Money Pilot Financial Advisor Podcast
Money Pilot Financial Advisor Podcast
Episode 58 TSP Annuity
There are options you can add to the annuity, at a cost. An increasing payments option an help protect against the loss of buying power due to inflation. It has a set 2% increase in the payments you receive each year, whether inflation is more or less than that.
Welcome to the Money Pilot Financial Advisor Podcast, where you team up with Money Pilot founder, former Army helicopter pilot and your host, Katie Cannon, you put your money where your heart is. Together, we'll tackle issues big and small so you can take charge and land your financial life.
Kathleen Cannon:Hello, and welcome back to the podcast. Today we're talking about one particular option for withdrawing money from the your TSP or Thrift Savings Plan. After you separate from service, it's called an annuity. There are other TSP withdrawal options like leaving your money there and TSP to grow taking regular withdrawals, called installment payments, or tapping it when you want with single withdrawals. But many people find the annuity option kind of confusing. So we're going to just focus on that today. Right off the bat, don't confuse the TSP annuity option with a FERS, CSRS or military annuity. If you stay in long enough to retire from the federal government or the military, normal people will call you who are retiree, but the government will refer to you as an annuitant. An annuitant is someone entitled to regular payments from a pension or an annuity. So OPM or DFAS will call you an annuitant because you're receiving pension payments as a retiree. If you choose to turn your TSP into an annuity, this is something else entirely. If you do that, I guess you could say you're a double annuitant if you go that route, and we'll talk more on that later. Now we know the TSP annuity option isn't your pension. So what is it? Believe it or not, an annuity is a life insurance product that you can buy with your TSP savings. You can use all or part of your TSP account balance to purchase a life annuity through TSP is chosen outside vendor, which is MetLife. Right now. purchasing an annuity means you can take money from your TSP to buy the annuity. The insurance company then sends you set monthly payments for the rest of your life or your spouse to if you choose a joint life annuity. The money you use to purchase a life annuity is no longer managed by you. It's gone. It's not like your TSP account, an IRA or a bank account. You give up your money and the control of it permanently. In exchange for guaranteed lifetime monthly payments. You can use all or some of your TSP to buy a life annuity. The minimum price purchase is $3500. The biggest things to remember are that you are literally giving up your TSP money that is used to buy the annuity. The annuity is a permanent contract that can't be changed and is guaranteed for life. So you can't outlive your money. Sounds pretty sweet. Right? Kind of like your pension. But there's a huge caveat to the life annuity. The annuity payments are set for life. So when you think about inflation, you realize that over time, that fixed amount of annuity income will buy you less and less over time, as the prices of things you need to buy inevitably go up and up. While Social Security military and federal civilian pensions rise with inflation, called a cola. The TSP annuity payments, payouts are frozen in time. Now are there some options that may make an annuity even more attractive at a cost? First is increasing payments which can help protect against the loss of purchasing power because of inflation. This option is a set 2% increase in your payments that you receive each year. Whether inflation is more or less than that. The cost is when the annuity payments start, they are smaller than if you had chosen level payments. I mentioned already that guaranteed payments for life are the number one benefit of an annuity. The flip side to that is that annuity payments stop when you die. You can choose a joint life annuity with payments that continue at 100% or 50%. Until both you and your spouse die, or under certain circumstances a dependent and again, the monthly payments you receive from your annuity would be less than if it was only paid until your death. Either way, this leaves nothing for your children or other heirs. And this is something to consider if passing along and inheritance is important to you. Lastly, annuities are priced so the insurance company makes a profit if you die at an average age or sooner. So an annuity could turn out to be a good deal for someone who lives way into old age, collecting that payment every month all the way along the way. die early and you may have been better off putting that money in a cookie jar. You may not be surprised to hear that there are options you can choose for that too. With the cash refund option. If you die before the amount used to purchase your annuity has been paid out. The remaining amount will be paid to your beneficiaries in a lump sum. For example, if you use $100,000 from your TSP to buy an annuity that pays you $2,000 a month, and then you die 30 months later, you've paid $100,000 for just $60,000 in benefits, ouch. With the cash refund option, the insurance company would pay your beneficiary $40,000 that's the$100 you paid to buy the annuity minus the $60,000 you received before you died. A different option is the 10-year certain option that guarantees you or your beneficiary will receive at least 10 years worth of payments. If you die within the first 10 years. Just remember, choosing these options lowers the amount of monthly payments that you will receive, and it can be a pretty big drop. So there's a lot going on here, which is what can make it confusing. So let's circle back. One, you can use your TSP savings to buy a life annuity that locks in a set monthly payment for you for the rest of your life. No matter how long you live to any nice other options that you add to your annuity will lower the amount of monthly payments that you receive more nice options, lower monthly payments to you to see how these different options would affect your particular situation. TSP has a great online calculator that will walk you through an estimated payment based on the amount of TSP money you give up, and the options you want. Play around with it and see how each option affects it. And I'll put a link in the show notes. Remember, when you buy an annuity through TSP, you're buying insurance that no matter how long you live, you will still have some money coming in. What you give up is the ability to change your mind, change your priorities, or to invest that money for potentially higher income. And once you make the decision, there's very little you can do to change it or get out of the contract. If something in your life changes that would affect how much you need each month. It's just very difficult or impossible to adjust from there. So with these pluses and minuses, how do you decide there are several key things to consider. First, How comfortable are you with uncertainty or risk. If you don't like risk at all or are more afraid of running out of money completely? Because you live a long time and annuity may be a good choice. If you're more concerned that a fixed income may leave you struggling to pay for your needs in the future because of higher prices, keeping your money and TSP or other investments with growth potential. Maybe a better bet for you. It may help to go back to last week's episode 57 that I did on risk profiles when thinking about how an annuity will fit your needs or tolerance for uncertainty. Also, will you be eligible for a military pension, federal government pension or social security? Remember, these pensions are guaranteed for life too, and they do increase with inflation. So doubling down with a fixed income annuity from TSP might not add much benefit. In this case, keeping your TSP invested instead, may be a good way of maintaining some more control flexibility and the possibility of more growth. What if you didn't stay in long enough to qualify for a pension? Well, an annuity might look a bit more attractive. If you really don't tolerate risk. Even then, if you think a TSP annuity may be right for you shop around. The TSP annuity is purchased by TSP for you from a particular insurance company, which right now is MetLife, you may get a better deal shopping around yourself. And lastly, if you want a fixed monthly payment out of your TSP, there is an alternative to an annuity. I mentioned earlier that if you keep your money in the TSP, you could choose regular installment withdrawals, that is a certain amount every month, quarter or year to your choice. With this, your money stays in your TSP account. You choose how to invest it, which may provide even higher income, and you can stop and start these payments whenever you'd like. And you can even change the payment amount if your circumstances change. But there is no guarantee that your TSP will last as long as you do. If you're considering turning all or some of your TSP into an annuity with MetLife. Talking with a fee only financial planner can be of great investment. I mentioned that if you want an annuity it pays to shop around for like I said annuities are an insurance contract, and insurance agents receive really good commissions for selling them. insurance agents aren't inherently bad, but they have a significant financial incentive to sell you their particular company's product. So you can go to an insurance broker instead of an agent who can help you shop different insurance companies for the best annuity for you. And better still, a fee only financial planner like me will take another step back with a wider view to help you decide what the best option for you is including annuities, other investment options, and how these tie in with Social Security, your pensions and how you envision living your life in retirement. You have any more questions? Reach out I love hearing from you.
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