You have several options about what to do with your TSP money in retirement. One of those options is to take monthly payments from your TSP.
If you decide to go that route, you can decide how much you want to receive from your account each month. You can choose a fixed dollar amount, ex: $500 a month, or a variable amount that TSP calculates based on your lifetime.
When we talk about TSP retirement choices in the classes I teach, roughly 1 in 5 people say they’re planning on doing monthly payments from their TSP in retirement. And the majority of those are planning on doing a fixed dollar amount (rather than the TSP calculated amount).
They’re usually familiar with the restriction on changing that amount. You can only adjust this amount once a year. And that change takes effect the next calendar year. So if you’re receiving $500 a month in 2011 and you wanted to bump that up to $600 a month – you make your request during 2011 (before December 15), and you start receiving $600 a month in 2012.
But what most people forget (or never knew?) is *how* the money comes out. Where does that $500 come from in your TSP account? Do they take your highest performing fund and sell part of it? Or your worst performing fund?
Your monthly payment comes out in proportion to how your total account balance is invested. The way that your entire account is allocated will determine which funds, and how much of those funds, are sold to provide you with your monthly payment.
So if 80% of your account balance is in the C fund and 20% is in the G fund… 80% of your $500 will come from the C fund and 20% will come from the G fund.
Why is This a Problem?
You have no control over which funds are sold to get your monthly amount. You might have some funds that are up, others that are down – but you don’t get to choose which funds you sell.
Let’s look at an example. I’m using round numbers here to highlight the concept:
Let’s say you chose a monthly payment of $500. When your $500 is scheduled to come out, let’s say your total TSP account worth $100,000. 80% of that is in the C fund and 20% in the G fund. For our example, we’ll say the C fund is trading at $15, and the G fund at $10. That means you have 5,333 shares of the C fund and 2,000 shares of the G fund.
Since your account balance is split 80% C fund and 20% G fund, your monthly payment will be split the same way – taking $400 from your C fund holdings and $100 from your G fund holdings. So TSP will sell 26.6667 shares of the C fund (at $15 a share) to get $400 and sell 10 shares of the G fund (at $10 a share) to get $100 to come up with your $500. This leaves you with 5,306.3333 shares of the C fund and 1,990 shares of the G fund.
Let’s say the next month, the C fund tanks. Instead of $15 a share, the C fund is now trading at $12 a share, while the G fund remained flat at $10 a share.
Now your 5,306.3333 shares of the C fund at $12 is worth about $63,676. Your 1,990 shares of the G fund at $10 a share is worth $19,900.
Your total account value has dropped from $99,500 ($100k less your $500/month payment) to roughly $83,576.
This drop in C fund price also changed the weight of your account. Before the drop, 80% of your account was in the C fund and 20% was in the G fund. But now, 76% of your account is in the C fund, and 24% in the G fund.
When your next payment of $500 comes out, 76% of that payment will come from the C fund, and 24% from the G fund. TSP will sell 31.667 shares of the C fund to get $380 and sell 12 shares of the G fund to get $120. $380 from the C fund and $120 from the G fund make up your $500 payment.
Again, we’re rounding in parts of this example – but you see the issue this causes.
When the C fund dropped, ideally, you’d want to take money out of the G fund that month and allow your shares of the C fund to ride. But you can’t make that choice when you take monthly payments from your TSP in retirement. The payment comes out the same way your account is allocated.
Now, if you’re planning on having all of your TSP money in retirement in the G fund anyway, this isn’t a concern for you. But if you were planning on having your TSP account invested in more than any one fund – you need to understand what this means to your retirement income.
If you take monthly payments from your TSP, the only way to change the proportion of how the funds come out is to change your total TSP fund allocations.
But doing that is like having the tail wag the dog.
This is a serious drawback to taking monthly payments from the TSP.
If you call TSP directly and ask, they’ll tell you this is the case. But I’ve never seen it mentioned in any of the TSP forms or brochures (If you have seen a reference to this – please let me know). And if you’re thinking about taking monthly payments from your TSP, you need to understand how it will affect you.