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Due to a recent interest in an effective strategy to disburse your Thrift Savings Plan (TSP) funds, I decided to write about it for everyone’s benefit. When you separate from federal service, you’ll have some options in regards to how you would like your TSP used. You can take it in a single payment, a series of monthly payments, receive a TSP life annuity, any combination of the three, or go with a private custom solution. It is impossible to say which is most effective.
For each federal employee, you’ll need to address exactly how it fits within your own financial plan, and figure out which is most beneficial for you.
The first option is the simplest: take it in a single payment. This is where you can withdraw your total account balance and invest it into an individual retirement account (IRA) or some other eligible plan. Make sure that it’s an eligible plan in order to avoid a large taxable event.
The second option is to receive it in a series of monthly payments. While slightly more complicated than the first option, it’s also a more flexible option. You can either choose to have TSP compute the monthly payments based on an IRS life expectancy table or a specific dollar amount per month. Using the life expectancy table, your initial payment is based on the balance of your account at the time of first payment and your age. From there, TSP will again recompute your payment based on account value at the end of the preceding year and your age. Essentially, your payment could be more or less each year depending on those two factors. By choosing the specific dollar amount option, you will dictate how much you would like to receive on a monthly basis until your account is depleted. It must be above $25 per month, and you have the option to change annually. You also have a one-time lifetime opportunity to change over to the life expectancy-based withdrawal payout option.
The third option is the annuity payout. This is the option that could be considered either the simplest or most complicated depending on who you ask. Essentially, if the TSP investor decides to purchase an annuity, the money used to buy it is taken out of the TSP and turned over to the annuity provider (currently MetLife). From that point forward, the annuity provider is the responsible party for both paying and servicing the account. There are three annuity options. One is Single Life which would provide the highest payout because there is no survivor benefit. The other two options, Joint Life with Spouse and Joint Life with Someone Other Than Spouse, have the survivor benefit, and otherwise are essentially the same with the exception that the “someone other than spouse” must have an insurable interest.
There are a couple of issues that may cause concern for some TSP participants. One concern is that a second-party company is running it. All TSP participants who choose this option have an interest in the survival of this single company. After all, many investors will tell you they don’t want to have all of their eggs in one basket. The second concern is, “Are you getting the best deal since it’s the only deal?” If there is no competition over providing the best product, how can you ensure you are getting the best deal?
The final option is this: Consider diversifying. While it is a commonly used term, people usually only think about it in terms of investments. It can also be considered in your TSP payout and not just its allocation while employed. Payout diversification could be as simple as taking the single payout to an IRA and then transitioning part of the funds to two or more competing insurance companies to provide a customized annuity. Another option would be to invest it in a customized portfolio that doesn’t have the TSP’s payout restrictions. These are just two of the alternative options that exist. To go through other options, consult with a trusted advisor to help you evaluate all options including your TSP options.
TSP is without a doubt an excellent retirement program. The takeaway for this article is to evaluate all options, and not just the options that you have within the TSP program itself. This will be one of the biggest decisions you will make as you retire and you will want to make sure that you get it right.
© 2012 First Command Financial Services, Inc., parent of First Command Financial Planning, Inc. (Member SIPC, FINRA), First Command Insurance Services, Inc. and First Command Bank. Financial planning services and investment products, including securities, are offered by First Command Financial Planning, Inc. Insurance products and services are offered by First Command Insurance Services, Inc. Banking products and services are offered by First Command Bank. In certain states, as required by law, First Command Insurance Services, Inc. does business as a separate domestic corporation. Securities products are not FDIC insured, have no bank guarantee and may lose value. A financial plan, by itself, cannot assure that retirement or other financial goals will be met.
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