Advanced TSP Withdrawal Strategies
There’s a lot to consider when it comes to setting up your Thrift Savings Plan (TSP) and deciding how to allocate your contributions. But there’s even more to think about when it comes to successfully generating useful income from your TSP once you’re retired.
The Federal Employees Retirement System (FERS) was designed to give you three different components for income once you reach retirement: your pension, your Social Security, and your TSP. Your pension and Social Security pay you as long as you’re alive, while it may be possible for the funds in your TSP to run out during your lifetime. Thankfully, you have more control over the funds in your TSP than you do over the funds in your other two retirement accounts. More control can mean more choices and flexibility, which can be a great thing.
In 2019, the TSP changed their permissible withdrawal options, and participants in the program have more than just two opportunities to withdraw money from their TSP account. Now, after you reach age 59 ½ and at retirement, you can take multiple partial withdrawals, receive monthly payments, take one withdrawal for the full amount, or you can create an annuity through the TSP via Met Life. You can also use any of those options in combination.
The Delayed-Withdrawals Strategy
A straightforward strategy to take with your TSP is to simply do nothing at all. If you fall under the category of retirees who don’t need the money inside their TSP, you do have the choice to leave it in there to grow, much as you did while you were still working. While this seems like a good strategy, there are still some risks to it.
If you’re not drawing from your TSP, it’s going to grow, and possibly significantly. So how is that a risk? Because at age 72, you have a required minimum distribution the IRS forces you to withdraw from your TSP and pay “taxes” on. So if your balance has grown, the amount you’re required to take out of it is higher. That means if tax rates go up between your retirement and age 72, you may have to pay more to the IRS in taxes.
The Monthly Payments Strategy
You can receive designated monthly payments from your TSP. You can decide the amount you’d like to receive and can change that amount as frequently as every 30 days. This setup strategy could be most important in very early retirement, because when you retire, the retirement application process can take anywhere from 90 to 150 days to finalize. In the interim, you’re only receiving 60% – 80% of the pension that was promised to you. So your finances may feel short during those early months. One solution is to draw a little more from your TSP until things are reconciled. Then, you can go back into your TSP and reduce those monthly payments to a smaller amount.
The risk of deciding on your own monthly payment amounts, of course, is that without a more long-termplan in place to consider, you could decide to withdraw too much early on.
The Annuity Strategy
If you want lifetime income from you TSP, one of the options you have is to send all or part of it to Met Life. They will provide you with a monthly annuity, and whatever the interest rate was when you set up these annuity payments is the static interest rate you will receive on them. Even if interest rates increase, you are locked into your original percentage. That may sound like a great deal, but there are
still some big risks involved with this choice.
You are tying up your funds by giving them to Met Life. They have control over your funds, and you no longer have the ability to go in and request higher monthly payments if you find you’re a little short on funds one month. And if you pass away before you’ve used up all those funds, they keep the difference.
The Partial Withdrawal Strategy
You can take a partial withdrawal of any amount from your TSP account multiple times, as often as every 30 days. The risk again here, much the same as with the Monthly Payments Strategy, is that if you withdraw too much too soon, it could cause you to run out of money later in your lifetime.
The Full Withdrawal Strategy
You can also move all of your money from your TSP and send it into an IRA, effectively closing your TSP account. Just remember that if there is at least $500 in your TSP account, it is still considered “open.”
If at any time you had rolled money out of your TSP and into an IRA, which is not taxable, as long as your TSP is still open, you can roll those IRA funds back into your TSP at any point in the future. You cannot make contributions any longer, but you can transfer from another IRA back into the TSP.
Timing Your TSP Withdrawals
In retirement, timing is everything. In an ideal world, you don’t want to retire going into a bear market. But how can you control or even know that? The reality is that you really can’t, so you want to consider other strategies to manage the issue of retirement timing.
The sequence of returns that impact you generally occur during the three years before you retire, and the three years after you retire. That’s because during that six-year spread is when you’re most likely to have the most money in your account. What that means is, a bear market that’s entirely out of your control could have the most significant impact on you during those years.
Knowing this, in theory, the money you don’t need to use in your early years of retirement can be set aside to earn more money that you can then use later in your retirement. But this involves thinking carefully about timing when you’re going to use your money, then putting it into an investment that matches what you’re trying to accomplish with it.
You could consider dividing your TSP funds into three portions: short-term funds, mid-term funds, and long-term funds, each determined by the length of time needed between accessing each fund, then put each of them into an account or an investment that matches what you’re trying to do for that specific time frame.
For example, say you have $100,000 in your TSP account. The first $20,000 could be used during the first five years you’re retired, or the short-term timeframe, so you want to set it aside accordingly. The next $20,000 could be used only after your first five years into retirement, or in your mid-term, meaning it could be growing untouched somewhere useful during those five years. And finally, the last $60,000 remaining, you may not plan to touch for ten years, as part of your long-term funds. Hopefully, those funds have also been growing nicely for ten years by then.*
*This is a hypothetical example provided for illustrative purposes only; it does not represent a real life scenario, and should not be construed as advice designed to meet the particular needs of an individual’s situation.
Using a Combination Withdrawal Strategies
You may want to consider having a TSP strategy that allows you to create income with flexibility and control, because as you move through your retirement, you’re likely to make decisions you weren’t considering at the moment of your retirement. You want enough flexibility in your overall plan to tackle unexpected financial decisions.
Using a combination of strategies may help you prepare for more financial stability in retirement. For any investment you make that allows you to do that, you want to take into consideration three important things: liquidity, safety, and growth. Ask yourself:
• Is your money liquid? Can you get to it if you have to without paying a penalty?
• Is it safe? What’s the likelihood you’ll lose that money before you get to spend it?
• Will it grow? Can it outpace taxes and inflation?
With liquidity, safety, and growth, you get to pick two out of three for any investment. No investment can guarantee all three—it simply doesn’t exist. You have to make your choices based on what you’re looking for a specific set of funds to achieve.
You generally want your short-term money to be liquid so you can draw from it as needed. And you would usually want it to be safe so that it isn’t subject to any bear market that comes along—at the absolute worst time. That means a good option for this portion of your money might be to leave it in your TSP, where you have access to it as needed, and it’s likely going to remain secure.
When it comes to your mid-term money, you would probably want that money to grow. You want it to do better than what it would do just sitting in the TSP. So in this instance, you might pick growth as one of your factors, and pair it with either liquidity or safety. It’s up to you to look at your life and decide which is most important to you, then find investments that match your criteria.
You may also want your long-term money to have growth, but in this case, it’s generally good to pair it with safety. This is the money probably you’ve carved out to sustain you for however long you live, which you can’t predict. That means it has to last, which is why you should aim to keep it safe. It’s recommended that you use a private market annuity for this purpose, rather than using the TSP’s Met Life annuity. It’s more likely that with a private annuity, the money remains in your control and your beneficiaries may still inherit it.
Figuring out how to withdraw and invest your TSP funds so they support you the way you need throughout your retirement may seem daunting. But it all comes down to taking a look at your life, thinking about your future, and understanding the plethora of options for making your money work for you. And if that still feels like a lot to tackle, know that an experienced federal benefits financial advisor
can help you put together a retirement plan.
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