Life Expectancy vs. Life Annuity
Before we start, though (and before anyone starts posting comments about which of these options is "best"), let me be clear: I'm not recommending either option. The fact is, there simply isn't one "best" option for everyone.
In seminars I've conducted lately, I've come to realize that some of the confusion about the differences between the life annuity and monthly payment options stems from the Personal Benefits Statements that many employees receive from their payroll office at the beginning of every year. On the portion of these statements that addresses the TSP, an example is given of the monthly income available if a life annuity is purchased. There is not an example of any other withdrawal option. That causes some employees to believe that this is the only option. Let's look at what the options actually are, and some of the major differences between them:
|Life Expectancy Payment||Life Annuity|
|Who administers the plan?||TSP||MetLife through a contract with the TSP|
|Where is your money?||TSP (you may continue to make interfund transfers)||MetLife. You no longer are in control of your investment.|
|What happens when you die?||The balance of your account is paid to your TSP beneficiary.||Depends on what type of annuity you elected. With a joint life annuity, payments will continue to the joint annuitant. With the cash refund feature, the balance of your original investment minus your payments will be paid to a beneficiary. If you choose a single life annuity with no cash refund, the money stays with MetLife.|
|Can you change your mind?||Yes. You may change to a specific dollar amount instead of payments based on life expectancy. You may also stop the payments and elect a single lump sum payment.||No. After your annuity is purchased, you cannot change your election or terminate your annuity|
|What happens if you live a long time?||Because the payment is based on life expectancy, the longer you live, the larger your payment will be. (Until you reach your mid-90s, at which point it may begin to decline, because the life expectancy factor is getting larger and the earned interest may not be enough to protect the principal.) There is risk involved if your investment declines in value based on the fund performance.||The promise is for lifetime payments. The TSP renews its contract with MetLife periodically to be sure they meet the same strict requirements to continue to administer this option. The latest contract was signed in 2006.|
|How many different types are there?||One. Your payment is determined each year by dividing your TSP balance by a factor based on your age.||
Five basic types:
Single life annuity with level payments or increasing payments; Joint life annuity (with your spouse) with level or increasing payments; Joint life annuity (with someone other than your spouse) with level payments.
|Does your spouse have rights?||If you are a married FERS participant, your spouse must consent to this election. If you are a married CSRS participant, the TSP will send a notice to your spouse notifying them if you choose to withdraw.||If you are a married FERS participant, your spouse has the right to a joint life annuity with a 50 percent survivor benefit, level payments, and no cash refund feature. Therefore, if you elect a full withdrawal of your account and you are not using your entire account balance to purchase the prescribed annuity, your spouse must agree to waive this annuity option. If you are a married CSRS participant, the TSP must send a notice to your spouse before your annuity is purchased, notifying him or her of your withdrawal.|
|Are there any tax consequences to this option?||A separated employee who will be 55 or older in the year of separation may elect this option at any age and incur no tax penalty. An employee who separates before they turn 55 will incur no tax penalty with this option as long as they continue the life expectancy payout for 5 years or until they reach age 59 1/2, whichever is longer.||These annuity payments are not subject to the IRS early withdrawal penalty, even if you are under age 55 when they begin.|
|Will taxes be withheld from the payments?||Yes. Automatic withholding is as if you are married with three dependents. You may change this withholding by completing an IRS Form W-4P. You may also waive the tax withholding.||When your TSP money is transferred to MetLife, there will be no tax due at that time. Your TSP annuity payments will be taxed as ordinary income in the years that you receive them.|
Here are some examples of the life expectancy payout. The chart presents two different potential balances for each age, and assumes that the balance is invested at 6 percent interest. You can do this calculation for yourself at the TSP Web site.
|Year||Age 50 $100,000||Age 50 $500,000||Age 55 $100,000||Age 55 $500,000||Age 65 $100,000||Age 65 $500,000|
*At age 70, the life expectancy factor changes to meet the IRS Minimum Distribution requirements. Because of recent changes in the law, the minimum payment required is less than the normal life expectancy factor.Life Annuity Payouts
Here are some examples of life annuity payouts. They assume that the interest rate index is 5.125 percent and for joint annuities, that the spouse is the same age as the retiree. You can do this calculation for yourself at the TSP Web site.
|Age 50 $100,000||Age 50 $500,000||Age 55 $100,000||Age 55 $500,000||Age 65 $100,000||Age 65 $500,000|
Single Life Annuity
|No added features||$571||$2,855||$607||$3,037||$726||$3,629|
|With cash refund||$560||$2,799||$583||$2,915||$660||$3,301|
|With increasing payments||$377||$1,884||$416||$2,080||$540||$2,700|
|Increasing payment option after 10 years of 3% increase/year||$492||$2,458||$543||$2,714||$704||$3,522|
|With 10-year certain||$568||$2,840||$601||$3,007||$705||$3,523|
Joint Life Annuity
|Level payment, 50% to spouse||$573 ($286 to survivor)||$2,865 ($1,432 to survivor)||$609 ($304 to survivor)||$3,047 ($1,523 to survivor)||$730 ($365 to survivor)||$3,648 ($1,824 to survivor)|
|Level payment, 100% to spouse||$526||$2,632||$550||$2,748||$628||$3,140|
|Increasing payment, 50% to spouse||$379 ($189 to survivor)||$1,894 ($947 to survivor)||$418 ($209 to survivor)||$2,092 ($1,046 to survivor)||$542 ($271 to survivor)||$2,712 ($1,356 to survivor)|
|Increasing payment option after 10 years of 3% increase/year||$494 ($247 to survivor)||$2,471 ($1,235 to survivor)||$546 ($273 to survivor)||$2,730 ($1,365 to survivor)||$708 ($354 to survivor)||$3,539 ($1,769 to survivor)|
As you consider the two options, you may want to review these two TSP booklets:Form TSP-70, Request for Full Withdrawal.
If you wish to make a partial withdrawal after separation, you will need to use Form TSP-77, Request for Partial Withdrawal.
Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.
CORRECTION: Due to an editing error, the original version of this column indicated that under the category of "What happens when you die," that "with a single life annuity, there's no cash refund." It should have read, "If you choose a single life annuity with no cash refund, the money stays with MetLife." The column has been updated to correct the error.