Q. I read your earlier article about creating an income stream from your TSP. In that article you discussed both substantially equal monthly payments and the TSP annuity. Have the low interest rates we have been having for the last several years affected the amount of money a person would be entitled to if they chose the annuity option?
A. Yes, interest rates certainly have affected the amount of money one would get if they elected a TSP annuity, and this has made annuities even less popular than they were before. For the last two months (July and August of 2016) the “annuity rate index” (a key component of the annuity calculation) has plumbed new depths. Up until July, the lowest the interest rate index had been in history of the TSP was 1.75%. That’s pretty low, but the index dropped to 1.625% in July and fell further to 1.5% this month.
Following is an example of a level payment joint annuity with a 50% survivor benefit and no additional features. This, by the way, is what the TSP considers to be the default withdrawal choice for FERS employees who are unable to get their spouse’s consent for a different withdrawal choice.
The assumptions that I made in this calculation were that the employee (and their spouse) were both 57 years old and were using $150,000 of their TSP to purchase the annuity. I also compared the August 2016 annuity with what the it would have been if it had been purchased in September of 2015 (2.375% interest rate index) and May of 2014 (2.875% interest rate index). The highest the interest rate index has been since January of 2012 was 3% (both in October of 2013 and February of 2014).
|Monthly annuity at 1.5% (August 2016)||$568|
|Monthly annuity at 2.375% (September 2015)||$660|
|Monthly annuity at 2.875% (May 2014)||$716|
John Grobe’s latest book, The Answer Book on Your Federal Employee Benefits, has just been released by LRP Publications. Order your copy at shoplrp.com. Ask your human resources office to contact Federal Career Experts about pre-retirement training.