How much can you expect to receive in monthly payments from the Thrift Savings Plan? The correct answer is “it depends”.
It depends on:
- How much you have contributed to the TSP up to now;
- How much you will contribute to the TSP between now and when you begin withdrawing money;
- The growth of the money in your TSP account during the time it is invested; and
- The choice(s) you make in withdrawing your money.
You can use the TSP calculator, which is available on the TSP website as an aid. It allows participants to estimate how much money will be in their accounts in the future, as well as what kind of stream of income that money will generate.
Though this is not the most sophisticated calculator around, it can still give you a fair estimate of what you might have when you retire and what that means to you in terms of monthly income.
Estimating Your Future Account Balance
Let’s look first at estimating your future TSP balance. All you need in order to get such an estimate is your current account balance; then you can enter the amount of expected future contributions, the duration of those contributions, how long you will leave your money in the TSP and the rate of return you expect.
Using the TSP calculator’s How Much Will My Savings Grow? calculator, a FERS employee who:
- Had an $80,000 p/a salary that increased at a rate of 1% per year;
- Had ten years until retirement;
- Had $200,000 in their TSP account;
- Contributed 10% of their salary;
- Did not make “catch-up” contributions; and
- Earned a rate of return of 5% per year.
Ended up with a total of $486,809.54.
What level of monthly income could you reasonably expect from a balance of $486,809 (I dropped the cents from the calculation)?
The Retirement Income Calculator lets you compare different TSP withdrawal strategies. For example, you could compare the results of choosing monthly payments versus purchasing a TSP annuity. Do remember that the results of any calculation are only as good as the estimates (e.g., rate of return, etc.) that are used.
Using the above employee and assuming that:
- They began withdrawals at age 57;
- Their spouse was also age 57;
- They lived to age 90;
- They earned 5% on money left in the TSP; and
- The annuity interest rate index was 1.5%. (The calculator defaults to the interest rate index that is in effect when the calculation is made. I did this calculation for use in the retirement coursebooks used by Federal Career Experts in their pre-retirement seminars back in October of 2016, when the index was 1.5%, close to its all-time low of 1.375%.).
Here’s what they received:
If they elected level monthly payments of $2,400 per month (never increasing or decreasing), they would be left with $41,590.89 at their death.
The calculator does not allow the user to change their monthly payment amount. This is a major shortcoming in the calculator, as most retirees will want to change the payment amount.
If they chose monthly payments based on the IRS life expectancy table, their payments would begin at $1,454.03 per month at age 57 and would reach $3,476.28 per month by their death at age 90. This option results in their payments being lowered at age 70 ½ to comply with the IRS required minimum distribution rules. They ended up with $430,232.22 by their death at age 90.
The TSP annuity figures here were computed with the 1.5% annuity interest rate index that was in effect in October of 2016. Though not the lowest rate ever, 1.5% is very low and resulted in a very low annuity amount. As the individual in our example lives to the age of 90, there will be no money left at their death.
- A level payment joint annuity would pay $1,844 per month for life.
- An increasing payment joint annuity would begin at $1,053 per month at age 57 and would have reached $2,792 per month by age 90.
If they were to use the so-called “4% rule”, they would begin monthly payments at $1,622 per month at age 57 and be able to take annual inflation increases. The odds are good that they would have money left at the time of their death.
So, what does this tell you about how much money you should have in the TSP by the time you retire? There’s a one word answer to this question – MORE!