How Much Income Will Your TSP Really Provide in Retirement?

Withdrawing a steady amount from your TSP in retirement is something most people will need, but how exactly can federal retirees do this?

Having a big TSP (Thrift Savings Plan) by retirement is amazing. 

But there is a problem. 

We aren’t used to living off a large sum of money. We are used to a pay check every 2 weeks. 

So how do we turn your TSP into a pay check without running out of money? 

This article will dive deep into exactly this question.

Biggest TSP Pay Check Mistake

The 4% rule is a great way to estimate how big of a pay check your TSP can provide without you worrying about running out. 

However, most people don’t understand how the 4% rule actually works and end up applying it incorrectly (which tends to leave a lot of money on the table!).

The Real 4% Rule

Many people I talk with believe that the 4% rule says you can only take out 4% of your TSP balance every year. But this is not true. 

What the 4% rule actually says is that you take 4% of your TSP balance at the beginning of retirement and then increase that original withdrawal every year based on inflation.

Here’s an example: 

Let’s say you retire with $500,000. 4% of that is $20,000 so in year 1 of retirement you can withdrawal $20,000. 

In year 2 most people think you have to again multiply 4% by your new TSP balance but that is not what the 4% says. 

The real 4% rules says that in year 2 you take the first years withdrawal amount and increase it by what inflation was during the year. 

So if inflation was 5% then your year 2 withdrawal would be $21,000 ($20,000*1.05). 

The chart below shows how one’s withdrawal would change over time with different inflation rates assuming your initial withdrawal was $20,000.


But You’re Not Done Yet

So if you have $500,000 in your TSP and plan on taking out $20,000 your first year, do you get to keep the entire $20,000? 

Probably not. 

Enter Uncle Sam. We can’t forget about taxes! 

Assuming a 20% effective tax rate, out of a $20,000 first-year withdrawal you would pay $4,000 of it in taxes and you’d be able to spend $16,000. 

And obviously, your tax rate in retirement will be based on what other income you have and what type of retirement account you are withdrawing the money from. 

For example, if you withdrew the $20,000 from the Roth TSP then you’d pay $0 in taxes. 

That’s right, $0!! 

That is one of the huge perks of the Roth TSP and you can go over the pros and cons of the Roth TSP here.  

How to Make TSP Pay Checks

Once you know how much you can withdraw from your TSP every year then you will want to decide how often you want to receive the payments (monthly, quarterly, etc) and break up the annual amount accordingly. 

The TSP (and other banks if you have IRAs) has many flexible options on how you want to receive your money.

Most people enjoy a monthly payment because most bills (like utilities, credit cards, etc.) need to be paid every month. 

So a $20,000 annual withdrawal would be about $1,666 every month which is about $1,333 after tax. 

But you can certainly adapt your payment schedule based on your personal needs. 

About the Author

Dallen Haws is a Financial Advisor who is dedicated to helping federal employees live their best life and plan an incredible retirement. He hosts a podcast and YouTube channel all about federal benefits and retirement. You can learn more about him at Haws Federal Advisors.