Understanding TSP Annuities

Converting your TSP into a life annuity is one option available to federal employees. Doing so sets up guaranteed monthly payments that last the rest of your life.

This can be an appealing option for people who are worried about burning through their savings or running out of money in retirement.

So if you are looking for security and stability above all in retirement, then an annuity may make sense as a payout option for your plan.

According to a fact sheet from TSP.gov, when you opt for a life annuity, you give up control of your money in exchange for guaranteed monthly payments.

It’s essentially a trade-off, where you relinquish control in exchange for certainty.

TSP annuities are straightforward and similar to other annuities. But there are several variations available, and you need to make a few choices.

First, you must choose which type of annuity to opt for: a single life annuity or joint life annuity.

In a joint life setup, you can select a joint annuitant (usually a spouse) who can benefit from the payments as well. If you die before your spouse, the payments continue and are distributed to them until they die.

The second thing to consider is whether you want to include a cash refund feature with your annuity. This option can provide more certainty for your beneficiaries by guaranteeing that any money left over from what you put into the annuity is distributed to them when you die. However, it lowers the payments you receive while you are alive.

The other option is setting up a 10-year certain period. If you opt for this protection, the payments from your annuity are available for 10 years regardless of when you die. Say, for example, that you die five years after purchasing the annuity. The payments would continue for another five years (the rest of the 10-year period) to your beneficiary.

To buy a TSP annuity, you must be eligible for and have a TSP.

This option is available to federal employees. If your retirement plan is not a TSP, then you don’t have access to TSP annuities.

Opting for a TSP annuity can make sense for people who are interested in lifetime security above all and are willing to potentially accept smaller distributions in exchange for this protection.

The annuity provides payments for as long as you are alive, even if your payments exceed the value of the money you used to purchase the annuity.

Because annuities continue to pay out as long as you are alive, the value of the investment is greatest for people who live long lives. So your life expectancy and health are other factors to keep in mind when considering a TSP annuity.

If you have serious health conditions or reasons to expect that you may not live deep into retirement, then opting for an annuity may not make sense.

Purchasing an annuity works similarly to setting up other TSP installments and can be done through your TSP account.

According to TSP.gov, the annuity is purchased through a private vendor that is partnered with the TSP. Funds are sent to the vendor within five business days of your annuity request.

The minimum purchase amount is $3,500.

You must also choose the format of your payments. You can opt for level payments, where you receive the same amount each month throughout your life, or increasing payments, which start lower and increase steadily year over year.

Once your annuity is set up in the format of your choosing and with your selected features, it begins its stream of guaranteed monthly payments.

Annuities do not make sense for everyone or every situation. Weighing your personal circumstances and what matters most when it comes to your retirement savings can help you determine whether an annuity is a viable option.

There are both benefits and drawbacks to opting for a TSP annuity.

The biggest pro of opting for a TSP annuity is its guaranteed payments. The peace of mind that comes with knowing you will receive payments every month, no matter what, for as long as you are alive can be very attractive to retirees.

Predictability of payments is enticing too. Depending on the setup, the guaranteed payments can be steady and consistent. So you don’t have to worry about irregular fluctuations in your income month to month.

If you opt for a joint life setup, then TSP annuities can provide for your spouse as well. If your spouse is still alive, then the payments continue to them.

However, there are also disadvantages.

Many annuities have higher purchasing fees than other financial products, which is something to be aware of when considering a purchase.

One big limitation of an annuity is the lack of control of the funds. Once you purchase an annuity, you essentially give up control of the principal.

If you have a change of heart later in life and decide you want that lump sum back, it may be difficult or even impossible to get it.

Annuities can also leave less money for your beneficiaries than traditional installment setups. In the standard setup, the annuity vendor keeps the principal and payments cease once you die.

Options that provide for your beneficiaries, such as a 10-year period, can result in smaller monthly payments for you.

According to an article from TSP.gov, annuities are far from the only way to receive your savings in retirement.

You can also opt for more traditional installment and distribution methods.

One option is a total distribution, where you pull all your savings out of your TSP and manage the lump sum yourself in retirement.

You can also set up regular installments from your account using the time frame of your choosing. This option may look similar to an annuity on the surface, as you receive predictable payments from your account. However, the difference is that you simply withdraw from your existing funds. That money is finite and will eventually run out.

When you purchase an annuity, you do so with those funds in exchange for set payments. Those payments may be smaller than distribution payments but with the trade-off that they last your whole life.

Editor Hannah Alberstadt contributed to this article.