Micah Shilanski (00:00) 

You can spend, you can save
What is the right thing to do?
Federal benefits, Thrift Savings Plans too
You can save your own way.

Expertise. You can save your own way.

If you beat the market every single year in retirement, but you run out of money in retirement, did you win? I think the answer is that’s no.

And that’s so important to retirees because you have spent the last 30 years building this amazing career, putting money in your TSP, increasing your pension, funding the things, doing the things you need to be. You’re coming at the top of this amazing mountain that you’ve been able to build.

But now the really important part comes: getting off the mountain safely.

And that’s why understanding TSP withdrawal options are so important. That’s why understanding how you take money out, what taxes are going to be affected, what the options are, what it’s going to lock you into that you may not realize. These are things you need to know before you take this election.

Hi, my name is Micah Shilanski. I’ve been helping federal employees retire for the last 25 years. I’ve helped over a thousand federal employees retire.

And one of the things that I have learned is the TSP is an amazing tool for growing money. It’s an okay tool for taking money out, but so many federal employees don’t understand what these rules are.

So I’m gonna go through the three best TSP withdrawal options. I’m gonna tell you what my favorite is, by the way, in those three options, one I think that works the best for most federal employees as they retire.

But more importantly, I’m gonna tell you the one that you should probably avoid. So make sure you stay tuned for that.

Let’s jump into this great content.

So the first distribution option that you’re gonna have is systematic withdrawals.

Now, I guess it’s a step back real fast. Before we start talking about what these individual options are, let’s define what the best is.

The best is what’s going to meet your retirement goals.

Now, since I don’t know exactly what your retirement goals are, let me tell you what most of the clients who come and see me is.

Well, number one, they want income to do the things they want to do now.

They don’t wanna have a giant pot of money that they’ve never used for their entire life to go on to their kids. And I mean, if that happens, that’s fantastic, right? We want the kids to be able to get the money, but you wanna be able to use the money now while you’re alive.

So we need income enough to be now. We don’t need to save all the income for later.

Number two, we need flexibility with our distribution options.

You know, imagine when you started your career 30, 40 years ago, you know, at 20 years old, you’re starting your career as a federal employee. You had no idea what the next 30 years was gonna look like or the next 40 years was gonna look like, right?

So many things in your life has changed. What’s the same as retirement?

You can be retiring at 57, at 60 years young. You’re gonna live 30, maybe 40 years in retirement.

We don’t know what that’s gonna look like all the way in that 40 years.

So we need a plan that’s gonna be as flexible as you need it to be when you need the money.

But we need some guardrails on there. We need some buckets that are kind of set up that kind of says, hey, this is a safe way that you can take money out with not a great chance of running out into retirement.

So that’s what we’re going to define as the best.

And number three, it’s going to be able to also take care of the kids, your spouse, etc. When you pass away, money left over to them.

Those are generally the three things my clients want to see when they’re building a distribution plan.

Now, a fourth one that I want to see is good tax planning. All right, but we’re not gonna get into that video.

I always gotta slip taxes in there because it’s so important, but we will talk about tax planning in future videos.

All right, so let’s jump back into systematic distributions, kind of the first TSP withdrawal option.

So when you reach 55 and you separate from service, you can take money out of your TSP with no 10% penalty.

This is a fantastic thing.

Please note this is different than an IRA. IRA, you got to wait till 59 and a half in order to take money out without a 10% premature distribution penalty.

So, what does a systematic payment mean?

You can go to the TSP and say, hey, you got a big lump sum of money. Send me X amount of dollars a month.

And you can decide what that is.

Every 30 days, you can even change that dollar amount. You could do it monthly amounts, you could do quarterly amounts, you could do annual amounts that can be sent out to you.

So these are systematic. The TSP automatically sends it to you and you can adjust it.

Well, that sounds pretty good.

So what’s the catch?

Pro rata distributions, right?

This is one of the downsides of the TSP.

Now, before people start saying I dog on the TSP, I don’t. I love the TSP. It does a great job for so many things.

But just because it does a great job on a lot of things doesn’t mean it does a great job for everything.

And this is one of the areas that you have to watch out for.

Pro rata distribution.

So what does that mean?

Let’s say you’re invested equally, I’m just gonna say in four funds in the TSP, the G, F, C and I fund, right?

Now you’re invested in those four funds.

Let’s say the market’s doing its thing, goes up and down all of the time.

And then all of a sudden the market’s going up, up, up, up, up, and you take systematic payments and you go to the TSP, you say, hey, send me $5,000 a month.

Well, the TSP will be like great.

They’ll start sending you $5,000 a month, and they’re gonna take that $5,000 proportionately from however you are invested.

So 25% from the G, 25% from the C, 25% from the S, 25% from the I, right?

All four of those funds, how you’re invested, they’re gonna sell out of that.

Now, if the market’s going up, that’s not necessarily a bad thing, right?

You’re selling as the market’s going up. Maybe not the best thing, but it’s not a bad thing that’s happening.

But what about when the market’s going down?

What happens to your TSP?

Well, we all know, like logically, right? We’re not supposed to sell when the market goes down.

We need to hold money for the long term so it’ll grow. And we need to sell when the market’s high.

This is one of the downsides with systematic payments out of the TSP.

You do not get to choose what fund it comes from.

It’s going to be taken equally or proportionately, excuse me, from all of the funds that you’re invested in.

So if the market goes down in retirement and all of a sudden you’re selling, selling, selling, selling, selling, selling, selling, selling, selling, what’s happening to your TSP?

You could be devastating it.

So while systematic payments on the face seem like a good option, and they’re not necessarily bad, right?

But you got to be really careful.

How does that blend into your long-term picture?

Let’s go to the second option that we have.

And this is doing a lifetime income.

This is similar to the systematic payments, but it’s a little different.

A lifetime income is you go to the TSP and you say, hey, I want to take distributions based on my life expectancy.

They’re going to look and say, great, how young are you? You’re 57.

They’re going to pull up an IRS table.

The IRS table says your life expectancy is X.

And every single year they’re gonna recalculate the monthly payments they send you based on your TSP account balance divided by your life expectancy.

I like this because it’s simple, right?

It’s kind of on autopilot, which is kind of nice.

Couple of things to be concerned about with this distribution.

Number one is every year it’s gonna change.

Well, with my clients, if every year it goes up, well, clients don’t really have an issue with that.

But if all of a sudden they take a 20% hit or a 10% hit in income in one year, they got a problem with that.

Like, why did my account go down in value? How come now I’m losing money?

This is what you got to be a little bit careful of when you’re taking this lifetime withdrawal income based on your life expectancy.

As your TSP goes up and down in value with time, your distributions will go up and down in value.

A lot of my clients like a lot more level increasing income, right?

They don’t like that down that’s gonna be there.

So does it make this a bad option?

Not at all.

Just understand how it works.

It’s still subject to proportionate distributions, right?

The other challenge that I have with this life expectancy option is that it’s going to, especially if you retire younger, it’s gonna give you a little bit less money because you have a longer life expectancy, right?

But then as you get older in your 80s, it’s gonna give you a ton of income.

Well, let’s kind of go back to our definition of what we thought the best strategy was.

If the best strategy is, hey, while we’re younger, when we retire first and we have the physical ability to do the things, let’s have the money to do the things we want to do.

If we’re saving all that money till we’re 80s, I don’t know if that’s really the best balancing act.

Right.

It’s not a bad strategy at all. It’s just something that you need to think about when you’re making these decisions.

Now, if you want to make sure you’re making the right withdrawal options from your TSP, then click the link below to schedule a consultation.

In our retirement review process, we look at your individual situation, we go through the circumstances that are affecting you and help you evaluate what’s best for your decisions.

We take all these theoreticals and we put them into real life practical in your situation.

All right, with that said, let’s jump into the best TSP distribution option, in my opinion.

And then we’re gonna get into the worst.

So the next TSP distribution is a little bit of the best of both worlds, and this is why I like it.

Now, my general rule of investing is any money you want to spend in the next five years doesn’t belong in the stock market.

And you already know why.

2008, 9, 10, 11, 12, right?

Took five years for the market to recover.

So whenever we’re building an investment plan or retirement plan, we gotta have a timeline that we’re keeping in mind.

How long is the money gonna be invested?

All right, well, let’s talk about the good news of the TSP, right?

One of the things I love about the TSP is your G Fund, right?

You have that guaranteed fund, the government fund.

It goes up in value.

It’s a really solid money market fund that’s there.

I like the C, S and I funds, but I can get the C, S and I funds somewhere else.

It’s the S&P 500, right, is the C Fund.

So I can buy that somewhere else.

I really can’t buy the G Fund somewhere else.

So I like both options.

This is a little bit of a Goldilocks right here.

Let’s leave money that you’re gonna need in the TSP for the next couple of years inside of your TSP.

Maybe you put that in your G Fund.

You then do a partial transfer of money into an individual IRA.

Now, why?

Now you’re gonna get the best of both worlds.

Now inside of your TSP, we can go back to that systematic distribution payment we talked about.

Say, hey, send me $5,000 a month or whatever that dollar amount is, right?

Now the downside of the systematic was proportionate distributions.

But good news, if you’re in your TSP, all we have is the G Fund.

There’s no proportionate distribution issue.

They’re just taking money out of that G Fund account.

You’re not subject to these whims of the market moving up and down.

Fantastic.

That transferred money into your IRA account.

Now you look at this as your long-term money, right?

Your C, S and I funds, etc.

This is the money that you want to grow over time.

Now, the really neat part about this Goldilocks strategy that we have is now we can take, when the market goes up in value in your IRA, you can always, even after retirement, transfer money back into your TSP account.

That’s right.

Even after you retire, you can take IRA money and transfer it back into your TSP account, which is fantastic, right?

Plus, it gives us a little bit more tax planning flexibility in an IRA versus the TSP.

So I really like this Goldilocks approach.

The other thing I’m going to add to it is you got to have a good distribution plan, right?

Says, okay, we have these withdrawal options.

I think this third option is the best, a little bit of both worlds, but how do you determine the right amount that you should be taking out?

And how do you put, dare I say, guardrails on your retirement?

That if your retirement goes a little bit south, if the markets fall a little bit, how do we know how much we can take out until we’re jeopardizing our retirement?

You need to find that out before you retire.

We put these rules in place.

Let’s jump on to the fourth option that you have.

And this fourth option, this is probably the one to avoid, right?

That this is the one I have never recommended it to somebody.

I’m sure theoretically, in some situation, that this could be applicable to you.

I just have never seen it.

And it’s the annuity option.

Now, anytime you hear the word annuity, be cautious.

Annuity does not mean bad, right?

There’s nothing evil about this whatsoever, but complex, 100%.

Annuities are complex vehicles.

And not all annuities are the same.

Even with the same company, with one company, you have multiple different types of annuities.

So, right now, I’m gonna zero this in a little bit.

Let’s talk about the TSP annuity.

Now, the TSP annuity is from MetLife.

That’s who’s gonna issue it.

Now, one of my qualms with this is I don’t think it’s very clear in the distribution forms when you’re online filling this out that you’re selecting this annuity.

If you know what you’re looking for, you know what you’re looking for and you can see it.

If you don’t know, it gets a little confusing in monthly payments.

My biggest issue with the TSP annuity, it is an irreversible decision.

Once you make it, you cannot undo it.

You are stuck with that.

So be very, very careful before you decide to execute on this.

All right.

Now let’s talk about how the TSP annuity works.

You can do it for all or a portion of your money.

Let’s just say, for example, you do it for all.

You select monthly payments.

I’m going to take all of my TSP.

They’re going to give it to MetLife.

Then they’re going to create a systematic payment every month.

They’re going to send you money you can never outlive.

It doesn’t matter what the stock market does moving up and down.

This is money going to come to you that you can never outlive as long as MetLife is in business.

So that’s the nice part.

It takes away some longevity risk from your money because the insurance company there is providing it.

But you gave up your entire TSP balance.

So you need to select a survivor benefit.

Maybe you select a 50% survivor benefit.

We find this kind of common.

It’s kind of how your FERS work, right?

Well, we’re both alive, I get 100%.

When I die, you get half.

The trick with the TSP survivor benefit, which is different than the FERS survivor benefit, completely different.

The TSP survivor benefit is whenever the first person dies, the survivor benefit goes into effect.

What does that mean?

Let’s say I do this TSP annuity.

I got $5,000 a month coming in.

And I choose a 50% survivor for my wife.

I die, my wife gets half, $2,500, right?

Okay, that makes sense.

That’s how it works.

Well, let’s say it’s again my TSP account.

I’m getting this $5,000 a month.

I choose a 50% survivor.

My wife passes away.

I go down to $2,500 a month.

I take the reduction that’s gonna be there.

So if you choose a survivor benefit, as soon as the first person dies, the survivor gets the remaining amount.

Most people don’t realize that.

Be very, very careful.

The other thing that happens in this annuity is you’ve irreversibly given all your money to MetLife.

There potentially is no death benefit there.

They have some minor death benefit options that are there, but there’s potentially no death benefit going to be there.

So when you and your bride die, you and your spouse pass away, there’s no money that’s going to be going to your kids.

Annuities also really depend on interest rates.

When interest rates are high, they pay a lot more.

When interest rates are low, they pay a lot less.

So it’s going to be very variable in how these things go.

Proceed with caution.

If you wish to do an annuity, look at several different annuity options.

There are many different things that are out there that you should be looking at.

So proceed with caution as you look at these.

Now you know the TSP withdrawal options, what I think is the best TSP withdrawal strategy and the one to avoid.

But here’s the thing: even with the right TSP withdrawal strategy, you could still not have enough money for retirement.

And that’s the reason I created this video right here, talking, going through a real federal employee’s retirement.

Can they retire at 57 with a million dollars saved in the TSP?

It’s a good question.

Watch the video, walk through the numbers, then find out for yourself if you’re ready to retire.

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