A common question for federal employees to ask me is, "so what's this annuity option in my Thrift Savings Plan (TSP)?" There is a lot of misunderstanding around what annuity options are available through TSP, as well as confusing the TSP annuity options with your FERS annuity.
To begin, the FERS annuity is completely separate from your TSP and its' annuity options.
Your Thrift Savings Plan has multiple annuity options that are offered through Met Life. These options are offered to TSP participants when they retire.
How do the TSP annuities work?
Every option is a modification of what's called an immediate annuity. With an immediate annuity you give up the access to your lump sum in order to get a guaranteed income for the rest of your life. It we look at an example of a $500,000 lump sum balance, you lose control of the 500k and in return Met Life guarantees you a payment for the rest of your life. They may guarantee you a payment of $5,000 a month for the rest of your life, but if you die next week Met Life keeps the balance. This is called a life annuity.
The TSP Survivor Annuity
Another popular option is the survivor annuity (not to be confused with the FERS Annuity), which operates just like a life annuity except that payments last until the second death of you or your spouse. Instead of guaranteeing you a payment of $5,000, they may guarantee you a payment of $4,600 a month. Still, the insurance company will keep the balance of the $500,000 after the second death.
What about the rest of the TSP annuity options?
The rest of the options are some combination of:
- a guaranteed income
- giving up your principal
- possible returns of principal for a reduced payout
- guaranteed survivor payout
For every benefit you add, such as a payment of principal to your beneficiary, your monthly payout goes down. The life annuity is always the highest payout for immediate annuities.
Should I choose a TSP annuity?
I have found that a TSP annuity is not a good option for most federal employees. Here are a few reasons why they aren’t a good fit.
- if you do want an annuity, you can find a better payout by shopping multiple annuity companies
- you give up access to the largest portion of your retirement dollars
- federal employees already have a substantial portion of retirement income guaranteed from their FERS Annuity and Social Security
An annuity is an insurance contract, and if you decide an annuity is the best way to go, then you would be best served by shopping insurance companies to find the best payout.
A federal employee's TSP is usually the lion's share of their retirement savings. If you choose to put your TSP in an immediate annuity, you forego access to that lump sum for the rest of your life. It is generally not a good idea to give up access to most of your cash.
The last reason involves how to structure a retirement income plan. The FERS system is meant to be a three-part retirement system - FERS annuity, Social Security, and Thrift Savings Plan. The FERS annuity and Social Security are both guaranteed, and provide cost of living adjustments. With 67% of your retirement income guaranteed, is it really necessary to guarantee the other 33%?
I’m going to go out on a limb and say NO, it doesn't make sense for a federal employee to give up access to their TSP in order to guarantee more income. If you want to know more about your FERS annuity and its relation to TSP, here is a previous article that discusses the subject.
Whether or not to take a TSP annuity is only one question that needs to be addressed at retirement. We cover all retirement concerns with our planning clients. Don't go into retirement questioning if you are making the right decisions. If you would like help with your retirement planning and retirement journey you are welcome to schedule an introduction call with Brad.
Brad Bobb, CFP® is the owner of Bobb Financial Inc, and an expert in retirement planning for federal employees.