Use Your Thrift Savings Plan to Increase Your Social Security Retirement

What is “pensionizing” and could it help to increase your retirement income?

I would like to share two resources for how annuitants in the Federal Retirement Employees System (FERS) or retired members of the armed forces could use their Thrift Savings Plan (TSP) to enlarge their Social Security retirement.

Steve Vernon holds the Fellow of the Society of Actuaries (F.S.A.) designation. His, How to “Pensionize” Any IRA or 401(k) Plan was written in 2017 while he was serving as a research scholar for the Stanford Center on Longevity.

What is “Pensionizing?”

The essence of “pensioning” is for individuals to generate a stream of lifetime retirement income without purchasing an annuity and without significant involvement from financial advisers. Vernon also refers to this method as the “Spend Safely in Retirement Strategy”. 

Alicia H. Munnell and Gal Wettstein both earned their doctorates from Harvard University. Working at the Center for Retirement Research at Boston College in 2021. They coauthored, Would 401(K) participants use a Social Security “Bridge” Option?

Munnell and Wettstein’s research indicated 401(k) participants may be willing to use their plan to purchase an annuity if offered as an option to enhance delaying Social Security retirement benefits. Such an option, if implemented, would pay the participants via the plan an amount equivalent to their Social Security benefits, thereby increasing their monthly Social Security payment when they do eventually claim.

How Would This Apply to Federal Retirees?

What is interesting is that Vernon, Munnell, and Wettstein did not consider the unique situation of FERS annuitants or retired military.

Federal annuitants and military retirees, unlike most Americans, have a defined benefit plan that is based upon a formula of years of service and the highest three years of their salary – in addition to Social Security and a 401(k) equivalent, TSP. This source of immediate income in retirement for federal and military retirees can be very helpful in the “bridging” or “pensionizing” the TSP to enlarge the Social Security retirement. 

Your TSP is designed similar to a 401(k). These are defined contribution plans. A percentage of voluntary contributions are matched by your employer and all of your contributions and the matching contributions are permitted to grow tax-deferred until you elect to withdraw them. You are allowed to decide within the plan’s parameters how the investments can be allocated. 

Your Social Security retirement is a defined benefit plan designed so that the longer you wait to begin collecting benefits, the more you will get each month. If you claim those benefits at age 62, rather than waiting until your full retirement age (FRA) you can expect up to a 30% reduction in monthly benefits. For every year, you delay past the FRA up to age 70, you get an 8% increase in your benefit. 

When you have been successful at the end of your career in contributing and allocating your investments in the TSP there is an opportunity to take advantage of the “bridge” or “pensionize” option n to fund the delay of claiming your Social Security retirement. 

FERS or military pensions with TSP accounts may be sufficient to take advantage of delaying their Social Security retirement benefits when you have a significant TSP account for several reasons. 

A planned withdrawal process for a large TSP balance becomes important because of future Required Minimum Distributions. Sometimes we are good at building up a TSP balance. The proceeds eventually have to be withdrawn or you will face penalties as well as taxes. The “bridge” strategy does this by offering an incentive of a larger Social Security retirement as a result of drawing down your TSP balance. 

A “bridge” strategy allows you to tap into your TSP as needed. At the onset, you are not committed to a certain age for claiming Social Security. One has the flexibility to delay Social Security anywhere between ages 62 to 70. 

Is a larger Social Security retirement a good deal? The Social Security retirement income unlike a TSP is an annuity. It receives a Cost-of-Living Adjustment every year. Social Security is also a guaranteed pension that will increase for each year delayed and will be at least 15% tax-free at the federal level with the remainder not taxed by all but 12 states at this time.

Other Considerations

Are you single or married? What is your family and medical history? Do you want to leave a legacy to children? Read an AARP article, What is the Social Security Break-Even age? If you have a financial planner, you should discuss a “bridge” strategy before considering it as being appropriate for your circumstances.

Delaying Social Security can also increase the Social Security retirement benefit for your spouse. He or she can have a bigger spousal pension from the spousal benefit and also the survivor benefit. A spouse may also want to wait until his or her full retirement age to claim the Social Security benefit as AARP shares in its article, How much will my spousal benefit be if I claim it at 62 and my spouse retired at full retirement age?

I am not endorsing the “bridge” or “pensionizing” concept as a blanket recommendation for those with large TSP account balances. The research from Vernon, Munnell, and Wettstein offered the idea of increasing your retirement income without purchasing an annuity. Some of you may already be doing this or thinking about it upon retirement.

Will Social Security continue to exist in the future as it does today? Social Security’s future is subject to political risk. Don’t forget your TSP account as an investment is subject to:

  • Systematic risk
  • Unsystematic risk
  • Credit risk
  • Interest rate risk
  • Reinvestment risk
  • Inflation risk
  • Liquidity risk
  • Company risk
  • Sector risk
  • Business risk
  • Political risk
  • Horizon risk
  • Foreign investment risk
  • Currency risk

 and most importantly:

  • Your emotional and behavioral risk

About the Author

Francis Xavier (FX) Bergmeister retired from the USMC and the F.B.I. Consider following him on LinkedIn as he shares articles from others about retirement and other financial topics. He also provides retirement seminars thru Federal Career Experts.