Upon reaching retirement, one of the most pivotal questions a federal retiree will have to ask is, “What should I do with my TSP?”
The TSP is unique from a FERS pension or social security benefit because rather than being a set monthly payment, you have access to a large “pool” of money.
When it comes to TSP funds in retirement, you have four basic choices: leave the money in the TSP; withdraw part of the TSP (including monthly, quarterly, or annual installment payments); withdraw all TSP funds; or convert the TSP funds into a life annuity. A life annuity turns your “pool” of money into monthly payments for the rest of your life – and possibly beyond.
The TSP life annuity is an intriguing option, but is it right for you?
Types of Life Annuities
It is important to note that once you convert TSP to a life annuity, you no longer have access to your TSP funds. The TSP fact sheet on life annuities says it this way, “when you purchase a life annuity, you give up control of your money in exchange for lifetime monthly payments from the annuity provider.”
With that in mind, there are two main types of life annuities available.
- Single-life annuity – A single-life annuity provides you with monthly payments as long as you are living. If you pass away, your beneficiary may receive a portion of your annuity. (We’ll elaborate more on that later.)
- Joint-life annuity – A joint-life annuity can be for either you and your spouse or for you and a non-spouse—if the non-spouse qualifies as a former spouse or an insurable interest. When choosing a joint-life annuity, both you and your joint annuitant will receive monthly payments. When either you or your joint annuitant dies, the survivor will receive either 100% or 50% of the current benefits. If you select the 100% survivor-benefit option, your monthly payments will be less while both annuitants are living than if you had chosen the 50% option.
Life annuities can be selected with either level or increasing payments.
Level payments are simply the same monthly amount for as long as you live.
Increasing payments mean that the monthly annuity payments will increase by about 2% every year on the anniversary date of the first payment. Increasing payments can be chosen with either the single-life annuity or the joint-life annuity with your spouse; however, increasing payments cannot be chosen if your joint annuitant is someone other than your spouse.
TSP life annuities do provide the potential for death benefit to beneficiaries. Whether you have a single life or a joint-life annuity, a cash-refund option is available. Under this option, if you die before the amount you used to purchase your life annuity has been paid out, your beneficiaries may receive a lump sum for the remainder of your account.
To illustrate, let’s assume Bob purchased a single-life annuity for $100,000 but died after only receiving $50,000 in annuity payments. Bob’s beneficiaries would be eligible for a lump-sum payment of the remaining $50,000.
Another available option is the ten-year certain election. Under this option, if you die before receiving annuity payments for a ten-year period, your beneficiary will receive payments for the rest of the ten-year period. This option is only available with a single-life annuity.
Please note that choosing either the cash refund or the ten-year certain option will result in your monthly annuity payments being less than a TSP life annuity.
Is the TSP Life Annuity Right For You?
To summarize, a TSP life annuity provides monthly payments to you for the rest of your life and can potentially be used to provide benefits to others as well. In exchange for the steady payments an annuity can bring, you must give up control and access to the full “pool” of TSP money.
While converting TSP to a life annuity may work well in certain scenarios, it’s vital to understand how this piece functions in tandem with a FERS pension, social security benefits, and any life insurance or other available retirement assets. It may be wise to speak with a financial professional to understand how a TSP life annuity may work in your financial plan.
Disclosure: The information contained in these blogs should not be used in any actual transaction without the advice and guidance of a tax or financial professional who is familiar with all the relevant facts. The information contained here is general in nature and is not intended as legal, tax or investment advice. Furthermore, the information contained herein may not be applicable to or suitable for the individuals’ specific circumstances or needs and may require consideration of other matters. RBI is not a broker-dealer, investment advisory firm, insurance company, or agency and does not provide investment or insurance-related advice or recommendations. Brandon Christy, President of RBI, is also president of Christy Capital Management, Inc. (CCM), a registered investment advisor.