Recent board meeting indicates possible changes on the horizon for the Thrift Savings Plan’s (TSP) least popular withdrawal option.
In a recent FRTIB (Federal Retirement Thrift Investment Board) meeting, the Director of the Office of Participant Experience expressed interest in putting up the TSP annuity contract available for bids. Currently, MetLife administers single-premium immediate annuities for those who choose that TSP withdrawal option upon retirement. At the start of 2020, the TSP’s governing body renewed their contract with MetLife and that contract only lessened the appeal of these annuities by reducing the maximum annual payment from 3% to 2%.
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Now, it seems that the FRTIB is going to reattempt renewing their annuity provider contract to make the offerings “more attractive” to federal retirees. Efforts to do so still seem to be in the preliminary stages.
TSP Life Annuity Option
We reviewed the pros and cons of these annuities in a recent article. They are irrevocable and can be purchased with either the full TSP account balance or just a portion. The annuities provided by MetLife provided guaranteed income for life, but if you pass earlier than expected, there are limited options to pass anything along to your surviving spouse or heirs. There is a 10-year payout guarantee though, meaning if you die before receiving 10 years of payments, your beneficiaries will receive the remaining payments. (For example, if you’ve gotten 6 years of payments upon death, the income will continue for 4 years, paid out to beneficiaries.)
The factors that determine the lifetime income amount include the amount of the premium paid, how many additional features are selected, the purchaser’s age, and the average interest rate of 10-year Treasury bonds when the annuity is bought. The additional features usually diminish the monthly dollar amount received. An example is the cash refund feature, which will pay any difference that results when subtracting the income received until death from the amount of the premium paid. The interest rate determines how much the contract value will grow while the annuity is in effect, and this rate is subject to volatility and is adjusted on a monthly basis. It was 4.450% last month, but as low as 1.209% in January 2020. As these financial products are designed to last at least a decade, the interest rate received may not be able to keep up with inflation if economic conditions change significantly, as we’ve seen over the last 3 to 4 years.
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Until Next Time,
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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.
***A fixed annuity is a long-term, tax-deferred insurance contract designed for retirement. It allows you to create a fixed stream of income through a process called annuitization and provides a fixed rate of return based on the terms of the contract. Fixed annuities have limitations. If you decide to take your money out early, you may face fees called surrender charges. Plus, if you're not yet 59½, you may also have to pay an additional 10% tax penalty on top of ordinary income taxes. You should also know that a fixed annuity contains guarantees and protections that are subject to the issuing insurance company's ability to pay for them.
