Comparing Withdrawal Strategies For Your TSP in Retirement
What are the different options to withdraw your money from the TSP when you separate from federal service in retirement? I will discuss the three main options to withdraw money from the TSP. This information is taken directly from the TSP Withdrawal Manual published online.
Questions to Ask Before Withdrawing
Given that you may need your retirement savings for 30 or more years, there are some critical questions you should ask yourself.
• When should I begin withdrawing my money?
• How much do I think things will cost during
my retirement?
• Will I have enough income to cover my expenses
after I retire?
• Will my retirement savings last for my whole life?
• Do I need to provide income for my dependents/
heirs?
Because of inflation, the cost of goods and services you buy today will probably cost you more. Once you live on a fixed income in retirement, increases in the cost of living can make the meeting even the most basic expenses challenging. Therefore, you need to carefully plan a withdrawal strategy for your TSP that matches your goals in retirement.
Tailoring Your Withdrawal Decisions
There are other factors besides life expectancy that you should consider when making your withdrawal decisions. Some examples:
• What additional sources of income will you have
outside of your TSP account?
• Will you be paying off a mortgage during your
retirement?
• Will you be moving to an area where your expenses
will be significantly higher or lower than where you lived before you retired?
Three TSP Withdrawal Strategies
There are three main withdrawal strategies for taking money out of the TSP. You can use one of these methods or a combination of them.
Single Withdrawal: You can withdraw any amount of $1,000 or more from your account in a single payment. There is no limit on the number of single withdrawals you can make, but we will not process more than once in any 30 days. Therefore, you can take a single withdrawal of part of your account even if you’re currently receiving installment payments. The benefit of this strategy is that you can use the money to pay for something like an upgrade in your home, buy a new car, or take a European vacation. The cost of the single withdrawal is that you might be pushed up into a higher tax bracket if you withdraw too much. Rolling over the balance of the TSP into an IRA can also be done.
Installment or Periodic Payments: You can set up monthly, quarterly, or annual fixed dollar amounts based on life expectancy. You could also withdraw money as you need it from the TSP. Setting up installment payments creates a monthly income stream in retirement, providing a more predictable cash flow. Installment payments could also increase the cash flow and may not push you into a higher tax bracket.
Purchase an Annuity: You can use all or part of your TSP account to purchase a life annuity through MetLife. Purchasing an annuity means that you pay now to receive monthly payments that last for the rest of your life (or, if you choose a joint-life annuity, the life of your joint annuitant). You no longer manage the money you use to purchase a life annuity. Instead, you give up your money and the control of it in exchange for guaranteed lifetime monthly payments with possible survivor benefits. The benefit of an annuity purchase is lifetime income like a FERS pension. The costs of annuities are that you typically pay higher fees that are not always transparent. But an annuity can be suitable for someone worried about running out of money in retirement.
Everyone’s withdrawal choices will be based on different circumstances, and you should carefully think about your options. The important thing is to make sure your decisions are well informed and carefully thought through.
You can use calculators online provided by the TSP to give you a reasonable estimate of what you will get in the three withdrawal options. Or, schedule a meeting with me, and we can review your TSP and discuss how it fits into your retirement plans.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid federal tax penalties. Individuals are encouraged to seek advice from their tax or legal counsel. In addition, individuals involved in the estate planning process should work with an estate planning team, including personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.
