The idea behind the TSP, or Thrift Savings Plan, is to use it as a piece of a healthy retirement plan, supplementing income, along with your Social Security payments and your FERS annuity. Without the TSP, most people will not hit their retirement goals. Most financial advisors suggest planning your retirement income around 80 percent of your working income, and without the TSP, that number might be exceedingly difficult to reach.
When it comes to the TSP paying out, you have two options: the first being a monthly paycheck, just like when you were working. The other is to put that money in a life annuity. More than half of retirees opt for former, taking the paycheck and taping into their TSP savings. And with the TSP Modernization Act about to launch, you’ll have even more options for how often and how much you’ll be able to collect. And adding to that, the Life Annuities contract for the TSP is set to be renegotiated, so there could be unforeseen changes coming on that front in the months and years to come.
The question is: which option should you choose? Because both are set up to provide payments to you at predetermined times, how are the Life Annuity and the TSP installment payments different?
Firstly, there is the freedom of choice you get with installment payments, especially with the new options available to you come September. Once you choose Life Annuity, that money is set, and your options of how and what you want to do with it after that become limited. Even if the new contract for Life Annuities ends up providing more options in the future, any current or about to retire employees will still be subject to the terms of the annuity when they locked it in.
This is in stark contrast to the new options with the TSP Modernization Act, which will allow you to collect payment either monthly, quarterly, or yearly, and will allow you to change your mind and restructure up to four times a year. This is true for all people who are already retired.
With Life Annuity, your money will be used to purchase an annuity (like MetLife) and is taken out of your TSP fund. Your money remains in the TSP account if you choose to make installment payments.
The thing is if you keep your money in the TSP there is a finite amount, even with the interest it has been accruing. You will have to manage that money closely, especially if it starts to dwindle. Life Annuity is a contract, and as such, comes with a guarantee. You will never run out of money in your lifetime if you invest in an annuity.
On the TSP website there are tools you can use to help figure out the exact numbers in your particular instance, but here’s an example: If your TSP was at 350,000 dollars when you retired at age 57 and you lived until you were 90 years old, the remaining money in the account would still retain a 5 percent interest. Currently, the interest rate for the annuities offered through the TSP is 2.625 percent. If you took out $1,500 a month for a paycheck from your TSP, you’d still have $240,000 in your account when you reach age 90.
Adversely, $1,600 is the amount you’d take in per month under an annuity, and that would remain even if you lived to 120 years ago, but upon your death, the fund is then absorbed into the annuity fund, and there will be none left over.
While installment payments are the most popular option by most employees, it is essential to weigh your individual needs and options when you segue into retirement. As it stands, it seems that generally speaking that the monthly payments are a greater benefit to you than the current annuities the TSP offers.
