Q: Can you tell me how the TSP annuity that is supplied by MetLife is calculated? I have been given a bunch of different answers and none match what the TSP rate is offering (which is of course much lower).
I was first told when I called TSP that it was an average of the last 3 months of the 10 year treasury rate. That did not seem to match what TSP is offering and then I was told it was based off the G fund rate. That does not seem to match either. Why is the December rate so low?
Also, MetLife outside of TSP offers a much higher rate for annuities to the private sector. The only problem is I am under 59 1/2 and would be very costly to buy an annuity privately.
A: According to the TSP, the interest rate index is based on a “moving average” of the ten-year US Treasury rate. I could not find any period of time (e.g., 3 months, 12 months, etc.) specified. Neither could I find anything more specific that the words “moving average”. For sure, it is not based on the current G fund return, which is higher than this months 1.625% annuity rate. The loan rate, which is based on the G fund, is 2.375 this month.
From here on, this response engages in some speculation. 1) I think we can assume that the G fund’s return does not differ too much from that of ten-year treasuries. 2) As of COB yesterday, the G fund had returned 1.66% since the first of the year. 3) The interest rate index is adjusted by eighths of one percent (i.e., 0.125%). 4) Right now, 1.625% is the closest possible interest rate to the ytd return. 5) With the G fund (and ten-year treasuries) performing better recently, we can likely expect the annual return to be in the vicinity of 1.75% at the end of the year. 6) Let’s see if the interest rate index goes up to 1.75% for January.
1.625% is a historically low rate, but it is not far off the 12 month average and it’s not as low as it has been over the last few months.
I’m not surprised to hear that MetLife offers a higher rate outside of the TSP; I just wonder if the annuity features are similar. The TSP annuity has been around for almost 30 years and wouldn’t have the features that an annuity offered today would. I saw some TSP statistics a few years ago that indicated TSP annuities were, far and away, the least popular withdrawal choice.
