We are fortunate to live in a country with great abundance, but unfortunately the troubles that we are currently facing threaten many Americans from a comfortable retirement or for some, no retirement at all! Unless your retirement is dependent upon winning the lottery, there is no magic answer. However, it is time to take on the responsibility for your own future. You can have a rewarding retirement by planning, exploring tools, and utilizing teamwork to produce significant results. As you know the TSP is a significant part of your retirement. Your responsibility is not only to save and manage it while you are working, but once you do retire, determine the best way to turn your TSP into a retirement paycheck.
What do I do with TSP when I retire? This is one of the most sought out questions we get from our clients. So let’s explore the three options for turning TSP into income. (1) Set up monthly withdrawals from TSP, (2) Create an annuity with TSP through MetLife, or (3) Rollover TSP to an IRA. Let’s examine the pros and cons of these three options.
If you leave your money with TSP once you retire, you can create income by taking monthly withdrawals. The pros are: you continue to enjoy the low fees that TSP offers, and you can change the amount of your monthly check every January. The cons are: you can only make changes to your monthly check in January. Imagine you’re retired and receiving a monthly check from your TSP account. You have an unexpected emergency and need to repair your roof, or you need to buy a new car, or your daughter is getting married and you have the pleasure of assisting with the wedding costs. You call TSP and ask them to send you a lump sum check. Guess what! They will not allow it. Your choices are to make a change to your monthly withdrawals in January or be forced to take the entire balance out of your TSP account. What if you want to stop your withdrawals? Let’s assume you are receiving a monthly check from TSP and come September, you realize you do not need this much income from TSP, because you are simply paying the tax and depositing the remainder into your bank account. And, the very next payment will dump you into a higher tax bracket. So you call TSP and request that they stop your monthly withdrawals until January of the next year. And guess what? That is not an option. So you see, for many retirees scheduling monthly withdrawals from TSP may be a great way to supplement your income, for others, they do not want to live within the restrictions of TSP.
The second option you have is to create a lifetime annuity from your TSP through a MetLife annuity. The pros are: you can have a guaranteed payment over your life as well as a joint life with your spouse or someone that has an insurable interest with you. If you are worried about the volatility in the market causing you to run out of money during your retirement, you can be worry free because MetLife can guarantee income over your lifetime. The cons are: it’s an irrevocable decision.
Let’s look at a pretty extreme hypothetical case to illustrate the point:
Mary has $300,000 in her TSP account at retirement and has elected to turn her TSP into a joint life annuity with her spouse John. Mary and John are both age 65 and chose level payments (their payment will not increase for inflation), so they could have a higher income now. They did not elect a cash refund option because it would reduce the amount of their monthly distribution. The amount of the payment for a joint life 100% survivor annuity is $1,319, based on the annuity’s current interest rate of 2.15%.
Now we’ll go over the edge to explain what could happen: Mary retires in December and in January she and John are finally in Europe on a long awaited vacation celebrating Mary’s retirement. During their visit in London they were taking a tour of the city on one of London’s popular double decker bus tours. A very sad thing happened during that tour. Both Mary and John were involved in a fatal accident when the bus was hit on its side and turned over. Mary and John’s three children were devastated to learn of their parents passing. They were also pretty upset to later learn that after 32 years of federal service and Mary faithfully saving in the Thrift Savings Plan since 1988, they would not be the beneficiaries of their Mom’s retirement account and in fact, MetLife would retain the entire balance. In addition, they would only get a refund of Mary’s contributions to her CSRS pension, not the lifetime annuity that she was entitled to!
The third option is to rollover TSP into an IRA. The pros are: you have more choices than the 5 funds offered through TSP, you can have more flexibility as to how you take withdrawals, and you can manage the IRA yourself or have a professional manage it for you. The cons are: you may not have the knowledge or experience to know how to manage the IRA, the choices available may be overwhelming and you may find yourself taking on more risk than you are comfortable with, and you will very likely be paying higher fees than those of TSP. (Higher fees are not always a bad thing if the net outcome results in a satisfying investment return)
I am certainly not here to tell you what the best choice is for creating income from TSP. The good news is that you do have choices, but the responsibility falls on you. In the current uncertain environment that we are in, these choices indeed are not easy. In my next article, I will share with you what many federal employees are doing with TSP at retirement utilizing SIPS planning (Sequential Income Planning System).
Carol Schmidlin is the author of FedSavvy, Tools and Tips to Maximize Your Federal Benefits
What do I do with TSP when I retire? This is one of the most sought out questions we get from our clients. So let’s explore the three options for turning TSP into income. (1) Set up monthly withdrawals from TSP, (2) Create an annuity with TSP through MetLife, or (3) Rollover TSP to an IRA. Let’s examine the pros and cons of these three options.
If you leave your money with TSP once you retire, you can create income by taking monthly withdrawals. The pros are: you continue to enjoy the low fees that TSP offers, and you can change the amount of your monthly check every January. The cons are: you can only make changes to your monthly check in January. Imagine you’re retired and receiving a monthly check from your TSP account. You have an unexpected emergency and need to repair your roof, or you need to buy a new car, or your daughter is getting married and you have the pleasure of assisting with the wedding costs. You call TSP and ask them to send you a lump sum check. Guess what! They will not allow it. Your choices are to make a change to your monthly withdrawals in January or be forced to take the entire balance out of your TSP account. What if you want to stop your withdrawals? Let’s assume you are receiving a monthly check from TSP and come September, you realize you do not need this much income from TSP, because you are simply paying the tax and depositing the remainder into your bank account. And, the very next payment will dump you into a higher tax bracket. So you call TSP and request that they stop your monthly withdrawals until January of the next year. And guess what? That is not an option. So you see, for many retirees scheduling monthly withdrawals from TSP may be a great way to supplement your income, for others, they do not want to live within the restrictions of TSP.
The second option you have is to create a lifetime annuity from your TSP through a MetLife annuity. The pros are: you can have a guaranteed payment over your life as well as a joint life with your spouse or someone that has an insurable interest with you. If you are worried about the volatility in the market causing you to run out of money during your retirement, you can be worry free because MetLife can guarantee income over your lifetime. The cons are: it’s an irrevocable decision.
Let’s look at a pretty extreme hypothetical case to illustrate the point:
Mary has $300,000 in her TSP account at retirement and has elected to turn her TSP into a joint life annuity with her spouse John. Mary and John are both age 65 and chose level payments (their payment will not increase for inflation), so they could have a higher income now. They did not elect a cash refund option because it would reduce the amount of their monthly distribution. The amount of the payment for a joint life 100% survivor annuity is $1,319, based on the annuity’s current interest rate of 2.15%.
Now we’ll go over the edge to explain what could happen: Mary retires in December and in January she and John are finally in Europe on a long awaited vacation celebrating Mary’s retirement. During their visit in London they were taking a tour of the city on one of London’s popular double decker bus tours. A very sad thing happened during that tour. Both Mary and John were involved in a fatal accident when the bus was hit on its side and turned over. Mary and John’s three children were devastated to learn of their parents passing. They were also pretty upset to later learn that after 32 years of federal service and Mary faithfully saving in the Thrift Savings Plan since 1988, they would not be the beneficiaries of their Mom’s retirement account and in fact, MetLife would retain the entire balance. In addition, they would only get a refund of Mary’s contributions to her CSRS pension, not the lifetime annuity that she was entitled to!
The third option is to rollover TSP into an IRA. The pros are: you have more choices than the 5 funds offered through TSP, you can have more flexibility as to how you take withdrawals, and you can manage the IRA yourself or have a professional manage it for you. The cons are: you may not have the knowledge or experience to know how to manage the IRA, the choices available may be overwhelming and you may find yourself taking on more risk than you are comfortable with, and you will very likely be paying higher fees than those of TSP. (Higher fees are not always a bad thing if the net outcome results in a satisfying investment return)
I am certainly not here to tell you what the best choice is for creating income from TSP. The good news is that you do have choices, but the responsibility falls on you. In the current uncertain environment that we are in, these choices indeed are not easy. In my next article, I will share with you what many federal employees are doing with TSP at retirement utilizing SIPS planning (Sequential Income Planning System).
Carol Schmidlin is the author of FedSavvy, Tools and Tips to Maximize Your Federal Benefits
