The primary reason we contribute to our Thrift Savings Plan account is to enable us to withdraw money from it eventually. Most of us view our TSP balance as a source of monthly income to augment our federal annuity and Social Security benefits (both of which are also paid monthly). Suppose we aim to replace 80% of our pre-retirement income (as suggested by many financial advisors). In that case, most of us will fall short if we rely solely on our annuity and Social Security. Due to this, many retirees decide to accept TSP payments regularly. More than half of all separated workers choose a withdrawal strategy that ensures a steady stream of TSP income in the future. Installment payments and a TSP life annuity are viable options for withdrawing money from your TSP account to get a steady cash flow. Monthly installments are the most common, followed by quarterly and annual payments. Your funds will continue to be invested in the TSP through installment payments, where they will (hopefully) continue to increase. With a TSP life annuity, funds are taken out of your TSP account and used to buy a monthly-paid single premium immediate annuity. Depending on your TSP balance, you can use all or part of it to buy the annuity. What distinguishes a life annuity from a series of installment payments, then? Although we can get payments on a recurrent basis with both options, the criteria are very different. The most significant distinction is that a TSP Life Annuity is a choice that cannot be reversed, whereas installment payments are flexible. With installment payments, a person can start or stop making payments at any time, and the payment amount can be changed more than once a year. If you have the TSP life annuity, you won’t have to worry about running out of money over your lifetime. With installment payments, there is no guarantee that you will continue to receive payments. You’ll have to keep an eye on your withdrawals to ensure you don’t miss a payment. You can choose to receive payments based on a fixed amount of money (level payments) or your life expectancy (deferred payments, increasing payments, etc.). The following examples were created using the TSP Payment and Annuity Calculator, one of the several calculators offered by the Thrift Savings Plan. Note that this calculator is no longer on the TSP website as of July 11, 2022. This is because the new Thrift Plans system is still causing problems. In the calculation (conducted in April before the new method went into effect), we assumed that a retiree aged 57 had $350,000 in their TSP when they started withdrawing. My other assumptions were that they’d live to be 90 years old and that the money in their TSP account would grow at a 5% annual rate for the rest of their lives. TSP annuity rates for February 2022 were used as the index for the annuity interest rate. Payments of $1,750 each month would be required until the beneficiary reaches the age of 90, at which point the TSP account would have a balance of $4,244. If you used the life expectancy figure provided by the IRS, your monthly payments would start at $1,045 and reach a maximum of $2,247 when you were 90. The total balance in the TSP account would remain at $295,069. A simple level payment monthly annuity would yield $1,394 and would proceed to pay out that amount for the rest of the individual’s life, no matter how long that person lived. At death, there wouldn’t be any money left. At age 90, the value of a fundamental rising payment annuity would have increased to $1,887 from its initial value of $998. At the time of death, there would be nothing left. Which option is preferred the most by federal employees who work independently? Life annuities are less popular than monthly payments. Separated employees appear to like the flexibility of monthly payments’ distribution options and opportunities for future growth over the Life Annuity’s guarantee of a fixed payout. According to recent research, 1.2 million fewer people are working now than before the outbreak. It also stated that there would currently be 3.5 million more workers if the increase before the pandemic persisted.
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