In previous articles we have talked about withdrawing from the TSP as a single payment or as a series of monthly payments. This will be the first of two articles that discusses the withdrawal choice known as the TSP life annuity. The TSP life annuity will provide you with monthly payments for as long as you live. If you elect a joint life annuity, it will provide you (and your joint annuitant) with monthly payments as long as one of you is still alive.
So, what’s the difference between the withdrawal choices of “a series of substantially equal monthly payments” and a “life annuity”; after all, both pay you a specified amount each month?
The biggest difference is who’s in charge. With monthly payments, you can choose two methods (a fixed amount, or the IRS life expectancy table), and there is an annual open season where you can change the amount. You can also cash out at any time by taking a final single payment of your account balance. Purchasing a TSP life annuity is an irrevocable choice that cannot be changed, even if your situation changes.
When you purchase a life annuity from the TSP, you are purchasing what is known as a “single premium immediate annuity” from an insurance company chosen by the TSP. The current insurance company is MetLife. You can use all or part of your account balance to purchase the annuity.
Another difference is how long your monthly payments will last. If you elect the substantially equal monthly payment method and choose a fixed dollar amount, rather than the IRS life expectancy table, you can pick any dollar amount that you want to pick. 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 might be an amount refunded to a beneficiary if you had elected a cash refund feature and died before you had received your purchase price back in annuity payments. Single life annuities also offer what is called a ten year certain feature in which, if you haven’t received payments for ten years before your death, your beneficiary will receive payments for the remainder of that period.
With a life annuity you have a choice of several types of annuity, but that is a story for a future article. We will close this article with a look at how the amount of your annuity payments is determined. There are several factors:
First is the amount from your TSP that you use to purchase the annuity. The more that you spend, the higher your monthly annuity payment will be.
The annuity options that you select. We’ll cover these options in a future article, but it’s fair to say that the more options you select, the lower the monthly annuity payment will be.
Your age (and the age of any joint annuitant) at the time you purchase the annuity. While it’s true that neither you nor MetLife know exactly how long you will live, it is clear that if you purchase a TSP life annuity at age 62, rather than at age 58, no matter how long you live, you will have received payments for four fewer years.
The interest rate index in effect at the time you purchase the annuity. The rate, which is based on a moving average of 10-year U. S. Treasury bonds, can change as frequently as monthly. You can find the current interest rate in the “loan and annuity rates” section of the TSP website. Over the last several years, the interest rate has been as high as 3% (October 2013 and February 2014) and as low as 1.375% (September 2016).