Changing the Distribution of your TSP

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“I retired as a FERS employee at age 56 with over 32 years of service. Upon retirement, I chose to withdraw $2000 per month from my TSP account. Here’s my question: I don’t need $2000 per month to pay my expenses given that I have a retirement annuity and other income. Can I change the amount that I receive each month without incurring a penalty?” – David.

David emailed Plan Your Federal Retirement to ask an important question about how to use his Thrift Savings Plan (TSP) in retirement.

When David planned his retirement, he anticipated needing to withdraw $2,000 monthly to supplement his retirement income gap.

Your retirement income gap is the difference between what you will earn from your FERS retirement pension, the social security benefits you may receive, and what you need every month to maintain your retirement lifestyle.

Side note: it is a MYTH that your retirement lifestyle will be LESS expensive than when you were working. We have helped hundreds of federal employees retire, and rarely do people spend less money in retirement, no matter how financially disciplined they have been throughout their careers.

Federal Employees need to understand their retirement income gap to understand how much they need to withdraw from retirement, but most federal employees make one classic mistake, like David may have when they plan for their retirement income gap.

It is important to know how much you need to withdraw in retirement to fill your retirement income gap, but you have to also know WHEN you need to start withdrawing those funds from your retirement. Not all retirement years are created equal.

Your retirement is going to ebb and flow with various income sources that work like financial levers: you need to know when to pull each to make your retirement plan sustainable and minimize the impact taxation will have on your retirement.

David may have pulled the distribution lever too quickly in anticipating what he thought retirement would be like. In doing so, David may be subject to unnecessary taxes from taking a distribution from his TSP and the opportunity cost of having taken funds from his TSP earlier than needed.

The TSP is a phenomenal accumulation tool for Federal employees to contribute during their working years. Many Feds set up their contribution schedule, make a few fund decisions and then leave their TSP on auto pilot until they retire. They rarely sit down and determine how much they need to have accumulated in their retirement before they retire or how much they should withdraw once they do retire.

Federal employees should have two to five years’ worth of anticipated cash withdrawals to supplement their retirement. For example, if David were anticipating that he would need $2,000 a month in retirement to fill his retirement income gap, he would need between $72,000 and $120,000 set aside in cash or cash equivalent investments before he retires. There are several reasons why having these funds is one of the savviest financial moves Federal Employees can make.
By having anticipated distributions set aside, a federal employee now has some wiggle room during not only times of market volatility but also if and when working to change your distributions from the TSP becomes more problematic than you think.

The TSP Modernization Act (that we strongly advocated on behalf of Federal Employees for!) did a tremendous job of overhauling antiquated distribution rules from the TSP. However, the TSP is not designed, nor do they want to be set up to be your bank account. The TSP does not work like a bank account.

The TSP is an investment account; therefore, withdrawals are limited, and rules apply.

This also means when you withdrawal funds from the TSP, your distributions are proportionate. When you withdraw money, like David’s $2,000, he cannot pick and choose which funds to take the money from. When he takes his $2,000 distribution, it is being proportionally taken from all funds. Federal Employees cannot choose which funds they want their TSP distributions to come from. Too often, we see distributions happen during a time period when one fund is down significantly.

How long does it take to get money from the TSP Office?

Plan on 60 days to start receiving your distribution from the TSP office. When we help Federal Employees across the country set up their distribution schedule with the TSP office, we always plan on having a sixty-day window.


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