Turning Your Pile Into a Paycheck: How Should You Invest Your TSP in Retirement?

How can federal employees determine how much they can safely withdraw from their TSP accounts to spend in retirement?

When you retire from the Federal government you have a big decision to make, one as important as the decision to retire in the first place: In addition to my pension and Social Security, how much do I need to withdraw from my TSP to be able to enjoy my retirement?

What matters more than knowing how much of your savings you can safely spend each month? For a federal retiree, not much. 

If you don’t know the answer, you run the risk of spending too much, running out of money and destroying your financial security in retirement. 

On the other hand, not knowing what amount is safe to spend may lead you to live too frugally and depriving yourself of the standard of living you should rightly enjoy. You retired for a reason, right? 

The FERS system is meant to have three separate sources of income: the FERS pension, Social Security (and supplement) and withdrawals from your retirement savings.

When doing the math before retirement, the size of your paycheck from Social Security and the FERS pension is 100% calculable. For example, as a form of a defined benefit plan, the FERS pension has a set of rules that when followed, will DEFINE the BENEFIT you receive. For the purposes of this article series, we won’t touch on the rules and advice surrounding the size of your pension or Social Security. We are more concerned about how you get your paycheck once you retire from the third source, the Thrift Savings Plan. 

Getting income from the FERS Pension and the TSP are as different as night and day. For example, the pension has four crucial characteristics that make it especially attractive to retirees.

  1. The income is guaranteed. 
  2. The income will last your entire life.
  3. The size of the income will rise each year. There are guaranteed cost of living adjustments in the FERS pension and Social Security. 
  4. You do not have to do any work or management to receive the income. Like a paycheck, it arrives each month like clockwork.

On the other hand, the income you could receive from the TSP is much more nuanced. Look at the 4 criteria above and ask yourself the following questions:

  1. Is the income generated by the TSP guaranteed? (The income, not the G Fund)
  2. Will my TSP last my entire life? My spouse’s? 
  3. Will my paycheck from the TSP rise each year with cost-of-living adjustments? 
  4. Do I need to manage the TSP to make it happen?

I would say the answers to the above questions are “It depends,” “Maybe” and “I’m not sure.”

Which brings me to the central issue we are tackling in this series: Do you confidently know how much can you withdraw from the TSP and other savings? How do you determine that amount?

More directly—How do I turn my Pile into a Paycheck?

When we pose this question at our FERS retirement seminars we usually hear one of the following answers from our students:

  • Well, you tell me, what can I take?
  • I want to live off the interest and not touch the principle.
  • Doesn’t the L Income fund do that? 
  • Give me the max amount I can take from the TSP and I’ll be happy.

But what is the max? What “should” you take? We just don’t know. It’s not a one size fits all answer.

The answer to this question has many variables that we will explore in detail in this series. However, the true reason we don’t know is that we are missing a critical piece of the puzzle.

When are you going to die? 

If you knew that “little” fact, the calculation would be much easier. You could do some simple spreadsheet math; put it 100% into the G Fund, divide the number of years you have left by your account balance and arrive at the correct answer.  

But since most of us don’t know that fact, we are left to choose between two alternate scenarios:

  1. Plan for a short life. Take more money out while you’re young and just “roll with the punches” if your money expires before you do. The positive of this approach is that if you die early, you at least lived it up. You didn’t leave anything on the table since you can’t take it with you. The negative is that you might run out of money and make hard lifestyle adjustments. 
  2. Plan for a long life. Take a little less money while you are young in retirement but greatly increase the odds you will never run out of money. The positive of this approach is evident; you will have money until you die. The negative of this approach is that you will have money left. You won’t be around to spend some of your hard-earned savings.

Every single person retiring from the Federal government has some version of this dilemma. Where you personally fall on the spectrum depends on your family needs, expenses and desired retirement lifestyle. 

There is also a myriad of other factors such as: Are you married? Do you have a chronic health condition? Do you need to leave money to your spouse so he/she can live? Do you need save money in case of long-term care or higher health care expenses?  (And more)

What does this have to do with investing your TSP post retirement? Everything. How do you know how to manage your Pile if you don’t know what kind of Paycheck it needs to generate?   

Do you know that most fatalities on Mt Everest happen after climbers have reached the summit? They had hit their goal! They made it and they were on their way down that’s when the danger was at its highest.

We can apply that lesson for retirement as well. Investing for accumulation is not the same as investing for distribution. As in climbing Everest, going up the mountain is very different than coming down. 

We want our federal family to have safe descents and great retirements. In the “Turning your Pile into a Paycheck” series we will explore fundamental retirement distribution strategies and decisions that every federal employee can benefit from including:

  • Why is investing for growth different than investing for income? 
  • What key considerations are most important? What are the risks? 
  • What are the best and worst options for retirement investments within the TSP?
  • Considering moving money out of the TSP—what are investments or products that you should avoid? 
  • What are good options? 
  • Should you pay for a financial advisor? Are there advisors you should avoid?
  • And more. 

How do you know what you should do? Not your colleague, cube-mate, or personal financial celebrity, you. We will attempt to find out! Stay tuned for our next installment! 

The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.”

Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Mission Point Planning Group and Securities America are separate companies. Securities America its representatives, Mission Point Planning and Retirement do not provide tax or estate planning advice.  These are services are provided in conjunction with a qualified tax and/or estate planning professional.

About the Author

With over 17 years of experience as a financial planner, author and educator, Anthony Bucci helps Feds ‘cut through the noise’ and make retirement decisions free from opinion, emotion and conjecture. Find out more about Anthony by visiting www.missionpointplan.com