Should you choose the TSP life annuity option? What is it? What are the pros and cons?
Upon retirement, federal employees under FERS can expect monthly income streams from their pension, social security benefits, and the Thrift Savings Plan (TSP). While the FERS annuity and social security amounts are pretty much fixed (although they usually see a pay bump due to annual COLAs), the TSP is a different monster altogether.
Recent federal retirees can select installment payments, a MetLife annuity, or they can withdraw their money and move it to an outside retirement account (IRA) and have a financial planner manage their investments and income. It doesn’t have to be an “all or nothing” decision, though. Federal annuitants have the option to use a portion of their TSP balance to purchase an annuity from MetLife and then they can withdraw all of the remaining portion, or set up installment payments with their remaining TSP balance.
Retiring from the Federal Government soon? Learn all about the Thrift Savings Plan at our No-Cost webinar, featuring Ed Zurndorfer!
No matter what decision is made – is the life annuity option ever worth it? The biggest problem with purchasing the annuity is that it is irrevocable and as it is a single-premium immediate annuity, you cannot surrender the contract down the road. By sacrificing flexibility, however, what you gain is certainty. The annuity will have a fixed growth amount (usually between 2% and 3%) and the annuitant will receive a fixed dollar amount for their lifetime, typically on a monthly basis.
Installment payments on the other hand can be increased, decreased, or stopped. The money also stays in the TSP, where it can continue to grow in the core funds (G, F, C, S, and I). This also means the option to withdraw one-time lump sums remains on the table should you decide to move all or any of the TSP money into an outside account.
As for annuities overall, they’re usually overpriced and overcomplicated, which makes them easy to sell. Certainty can also be appealing to some folks. That being said, if the MetLife annuity seems unappealing, it is possible to withdraw the funds from the TSP and purchase another annuity product elsewhere. But whatever you choose, this decision is one of the most important when retiring from federal service and why you need the most crucial component to a comfortable federal retirement: strategy.
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**Written by Benjamin Derge, Financial Planner, ChFEBC℠ The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Benjamin Derge and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Expressions of opinion are as of this date and are subject to change without notice. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors.
***The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal employees and members of the uniformed services, including the Ready Reserve. The TSP is a defined contribution plan, meaning that the retirement income you receive from your TSP account will depend on how much you (and your agency or service, if you're eligible to receive agency or service contributions) put into your account during your working years and the earnings accumulated over that time. The Federal Retirement Thrift Investment Board (FRTIB) administers the TSP.***
