TSP annuities

[free4now]

My father is retiring now from many years of civil service in his mid 60's, and deciding whether to take the sum in his TSP as an annuity. TSP is Thrift Savings Plan, a government only retirement savings account. He will have a pension and social security as income, but the TSP money will be a necessary supplement to his income. The TSP plan allows him to take withdrawals as a lump sum into an IRA or as an annuity underwritten by Metlife. He's thinking of going with the annuity for a couple of reasons:

- He's used to spending a monthly income and likes the discipline of that enforced spending limit
- He is healthier than most folks his age and projects a longer than average lifespan
- The TSP annuities may be a better deal than what can be obtained on the open market (they are only available to government employees in the TSP plan).

As an early retiree myself, annuities are anathema, but maybe they could make some sense for conventional retirees like him. I took a look at the TSP annuity calculator at:

TSP Annuity Calculator, Introduction 08-05-2004

and it does seem to return some decent numbers... it looks like a COLA'd annuity would pay him about 6.5% of the original balance each year, and a non-COLA'd annuity would pay about 8.5% per year.

My initial advice was to wait a few years to make the decision... I think he has until age 70.5 to make the decision, so I suggested waiting until he's settled into his retirement situation to pull the trigger, but I must say it does look somewhat attractive.

Anyone else looked into TSP annuities?

 

[RetireeRobert]

I took a look at the TSP annuity calculator at:

TSP Annuity Calculator, Introduction 08-05-2004

and it does seem to return some decent numbers... it looks like a COLA'd annuity would pay him about 6.5% of the original balance each year, and a non-COLA'd annuity would pay about 8.5% per year.

My initial advice was to wait a few years to make the decision... I think he has until age 70.5 to make the decision, so I suggested waiting until he's settled into his retirement situation to pull the trigger, but I must say it does look somewhat attractive.

Anyone else looked into TSP annuities?

Don't know a thing about them. But your advice to him to wait a few years does seem like good advice---IF he gets a proportionately larger TSP annuity payout at age 70 rather than starting it now at mid 60's.

You could go to Vanguard's annuity site and see what his TSP lump amount could buy annuity wise now and at age 70, and compare to the results to what the TSP annuity would pay.

The 6.5% cola'd, guaranteed for life annuity at age mid 60's does sound kind of attractive. Don't think he could duplicate that by rolling TSP lump into an IRA.

You did say the tSP would be necessary element of his income so assume he does need that income by age 70-71?

 

[clifp]

A few comments. First definitely wait, the longer he puts off annuitizing the more income he will have. It generally make sense to convert a small portion of your TSP/IRA into a ROTH IRA. Having money that you can withdraw latter into retirement that won't increase your Adjusted Gross Income is very helpful.

Generally the best time to make this partial Roth conversion is the first couple of year after retirement before Social Security and/or Pension kick when your taxable income is the lowest. Here is one possible spending approach
Year 1 and 2 collect pension, spend down taxable assets, convert 10-20K to a Roth IRA
Year 3, 4 collect pension, Social Security spend down taxable assets. This minimize the amount of SS subject to income tax
Year 5 running out of money start TSP/IRA withdrawals
Year 6 annuitize some of TSP
Year 7 car died, darn dip into ROTH IRA to get new(er) one.

As for the annuity. My new mantra is there is nothing wrong with buying an annuity, but you almost never want to be sold one. As long as salemans isn't involve I think they make sense for a lot of conventionally retired folks. I don't think it makes sense to annuities the entire TSP, given he has a generous COLA federal pension, and COLA SSI is probably a good compromise. The problem with annuitizing it all is I think you want to have a emergency fund and IRA works fine for a senior citizen and ROTH is even better.

Finally, I ran an simple annuity for a 65 year old man on both Vanguard and the TSP website, the results were virtually identical, (Vanguard wants more details) so shopping makes sense.

 

[free4now]

Good replies. I also tried the vanguard calculator at

Vanguard Lifetime Income Program -- Request a Quote

and it returned payouts about 1/4 percent less than what the TSP annuity calculator gave, so the TSP annuity looks like a decent deal.

I also agree that converting part of the TSP to a Roth for e-fund and lumpy expenses would be wise.

 

[Tadpole]

About the COLA

it looks like a COLA'd annuity would pay him about 6.5% of the original balance each year, and a non-COLA'd annuity would pay about 8.5% per year.

I hope you saw this at the bottom of the results page:

Because you chose the increasing payment option, your payments can increase each year based on the consumer price index. This increase can range anywhere from 0 to 3%.

So it is a COLA as long as the cost of living rises 3% or less. I agree with those that are saying that, if you annuitize it, you should consider annuitizing only part of it.

 

[W2R]

Anyone else looked into TSP annuities?

Yes, I have. I am a federal employee. However, only 2% of federal retirees buy them. They are a good deal, as lifetime immediate fixed annuities go. At a federal "retirement training" seminar, we were discouraged from getting them due to the low interest rate environment at present. The exact words were, "You can do better on your own", though the presenter did not elaborate on that.

Is he in the old CSRS retirement system? If so, he should have a substantial pension coming to him in addition to the TSP, and income derived from the TSP will just be a minor portion of his retirement income.

If he is in the FERS retirement system, instead (as is everyone first employed in the late 1980's or after, and some who transferred from CSRS), I would suggest that he should devote no more than 25%-33% of his TSP money to an annuity. This is a rule of thumb that I have read in several discussions online, and it seems to make sense. When you buy an annuity, it would be helpful if MetLife (which handles the annuities), or whatever company they sell the annuity to, remains financially solvent. The federal government is no longer involved, once you buy the annuity, and if anything bad happens they wash their hands of it.

I was planning to buy a TSP annuity with about 30% of my TSP money, until I discovered recently that I may come into a substantial inheritance. This shook up my retirement planning in a number of ways. Now, I am tentatively planning to put my TSP into the "G Fund" as part of my fixed (non-equities) asset allocation. Although the "G Fund' doesn't pay as well as an annuity, it is pretty predictable and has never had a negative return. I think it is about as rock solid as anything I know of.

At present, conversion of TSP money directly to a Roth IRA is NOT permitted. You can roll over to a non-Roth IRA, and from there to a Roth. It is anticipated that conversion directly to a Roth IRA will become possible in 2010.

 

[donheff]

Good replies. I also tried the vanguard calculator at

Vanguard Lifetime Income Program -- Request a Quote

and it returned payouts about 1/4 percent less than what the TSP annuity calculator gave, so the TSP annuity looks like a decent deal.

I also agree that converting part of the TSP to a Roth for e-fund and lumpy expenses would be wise.

I haven't paid enough attention to annuities to run detailed numbers but, if Vanguard is only 1/4% behind, it may be a better deal. If I remember correctly, their COLAd annuity goes up as much as 10%/yr vs TSP's 3%. Also, I don't think his only alternative is to roll the funds into an IRA. I think he can set a fixed monthly withdrawal schedule and keep the funds in the TSP. TSP has much better expense ratios than any alternative.

 

[W2R]

I think he can set a fixed monthly withdrawal schedule and keep the funds in the TSP. TSP has much better expense ratios than any alternative.

This is what the vast majority of federal retirees do with their TSP, from what we were told in retirement training. You can change the monthly withdrawal amount once a year to any amount equal to or exceeding $25/month. (Or, instead of a fixed amount, you can withdraw according to life expectancy as in 72t.)

 

[martyb]

I will PROBABLY go the fixed withdrawal route with my TSP when I retire in 5 yrs. but I haven't decided 100% yet. My question is: Is your dad under CSRS or FERS? I know somebody already asked this but, if he's CSRS, then he might not be able to anticipate a whole lot of SS because of the WEP (Windfall Elimination Provision) that drastically reduces SS for people who are covered by a public pension and have not paid into the SS system over most of thier career. I qualified for slightly more than the required 40 quarters needed to receive SS, but since I'm a CSRS employee, and the 40 quarters was earned primarily in the 70's and early 80's, my SS check is gonna be really small....probably in the $250 per month range. I figured that out for myself, and then a SS person confirmed it for me on the phone awhile back. Even though I've been paying some $$ into SS all these years due to SS being witheld from my AF Reserves paycheck each month, it's not enough to be considered a "substantial" amount that would qualify for SS. So.....be sure to determine whether your dad actually does have some SS coming to him, and how much that amount is. You cannot go by the statements that SS sends him periodically. They do not apply to a civil service employee who has worked their whole career under CSRS.