April 13, 2007
Based on the responses to last week's column on two of the Thrift Savings Plan withdrawal options, some of you still want to know which is the "best" choice. Well, here's one thing I've learned in my experience as a federal benefits specialist. Never give advice to an employee on a decision that they are facing. The job of a benefits specialist is to provide accurate information so employees can make their own decisions. As Bob Leins, my associate at the National Institute of Transition Planning, has always said, "That's why they make vanilla and chocolate."
I thought it might be fun to explore the advantages and disadvantages of the various TSP withdrawal options through a quiz. Consider the following statements and respond to them with "True" or "False."
Analyzing Your Responses
Let's look at how your answers might influence your withdrawal decisions.
Questions 1-5: If you answered "True" to these first five questions, you don't need my help. You've already considered your options. You are your own financial planner and feel confident about the choices you make with your money. Most who answered true to these questions will probably want to manage their TSP themselves after retirement. Many people who fall into this category feel comfortable moving their TSP to an IRA and will remain diversified in various low-cost, no-load, mutual fund investments. In this way, they can take money out as needed and leave the rest of the principal invested for future growth.
Questions 6-8: If you answered "True" to these three questions, you are probably a little more conservative with your investments. If you're in this category, you are probably less knowledgeable about investing and have other things you want to do with your time. It might bring you comfort to have a scheduled payment arrive from your investment once a month. So you might consider the series of monthly payments offered through the TSP. You may choose either a specific dollar amount that can be changed annually to meet changing financial needs or a life expectancy payout that should increase in most years as you get older.
If your idea of investing is keeping your money in bank CDs or the G Fund, then the life annuity offered through MetLife most likely will provide you a better return. The annuity works best for those who are older, because the payout is higher based on life expectancy factors. It is also important to be in good health because you want to be sure you live long enough to at least get a return on your original investment. With an annuity, one of your goals is to outlive the insurance company's projection of your life expectancy.
Question 9: If you answered "True" to this question, you still have some time to choose. You may decide to keep your money in the TSP and not touch it. The TSP has low administrative expenses, your money stays tax deferred, you have a diversified set of investment choices that are simple to understand and you don't have to do anything. You may feel comfortable moving your TSP investment to your own IRA to have more investment choices, providing even more diversification into investments not available in the TSP. Be aware of the tax penalties that you may incur on withdrawals made prior to age 59½.
Question 10: If you already are over 70½ when you leave federal service, you must do something by April 1 of the year following your separation. If you make a partial withdrawal, withdraw your entire account in a single payment, begin withdrawing it through a series of monthly payments or purchase an annuity, the TSP will ensure that your withdrawal satisfies the IRS minimum distribution requirement. Be sure that the TSP has the correct information regarding your date of birth and separation date from federal service; otherwise, you may be subject to a severe penalty for not making the required minimum payment.
What if you answered "False" to most of these questions? Then you've got some homework to do. Here are some resources to get you started:
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.
April 13, 2007