Return to Article: Life Expectancy vs. Life Annuity
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44348
I bought an annuity in 1999 for 10,000 and I now only have 12,000 invested. The highest it has grown was 13,700. I will be retireing in 10 years and feel this has been a waste. I would of thought I would have at least double this amount. Say it is less then the 10,000 by the time I want to retire. How much would I get a month and for how long? confused
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26653
I plan to retire at age 53 because of health related issues. I understand that I can get to my TSP at age 53 without a tax penality by setting the TSP up with equal monthy payments until age 59.5. Can I elect the amount of equal monthly paypments or must I use the life expectancy option which is my case will be less than I need to retire. I prefer not to buy a Metlife annuity.
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26514
I have 2 questions:
If I am looking at it correctly, the life expectancy draw pays you about 3% annually of the principal amount in your TSP, but it is earning an estimated 6% annually, if that is the case the principal will continue to grow by the additional 3%, why does it not pay out a larger percentage or equal to what it is earning, which would still leave the prinipal the same for the rest of your life?
Second: If you take a life expectancy draw at age 50 with no tax penalty, at what age can you change it to draw a specific dollar amount of the participant's choosing without having a tax penalty and once moving over to that choice can you change the amount anytime that you want?
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22829
I understand that President Bush signed the Pension Protection Act of 2006. In this Bill Law Enforcement and Firefighters in the Federal Retirement system can now make withdrawls from their TSP at begining at age 50 without any tax penalty. It this correct?
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22645
TIP - I believe if you look at your W-2 you will see that your worries about TSP contributions reducing your SS basis are unfounded.
You should notice the monies contributed to TSP are subtracted from your compensation, wages and tips, but are included in your SS and MEDICARE totals.
I believe this to be the case because the money that disappears from our checks for SS and MEDICARE are a "with-holding" and not a tax in Uncle Sam's eyes. TSP being "tax deferred" and not "with-holding deferred" being the catch here.
Let me know when you figure out the rest of the calculations; throw in how the state you decide to retire in treats pension income, other sources of income, age, life expectancy, etc etc and it truely is an "individual" answer as to what course of action is best.
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22585
Taxpayer,
I understand the $94,000 limit on SS. My mention was to eliminate that as a discussion point, as in my case it's a mute point. I understand that anyone who is eligible to receive the additional 4% income derived from matching funds would be foolhardy to miss such an opportunity. I understand about the impact of sheltering income using contributions to the TSP in order to reduce one's tax signature.
What I'm unsure of this the delicate balance of losing SS income due to sheltering current income in the TSP and the balance struck between using the TSP as opposed to a Roth instrument. Your assumptions included "However, in TSP you avoid tax on the contribution asw well as the earnings." Perhaps I misunderstood your point, but taken literally, I'm almost positive that is incorrect. Those base funds and their earnings are not tax exempt but tax deferred.
If I may:
1. For every $100 I shelter in the TSP, I lose that as an income basis for SS earnings. 2. For every $100 I shelter in the TSP, upon withdrawal I pay income on that $100 and every cent it's earned being the sheltering and the harvest. (the deferral) 3. For every $120 I receive in income and place $100 in a Roth, after paying taxes at the 20% (or the current rate), I can harvest that $100 and every cent it earned without taxes.
Personally, I like the TSP. I am just concerned that I may ultimately pay MORE taxes on the base monies AND the gains. In addition, I may be restricting my SS income in the long run.
While the basic facts are evident, I am unsure of that delicate balance and calculations wherein each individual must make their decisions. I hope in the upcoming articles about estimating retirement benefits, Tammy will not fail to address the balance between TSP, SSN, and other vehicles.
I'm seriously considering keeping what I have in the TSP there, working it as best I can, reducing my participation to the matching funds level, and switching to an alternate investment vehicle. The major thing stopping me is I like my progress so far and the lack of finding a reliable fund with less costs.
Anyone out there who has some input on this issue, please feel free to chime in. Tip off
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22555
Tip,
I am not saying you need to make $94,000. The $94,000 is the maximum for SS contributions. There are no SS taxes after $94,000. You can make any amount but only pay SS on the ifrst $94000. If you do not make $94,000 you reeduc3e your SS for every dollar you contribute pretax into TSP. Go to the SS site for a calculator and you can see the impact on your SS benefits based on different incomes that you submit. I assume there is no contribution by the government to your TSP because if there is you certainly come out way ahead in TSP than in a ROTH. Also, the ROTH contribution is not tax exempt, only the earnings on the contribution. However, in TSP you avoid tax on the contribution asw well as the earnings. Your far better off in TSP than in a Roth. Finally, if you have the money you can still contribute to a ROTH even if you contribute to the TSP. ROTH contributions do not need to come from income but can be moved from any savings account but the amount is limited each year for you and your spouse - don't forget her even if she does not earn income. Your situation strictly is a math problem that you should woprk out to decide what to do. If you cannot do that I guess that your are best off contributing into TSP on a pretax basis especially if you receive contributions from the government in TSP.
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22474
Taxpayer,
Thank you for your voluntary diligence and response. Unfortunately, and evidently unlike many in this readership, I still struggle beneath your threshold. Actually, combining my current pay, military retirement, and investments I still come under that $94K threshold, if only just. Being frugal and living in a lower cost area does help greatly to assuage the impact of the lesser income on my life style.
While not quite in the august throngs of the upper middle class, I feel my income probably reflects a large segment of the civil servant community and still wonder if there is a break point wherein participation in the TSP becomes derogatory to your total income in the later SS days. Currently I'm hoping the gains are greater than the losses.
Until recently, I'd blithely contributed to the TSP; pleased with my returns and the tax shelter provided. I've spoken with a number of folks who have expressed the opinion that Roth IRAs are a better way to go. I was convinced that the lesser fees, personal control, and immediate tax relief were superior.
Now I'm not as certain since I can not fully estimate the impact on my drop in Social Security payments over the long run. I'm currently considering a sea change in direction; i.e. I'm considering combining the two.
I do hope that Tammy will eventually get around to discussing the tradeoffs between TSP participation, alternate investment vehicles (such as the Roths), and the implications of their impact on Social Security after retirement. While I will not depend on her findings, I've come to appreciate the thoroughness of her research and method of presentation.
Taxpayer, Numbers, or any of my other fellow readers I request any references you may come up with. I'm sure that I'm not unique in my interest or concern.
Tip off
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22446
Tip,
I think I finally got the anser to the social security question.
If you deduct TSP on a tax exempt basis, your social security could change because it is based on the taxabe income. To maximize yoour social security you should not go below $94,000 in taxable income or you will reduce your social security because you will not reach the maximum for SS contributions. However, you probably save close to half the amount you put into TSP and in the long run you come out way ahead over maximizing the SS contribution.
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22409
What each person does with their retirement fund must fit their needs, comfort zone, and longevity expectations. Just remember, as you read Christmas Tree's statistics, that if you base your withdrawals on a shorter life expectancy you can still bank it. That is to say, as you pull it out you can THEN put some of it away in a Roth, stocks, bank, or a mattress for that matter. You will be paying taxes on it but you don't have to spend it all.
If you take the longer term approach and tie it, it merely sits there, hopefully gathering interest, until you pull it out and THEN you pay taxes on it. That would merely make for lesser withdrawals per annum and a lessened tax signature in the current time frame.
Regardless, the tax considerations of funds withdrawal must be examined along side all the other aspects.
Personally, being a FERS, as I review these various options I could see one option wherein I can control my own money, trading as often or little as I wish; pay the smallest fees around; base my payments on my needs; AND change my mind later. Well, I've done as good as those folks at the commercial funds, with fewer costs, and I always like options. So it looks like the TSP Life Expectancy Payment with a specified amount (to assure a consistent withdrawal over time) is my best/favored option.
Speaking for my spouse (a CSRS), merely as an interested bystander and taking an educated guess, I think she'd be inclined to go for the annuity to eliminate any trepidation and guesswork. So it looks like your information has covered us both.
Good luck to y'all out there and many thanks to Tammy for these highly educational articles.
Tip off
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22392
Guys only read this. A recent study reported that IF a man lives to the age of 65, he only has a whopping 25% chance of living to age 80!Factor that in when computing your dollars in retirement. Unless you are prepared to really set up your spouse in fine fashion, it might just be smarter to take the money now, rather than slave away for a few more years, hoping for the illusory pot-o-gold!
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22277
I'm a little confused. I just attended a CSRS seminar and was told that if you retire in the year you turn 55 or anytime after you turn 55, you can access your TSP before you are 59 1/2 without the IRS penalty. Can you confirm/clarify this? I would rather invest in the TSP tax deferred investments than an after tax investment account, but am concerned about having enough money from the time I am 55 until I am 59 1/2 and eligible for the IRAs and other annuities I have.
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22267
I've noticed that Met Life seems to be the sole player in a growing number of things. Is this such a good idea? Does the government regulate these players more than others? I hope so; we tend to trust something coming from or through OPM more than something you just get out of the phone book. I have nothing against Met Life, I just want to be secure in the event of problems. Normally I accomplish this by diversifying. With work-related things like this, I tend to stick with the federal option because I feel like OPM is there to complain to and might help if we need it. Is that a justified assumption?
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22247
I notice that your examples of the life annuity payments use lower interest rates. No problems there. Are the interest rates quoted by MetLife negotiable? (e.g., more TSP principle to annuity, higher rate of return)? Thanks.
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22235
Admin, USG
you may take an annuity anytime but you will have tax to pay if you begin before age 59.5. You do not have to retire or quit to take the annuity but watchout for the tax penalty before age 59.5.
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22229
You informed us that with a life annuity - "When our TSP money is transferred to MetLife, there will be no tax due at that time. Our TSP annuity payments will be taxed as ordinary income in the years that we receive them." I have three (3) questions. Can I transfer money from a Civil Service Retirement System Voluntary Contributions Saving Account to MetLife for the purchase of a life annuity? If so, although I have already paid tax on this money before it was deposited, will the money be taxed again? If so, when?
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22216
The charts in the article are showing "monthly" pay outs! Sorry for not labeling them better. I think I will do one more TSP withdrawal article this week. Based on the comments, more information is needed to help in choosing what is the "best" option and why. There are some strong opinions, but remember that everyone has different needs and different tolerance for risk. Some options are simply easier than others and require less expertise.
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22213
Again, there is another option. The following is from the TSP web site. "If you choose to withdraw your account in monthly payments, you must also choose whether you want the TSP to compute your payments based on the IRS life expectancy table or whether you would like to receive a specific dollar amount each month. (See "Can I change my withdrawal after I receive it?".) If you choose to receive a specific dollar amount each month, you may be able to transfer all or part of your payments to an IRA or other eligible employer plan. This will depend on the number of payments you are expected to receive. For additional information, read the tax notice "Important Tax Information About Payments From Your TSP Account.")
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22207
1. The tables presented should indicate that the payments are annual or monthly and neither is indicated. A reader has to assume but the readers that do not understand what is going on may not understand what to assume.
2. If you "retire" and leave TSP coverage, you should move your TSP in total to a good established firm in the form of an IRA. I also have found better annuities with other insurance firms than the TSDP Metlife offer. You may also use your TSP balance to buy these other annuities.
3. The purchase of an annuity is an option for your IRA funds also so move the tSP to an IRA and then decide upon an annuity.
4. Diversify your investments - move out of TSP into several different IRA holders so you do not have all your eggs in a single basket. If you buy a Metlife annuity what happens to your money if Metlife goes out of business? (You loose). Move some into a stock mutual fund (such as Fidelity or Janus), move some into a bank CD IRA, and use some to buy annuities with at leawst two highly rated life insurance companies (you have to be confident the companies will continue in business for the life of the annuity (your expected life).
Don't leave all your eggs in one basket and don't move all your eggs to one basket - diversiy because you have no other source for these funds after you retire.
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22201
Life Annuities are almost always a bad choice for the annuitant, think twice about them. The rate of return on the annuity investment payout is pittyful and Annuities always bring big fat commission checks to the salesman and the Insurance company.
The best move I made was to withdraw 100% of my TSP money and roll it over to a non contributory IRA through a national Brokerage firm that had " real Choices" in mutual funds and other investment options and not that sub performing vanila stuff offered by the TSP, including those joke of a Life cycle funds.
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22192
The 10 year age gap does provide an exception to the uniform life table. However, the RMD with one spouse 11 years younger at age 70 is 3.56% versus 3.65%. If the age gap was 15 years at age 70 the RMD is 3.22% versus 3.65%. If the age gap was 20 years the RMD is 2.85% vs 3.65%. Sure there is a difference but the management fees and market risks depending on one's investment prowess could easily wipe out the extemely small tax advantage for most people.
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22189
Thanks for the info- I'm still not sure which way to go. I think the charts would have been more helpful if they reflected age 60 in the examples.
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22187
One question I have been able to find an answer to is this: If you want to take a life Annuity do you have to do it right at retirement or can you elect to take it anytime after retirement. I would like to retire at 51 and start taking a life Annuity at 53 or 54. Can anyone answer this question?
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22184
According to the TSP:
IRS Single Life Table, Treas. Reg. § 1.401(a)(9)-9, Q&A 1, is used to calculate monthly payments based on life expectancy for participants who are 69 years old or younger. Once a participant turns 70, the Uniform Lifetime Table, Treas. Reg. § 1.401(a)(9)-9, Q&A 2, is used.
The annuity payments are based on MetLife Insurance life expectancy / actuarial calculations.
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22182
In regard to the payout tables, is the amount mothly or yearly?
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22177
Page 5 of the TSP document you referred to identifies a third method for withdrawing a TSP account. That is to receive it in a series of payments of a specific dollar amount. The participant may also make adjustments to the amount annually. Please clarify for your readers. Thanks.
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22176
Can you provide scenarios for which the life expectancy and life annuity would be more beneficial to use versus the other?
Thank you.
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22175
I have a question. If I elect Life Expectancy payments because I have to get an early out (BRAC/RIF) before I am 55 it says I must keep up the payments for 5 years or until 59 1/2. Can I increase the amount or is that the most I can withdraw during the 5 years?
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22172
Your examples use the Uniform Lifetime Table to calculate the MRD. Does the TSP use the Joint Life Expectancy Table if the spouse is more than 10 years younger? If not, this would be a good reason to move the TSP funds to a low cost IRA.
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