Have you given any thought to how you are going to take distributions from your Thrift Savings Plan account when you are retired? The TSP offers many choices.
1. Individual payments. You can make an individual withdrawal as often as once every thirty days, though most individuals make fewer, and some make only one. An individual payment can be rolled over into an Individual Retirement Arrangement (IRA). You can make an individual withdrawal even if you are receiving monthly payments from the TSP.
2. Annuities. You could use your TSP balance to purchase a single premium immediate annuity from MetLife. Do to the fact that an annuity is an irrevocable choice and that today’s low interest rates make annuity payments (which come monthly) lower than they have been in the past, annuities are far and away the least popular choice.
3. Installment payments. These payments can be taken on a monthly, quarterly, or annual basis and can be changed, stopped, or started at any time. Monthly installments is the most popular method of withdrawing from the TSP.
Because monthly installment payments are the most common withdrawal choice, we’ll take a look at withdrawal strategies using monthly payments. The TSP offers two choices of installment payments.
1. Installment payments of a fixed dollar amount. Because you are free to change the amount of your payments, as well as stop them or start them, this choice offers a lot of flexibility.
2. Installment payments based on the IRS life expectancy table. These payments start out as a modest amount and gradually grow. At the age of 72, the amount drops, as the table adjusts to required minimum distributions. The payments then begin growing again, with each year’s RMD being a higher percentage of the account’s value. This generally results in higher and higher distributions as you age.
A recent study conducted by J. P. Morgan Asset Management suggests that a large percentage of retirees don’t make withdrawals from defined contribution plans (such as the TSP) until they have to start taking RMDs. And a whopping 84% then take only the minimum amount required. Is this the right strategy?
Economist David Blanchett and others would suggest not. Blanchett came up with the concept of the “spenders’ slope”; a theory that most retirees will spend more in the early years of retirement. When people are (relatively) young and vigorous, they will spend more money on travel and other activities that they enjoy; they’ll be checking items off their bucket lists. The spenders’ slope posits that later in retirement (later being determined by the retiree’s health and life expectancy) spending will drop to 70% to 80% of what it was in the early years of retirement. If that’s the case, then a retiree would want to take more money in the early years of retirement and slow it down later. Doing so would reduce the bite of taxes on RMDs when they start at a later age.
Of course, there is the worry of running out of money before you run out of time. About 60% of the respondents in the J. P. Morgan study were afraid of ending up with less money than they need late in their life. We retired federal employees have a leg up on most other retirees – we have our FERS annuities to rely on, along with our Social Security. These two sources of income (both with cost of living adjustments) will last us as long as we live and will likely cover the expenses we will incur after we have reached the “slope”.
Nevertheless, pay attention to your projected retirement needs and fashion a TSP withdrawal plan that matches them.