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I have $1,000,000 (or $500,000 or $750,000) for retirement, now what?

Figuring out how to use your money in retirement.

When most current federal employees retire from government, they will have three (or more) sources of retirement income:  

1. Federal Employees Retirement System basic benefit 

2. Social Security retirement (or the FERS supplement) 

3. Thrift Savings Plan distributions 

The first two provide streams of income meant to last a lifetime along with survivor benefit options, while the third provides more flexibility. The evidence that federal employees have done an excellent job of saving for their retirement in the TSP is shown in these statistics from February: 

  • $877 billion: The total TSP assets (about $2,700 per person in the US). 
  • $181,113: The average balance of all federal employees covered by FERS. 
  • 87.3 percent of FERS employees who received their full agency match; a Plan record.  
  • $241 million: Money rolled into the TSP from other employer plans and qualified retirement savings accounts, which was also a Plan record. 

Figuring out how to use this money in retirement is another story. In 2023, 88,773 retirement applications were received by the Office of Personnel Management for FERS and CSRS annuities. According to the Federal Retirement Thrift Investment Board's monthly Participant Activity Report

  • Close to 300,000 separated participants (federal employees who have retired or otherwise separated from federal employment) withdrew some of their money as a partial lump sum withdrawal.   
  • A little more than 150,000 separated employees cashed out their TSP accounts entirely. 
  • A little less than 100,000 separated employees transferred their TSP balance to an IRA or employer sponsored savings plan. 
  • Less than 35,000 post-separation withdrawal transactions were processed for initial monthly payments. 
  • 750 individuals purchased a TSP life annuity through the TSP’s annuity provider, MetLife.   

What you need to know: 

  • Withdrawing a large lump sum payment from your pre-tax TSP balance may have unfortunate tax consequences. You may pay taxes on that distribution in a higher marginal federal tax bracket than when you were employed. Don’t forget that you may also have to pay state income taxes if you live in one of the 21 states that tax such withdrawals. California, New Jersey and Vermont have the most progressive tax rate structures, which like the federal income tax, means that the tax rate you pay increases as your income rises. 
  • Receiving a monthly installment payment is an easy and popular way to create a third stream of income in retirement. But it’s not guaranteed to last a lifetime. Be sure to manage your account for future growth and be careful not to withdraw too much too soon. You will be permitted to start, stop or change your installment payment at any time. The minimum amount for installment payments is $25. Monthly payments from your traditional TSP balance are subject to ordinary income tax.  
  • The annuity option, once elected, cannot be changed or stopped. The monthly payments of a TSP annuity are computed using your age at the time of purchase (the older you are, the bigger the payment). The interest rate index, fixed for the life of your annuity, also impacts the value of your monthly payments. You no longer manage the money you use to purchase a life annuity. You give up control of the money used to purchase the annuity in exchange for guaranteed lifetime monthly payments. The interest rate index was 4.075% for annuity purchases in May 2023. This rate has ranged from a low of 1.209% in July 2020 to a high of 5.75% in August 2002 from 2002 to the present. The annuity option offers the following features to choose from: 
  • Increasing payments to allow for future inflation that are capped at two percent annually 
  • Joint annuity options, to provide 50% or 100% to the survivor.  It is important to note the survivor annuity amount is paid to whoever survives rather than to your survivor.   
  • Cash refund 
  • 10-year certain 
  • Choosing a direct rollover can provide additional withdrawal and investment options not available from the TSP. You won’t be taxed on this money until you withdraw it from the traditional IRA or the eligible employer plan. Any part of your traditional (pre-tax) balance that you roll over to a Roth IRA will be taxable in the current year. Remember that no income tax will be withheld, so you may need to pay estimated taxes to ensure you pay enough income tax during the year. 

Micah Shilanski, a Certified Financial Planner, maintains that the question to ask when deciding how much to withdraw from the TSP is, “What are we solving for?” and “How much money do we want coming in every month?” A general rule of thumb, according to Shilanski, is that any money that you want to spend in the next five years doesn’t belong in the stock market. Why five years? Remember the years 2008, 9, 10, 11, 12. It took five years for the market to get back to even, from the peak of the crash to the recovery in 2008. The average market corrections have lasted about three years from peak to valley to recovery. But I like to err on the side of caution.  

Shilanski gives the following example of how to determine a withdrawal strategy using a “bucket system.”   

If the goal is to have a cash flow of $8,000 a month, it is important to consider the income streams that are payable to you. If $4,000 would come from the FERS Basic Retirement Benefit and Social Security retirement, then the remaining $4,000 would have to come from retirement savings. To have a net distribution of $4,000 from the TSP means that around $5,000 would need to be withdrawn to allow for taxes (unless it is withdrawn from qualified “Roth” savings that are tax-free).   

Using a “bucket strategy” to produce this income, Shilanski says that there needs to be a cash bucket that contains one to two years of withdrawals. This means that if $5,000/month is needed, then the cash bucket would hold $60,000 ($5,000 x 12 months) - $120,000 ($5,000 x 24 months) to cover this need. Cash is something that is liquid, meaning I can access it virtually immediately with no risk of loss. That is not the C fund and it’s also not a brokerage account invested in stocks that move up and down. Liquid, for example, is a money market fund, a bank account, or the G fund.   

There should be an income bucket holding two to three years of money. This would hold another $120,000 - $180,000 for this example. The income bucket would be in fixed income investments such as bonds, dividends, F Fund. These investments might move a little bit but don’t have a substantial risk.  

The balance of the retirement money would be invested in a growth bucket. The growth bucket would be in stock investments such as mutual funds invested in the stock markets, the C, S, or I Funds, etc. Since this bucket is not needed for five years or more, the value can go up or down and it should have time to recover from a loss.   

According to the TSP, if you have both traditional and Roth money in your account, you can specify that your withdrawal or distribution should come only from your traditional money, only from your Roth money, or pro rata. Pro rata means the withdrawal or distribution will have the same percentages of Roth and traditional as are in your account.  

However, note that withdrawal payments will come proportionately from the investment funds held in your TSP account. For example, if you have 75% of your TSP allocated to the C Fund and 25% allocated to the G Fund, then 75% of your withdrawal payment will come from the C Fund and 25% will come from the G Fund. It is not permissible to transfer funds between the Roth and the traditional funds in your account. You may wish to consider moving some of your TSP to outside investments so that you can strategically withdraw from the investments with the least risk to provide your monthly income stream.  

Qualified investment professionals can help you make sound financial decisions. FINRA oversees U.S. member broker-dealers and their personnel, including individuals who recommend or sell securities products to the public. FINRA has resources that can help you understand the types of professionals you might encounter, their qualifications, and how to check them out before you take their advice or entrust them with your money.   

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