strategy should not be overlooked and will help determine your income during retirement. Surprisingly, a recent survey by J. P. Morgan showed that 84% of those who are withdrawing from their retirement accounts use the default strategy of letting the Internal Revenue Service (IRS) decide their withdrawals. These folks simply follow the IRS life expectancy table that determines the size of their withdrawals.

This might not be the optimal strategy for a couple of reasons.

1. Most retirees will spend more money early in retirement as they work on bucket list items such as travelling to all the places they want to see. It’s easier to travel when you are (relatively) young. As retirees age, their spending decreases. Financial pros have a name for this decrease – the “spender’s slope”. Spending can decrease from 20% to 30% once the retiree begins slowing down.

2. Conversely, the size of distributions that follow the IRS life expectancy table increase as an individual ages. The Uniform Life Table (used by the TSP to calculate withdrawals for those who choose installment payments based on their life expectancy) has a 72 year old withdrawing 3.91% of their account balance. I chose age 72 for this example because it is: A) the age at which, with few exceptions, one must begin taking Required Minimum Distributions (RMDs) from retirement accounts (both IRAs and the TSP); and B) it’s an age at which most retirees are still active and are spending more vigorously than an 82 year old (who must withdraw 5.85% of their balance), or a 92 year old (who has to take 9.81% as their RMD).

Another interesting fact from the survey is that 80% of retirees who have retirement accounts wait until the age at which they are required to start withdrawals to begin taking money from these accounts. That age is 72 and there is legislation that will increase it to 75 over the next ten years wending its way through Congress.

Don’t let the IRS dictate your withdrawal strategy; consider your needs and desires before you begin taking money from the TSP and IRAs. Maybe you’ll end up following the IRS table anyhow, but at least give it some thought.

You might wonder why this article doesn’t talk about optimizing your withdrawals from your FERS annuity and Social Security. In both of these sources of retirement income, the amount you receive is determined by a specific formula. You can’t take more from FERS or Social Security early in your retirement and take less in your later years. That’s a good thing. Guaranteed, inflation-indexed, income is a good thing to have, and we are fortunate to have it in both FERS and Social Security.

Increasing TSP Contributions so You’re Not “Livin’ on a Prayer”

Rollovers: Moving Your Money Out of the TSP

TSP: Common Misconceptions

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TSP Investors Handbook, New 7th Edition