With one year or less until retirement, you’re preparing to touch down. Your focus shifts from assessing the ability of your Thrift Savings Plan to meet your overall needs in retirement, to accessing your account when necessary. While a change of course might be possible, it’s certainly not desirable.
Assuming that you’ve accounted for or dealt with any obstacles in the way, such as outstanding loan balances, early withdrawal penalties, spousal rights or court orders, accessing your account is as easy as completing one of the distribution request forms available at www.tsp.gov.
Now it’s time to focus on how you will actually secure and produce the income stream you’ll need in retirement.
Whether to annuitize
One option for turning your TSP account into a reliable income stream is to use all or part of it to buy an immediate annuity. You may buy the annuity offered by the TSP’s vendor, or you may buy one from an insurance company that you select. If you are not a competent investment manager and are unwilling to hire one to advise you on TSP withdrawals, then an annuity may be a good choice.
The advantage is that you are guaranteed income for as long as you’ll need it. The disadvantage is that you’ll have to relinquish control of your savings to get it.
Buying an annuity need not be an all-or-nothing proposition, however. One strategy you may want to consider is to buy an annuity that will guarantee the income you need to cover your essential living expenses, and then use the remainder of your savings to provide additional income — and the potential for greater growth — for nonessentials.
In any event, you should make sure to find an annuity that guarantees inflation adjustments for as long as payments are made.
Distribution planning
If you decide to retain some or all of your TSP balance instead of using it to buy an annuity, you’ll have to decide whether to leave your money in the TSP after you retire or move it out, as either a distribution or a rollover to an IRA, or both. If you retire during or after the year in which you reach age 55, you’ll avoid the IRS’s early withdrawal penalty by leaving your money in your TSP account at least until you’re 59½.
Because of the TSP’s low expenses and efficient design, I encourage you to leave your money there, and even to move eligible outside retirement plan money in, if possible. In my opinion, the only sound reason to move your money out of TSP is to have withdrawal options not offered by TSP — for example, an immediate annuity or irregular partial withdrawals.
Managing your account
Managing your TSP account to support a stream of withdrawals can be a difficult and risky endeavor. It really should be handled by someone with the right knowledge, particularly if you want to get the most out of your account without undue risk of failure.
One way to guarantee lifetime income is to take a series of payments based on your life expectancy, which changes each year. Since the account balance and your life expectancy change each year, so do the payments.
The idea is that you keep dividing your remaining balance into smaller pieces so that it lasts as long as you do.
The variable payments produced by this method are often unattractive to retirees who want predictable income from one year to the next, however.
Another option is to use the TSP’s L Funds and follow the guidance you’ll find at www .tsp.gov.
There are as many ways of managing investment accounts as there are managers. They are all subject to risk, however, and it is important to keep in mind that the consequences of failure can severely affect your ability to live the life you want in retirement.
Retirement is not the time for speculative or reckless investment strategies. Each time you take a withdrawal, the game changes and you have to reassess the probabilities going forward.
Written by Mike Miles
For the Federal Times
Publication June 4, 2007