Ep #26: What’s The Best Distribution Rate From Your TSP?

 You can spend. You can save. What is the right thing to do? Federal benefits, great savings plans too. You can save your own way, with help from Micah and Tammy. You can save your own way. Save your own way.

Micah Shilanski: Welcome back to the Plan Your Federal Retirement podcast. I’m your cohost, Micah Shilanski. With me as usual is the amazing Tammy Flanagan. Tammy, how are you doing, ma’am?

Tammy Flanagan: Hey, Micah, I’m just doing good today and looking forward to talking about some of these TSP options that we have on our agenda for today. I think I’m going to learn something here on taxes and financial planning and maybe I’ll tell you something about benefits you didn’t know before, but we’ll see. I think it’s a good synergy between all the different things we both know.

Micah Shilanski: Yes, I am slapping ourselves on the back right here, but I do say I really enjoy this duet on the podcast, because your knowledge about the benefit structure, the processes, actually how things work in federal benefits is just amazing. And to compliment that with what actually happens in retirement and working with people one-on-one and bringing in the other elements in addition to the federal benefits, really designed to help you or listeners get the most out of your retirement benefits. Because you’ve already worked a whole career, you need to make sure you know how these work so you get the best advice and you’re able to apply that advice to your personal situation.

Tammy Flanagan: Yep. I think that’s why I love doing this partnership with you because I always think there’s always the financial piece once you understand the benefits. So this way we can kind of bounce it back and forth. So hopefully our audience is seeing that as well.

Micah Shilanski: Well, Tammy, today I really wanted to chat with you about this. I’m using air quotes when I say the word safe, right? Because in my world, our regulators don’t like that word, so I’m just using it as an example, right? What is a, quote, safe, quote, distribution from your TSP? This is a question we get a lot and this is a hot topic that’s even debated between financial planners. How much can you take out? How much can you not take out? There’s a lot of things that come into it.

Micah Shilanski: Tammy, I think people, when they generally approach this, are starting to approach it the wrong way. Number one, they just focus, on great, how much money can I take out? But really they need to step back and answer the question that you brought up first, how does the TSP actually work for distributions? We can have a theoretical conversation about how much money or percent can you take out, but you first need to understand the tool that you have. How does it work well, how does it not work out well? How does that fit in? Then we can jump into the question about how much money you could potentially take out.

Tammy Flanagan: Yeah, Micah, and I also think there’s, I don’t to call it a psychological or a mental aspect of this, because we’re in such a mode of accumulating money and saving money and seeing that account balance grow and we’ve had such a great run on the stock markets. Everyone’s seeing probably the highest amount of money they’ve ever had in their life and to think about having to start depleting it, we’re taking distributions from it, that can be scary for a lot of people. Or we don’t want to see.

Tammy Flanagan: We’re still wanting to accumulate that money, but now we need to spend it, and I think some people are avoiding it. They’re living on just their first benefit and their Social Security, even though they could probably have a better lifestyle if they’d incorporate all three parts of their retirement.

Tammy Flanagan: I think for some, we don’t think of the TSP as being one of the three sources of income. We look at that as like the pot of money when everything else runs out. So I think there’s something to do with the mindset about how we look at this savings that we have in our Thrift and then we have to think about a plan for distribution. Because I don’t think we make that plan while we’re still working, so I think that’s something important to talk about.

Micah Shilanski: Yeah, that’s really important, right? Because you’ve worked so long for this money, how do you take it out? Tammy, what I tell clients when they go to retire is the exact same thing you talked about, saying, look, for your entire career, you’re pretty much used to that TSP going up, but now you’re about to enter this new chapter of your life where you’re taking distributions where instead of putting in $20,000 to $30,000 a year, because remember your match, right? You get your match, which is also a contribution. So you get 20,000 to 30,000 plus a year going into your TSP account and now all of a sudden you’re taking out $30,0000, $40,000 a year on there. So instead of putting money in, now we’re taking money out, and then what happens when the market goes down? What psychological effect is that going to have? That’s a huge part of retirement.

Tammy Flanagan: Yep. There are a finite number of dollars in the Thrifts, so it’s not like our Social Security or our first benefit that’s guaranteed for life. This money can run out if we’re not careful so I think it’s important really to talk about some ways we can make sure that we have a nice lifestyle in retirement, we’re not really cheating ourselves out of a wonderful retirement life. But on the other hand, we don’t want to live it up too soon, too quickly, or we could run out of money. So what’s that sweet spot?

Tammy Flanagan: That’s the part I’m really interested to discuss with you because I think there’s ways to arrange that that’s very safe and there’s other ways to arrange it that’s very smart. I think we need to come up with both the smart and the safe method.

Micah Shilanski: I love it. I love it. Well, Tammy, let’s jump into this. Now, a couple of things, I think. When you fast forward the clock and you’re now separated from government service, let’s talk about how does the TSP work? What are some things we should consider based on age? Then let’s talk about how the distributions actually work from the TSP.

Tammy Flanagan: Well, just by the way it works, this is probably going to be the last thing you do when you retire. So we always tell people put in your retirement application two to three months ahead of your retirement date. But you cannot put in your TSP withdrawal application two to three months ahead of time because they just won’t accept it. So to take a, they call it a post-separation withdrawal, you have to wait until your payroll office has notified the TSP that you’re actually off that agency’s payroll.

Tammy Flanagan: You’ll know when that happens because when you go into your TSP account, all of a sudden you’re going to have some options there that you didn’t have before that have to do with the withdrawal choices that you’ll have. So if you try to do a post-separation withdrawal while you’re working, you wouldn’t know where to do that because that’s not lit up yet on your TSP account. So that’s one thing that you’ll see. Usually within 30 days of your separation, if you’re lucky, that’s when you’ll have that option available. So that’s the first thing.

Tammy Flanagan: The second thing is once you decide that you’re going to take a withdrawal, now you have to decide do I want to take an installment payment on a regular basis? That can be monthly, quarterly, or annually. Just once a year, they send me a check, or once a month, or once every three months. So you can do it that way of specific dollar amount. You can also do monthly payments where the TSP computes your amount based on your age. So as you get older, the payments get bigger, and as you have a bigger account balance, of course, you’re going to take larger payments as well.

Tammy Flanagan: Then you also have the option to purchase a life annuity. Every year a thousand people, last year, only 400-some people, purchased annuities through the TSP. That’s a whole different election. That’s a more permanent election that does provide lifetime income, but it also has some pretty significant concerns and some things you want to be aware of. So I think we need to talk a little bit about the difference between the annuity versus taking just money out on a regular basis.

Micah Shilanski: Yeah, absolutely. Right. You really need to understand the repercussions of these actions. The annuity side of it, whoa, I’m going to throw up some red flags, right? I’m not saying that TSP annuity is bad, that’s not what I’m saying. I’m saying that’s a lot of caution flags that’s a lot more than a yellow. It’s a red. You need to stop, you need to really understand what you’re doing, because it’s an irreversible decision.

Micah Shilanski: This is my reaction, Tammy, to any irreversible decision. That’s a red flag. Just stop, wait, get more information, make sure you understand the decision you’re making before it’s irreversible. Now, if it’s not irreversible, then great. We should still understand it, but we can fix it later. But once we go to an annuity and it’s irreversible, that money is gone. So we really need to understand how that works and if it’s going to meet our goals or not.

Tammy Flanagan: Yeah. That’s why even at the seminars, when I teach them, I always tell people how the annuity works, what the options are, not because I’m promoting it or not promoting it, I just want to make sure they understand what their choices are and if they choose the annuity option, what does that really mean and what are some of the variables within that option that are going to affect not only your income, but your spouse’s income, too, if you’re married. So there’s a lot of, like you said, there’s some red flags you want to throw up. There are some choices you can make later that you don’t have to make right now. So maybe this is a good option for down the road. Maybe not such a good option for right now depending on your age, depending on your income needs. So there’s a lot of different questions you have to answer to make this individual to you.

Micah Shilanski: Absolutely. You know, one of the things you mentioned I want to pull out of there, Tammy, is the time delay, right? Sometimes I talk with retirees and they’re like, well, Micah, I’m not worried about it because it depends on when they get around to my pension, how long does it judicate, or when I get managed from payments. I’m just going to live off my TSP in the meantime. Well, okay. Well, number one, that has tax ramifications you may not be thinking about.

Micah Shilanski: So there’s some tax issues, but number two, when can you access your TSP? People are well, once I’m separated from service, I have access to my TSP. Tammy, as you know, that’s theory, right? Reality, it’s when TSP has been notified, as you said, that you’ve been separated from service. We’ve seen it take 30 to 60 days sometimes for your agency to notify TSP. Good, bad, right, or wrong, this is just reality. So you need to make sure you have cash reserves. We need to make sure you have money sitting on the sides that’s available to you before you separate, because we’ve seen all sorts of crazy stuff happened with your TSP, with other things, which cause delays in not getting the money.

Tammy Flanagan: Yeah. I always tell my clients that before you even retire have at least six months of expenses on hand, not from the Thrift, not from counting on your interim retirement payments, because what if none of that starts up right away. We’ve had situations this year that are crazy. Like with the National Finance Center, there have been up to six month delays in even telling the Thrift that you’ve been separated. That means you can’t take money out until they’ve been notified. That’s happened, which I think is ridiculous, and these employees haven’t gotten their lump sum leave payments for months rather than weeks after they retire. OPM has had some significant delays in some of the retirement processing, so you can’t really count on anything until the dust has settled and it can take literally months for that dust to settle.

Micah Shilanski: So what you can count on is money in your bank account. This is what we count on, right? It’s money that’s available to you. We don’t have to worry about an agency of any capacity approving it in order to get it sent out. So Tammy, one of the things that we recommend a lot to our clients is let’s take someone, they’re going to retire when they’re 60 years young, they also have the ability to is once you’ve hit age 59 and a half for an aged based in service withdrawal. So sometimes what we’ll do with clients that have all of their money in the TSP and they really haven’t saved outside of it, you know what? Maybe you’re a candidate that you should be looking at an in service transfer and while you’re still working, move money from your TSP account into an IRA.

Micah Shilanski: Maybe not all of it, but again, that six months comment. What if TSP doesn’t get notified that you’ve separated? How are you going to get money out? What if there’s a delay? What if OPM is still working from home and they’re still eight months behind, right? What if all of these things that we’ve seen in the last 12 months actually happen, they happen to you? So you need to be preparing for this. That’s something you have to figure out before we could even talk about TSP distributions. You’ve got to know how it works and you’ve got to know what your plan is, then we can start talking about how we can take money or how much money we can take out.

Tammy Flanagan: Yeah. So I wanted to kind of emphasize one thing you said, Micah, is that if you’re over 59 and a half, you can do an in-service withdrawal and move the money to an IRA where you can take it out if you need it without penalty. Now, for someone younger than 59 and a half, whether it’s a law enforcement officer or just somebody who has 35 years of service and they’re 58 years old, you don’t necessarily going to have access to that IRA money too easily because you’re going to pay a penalty. So in that case, what do you think about taking a loan from the TSP?

Micah Shilanski: I knew you were going to ask that. It wasn’t even our pregame.

Micah Shilanski: No. I am very, very, very, very, very, very hesitant on taking that loan out from that TSP account. There is a lot of things that could potentially go wrong with that, including a big tax burden. So Tammy, one of the things I would suggest before that, can we take a home equity line of credit? Right? Could we go to the home and say, hey, get a $50,000, $100,000, line of credit.

Micah Shilanski: Now the beautiful part about a line of credit is you’ve got to pay a couple hundred bucks to set it up, but you’re only charged interest when you use the money. So in that case, maybe I get a line of credit so if this stuff does happen, because I’ve saved all of my money in the TSP, I’m younger than 59 and a half, I need some options, maybe that’s a good use of credit to use that as an option. Then after everything gets settled, then we could pay it off. Because with a line of credit, I have not triggered any tax liability issues. I haven’t triggered any pre 59 and a half 10% penalty issues that could come from an IRA account. I have a little bit more flexibility. So I think I would lean towards that type of lending before I would do a TSP loan.

Tammy Flanagan: Yeah, I agree with you, Micah. The only thing I would add to that is if you are going to do that, do it well before you plan to retire. That’s like buying a house. That’s like taking out a mortgage. You’ve got a lot of documentation. A bank just doesn’t want to open a line of credit for you if you have no income, so it’s a good thing to do this before you retire so you still have a paycheck. You don’t have to tell the bank you’re retiring in a couple of months. They’ll get that approved for you, get it in place so that now it’s available.

Tammy Flanagan: Because what we’re talking about is that in those first couple of weeks or months after you retire, you could be short because you’re not getting at that bi-weekly paycheck anymore and OPM and TSP hasn’t started paying you the money that they owe you yet. So I would just make sure you think well ahead. This is why retirement planning needs to start well before you put in the application.

Micah Shilanski: We could even complicate it more. We could add the third bucket, Social Security. You could be saying, well, I’ll be 62, I’m just going to take money out from Social Security so I could live on that. Great. Well, my mom went to apply for Social Security, they had her wrong birth date. So we had to go back and get that fixed from Social Security and that took seven to eight months to get fixed. Right? They couldn’t do any payments because all of her information didn’t match Social Security’s information so we had to fix it at that time.

Micah Shilanski: So trust me, we have seen so many things go wrong in this. We don’t want that to happen to you. The more options you have, the more flexible your retirement can be. That’s the key to successful retirement is having flexibility for these unknown things that we know are going to happen. We just don’t know what they will be or when they will be, but something’s going to go wrong eventually.

Tammy Flanagan: That’s for sure. I mean, it’s like that old saying goes, you plan for the best, but prepare for the worst, and definitely that holds true for retirement. Especially these days with what we’ve gone through with the pandemic and the teleworking, this has really affected all aspects of retirement planning. So just allow time and you’ll have a lot less stress if you prepare for that longer wait.

Micah Shilanski: You bet. One more thing on the time delay, Tammy, that I wanted to jump into, then I want to talk about dollars and cents, how much could we think about safely taking out of your TSP for a longevity perspective. One of the things that we need to think about on a time delay is TSP’s Modernization Act and went through. Which is great, right? Really loosened up a lot of rules on the TSP and how we could take money, which we love. There is still some limitations in it, right? You can only change your distribution once a month, every 30 days. What we have seen, the reality is every 30 days is close to every two months because it’s a paperwork process with TSP.

Micah Shilanski: So if you’re planning again on a tight timeline with TSP, it says, hey, if I need money, I took money out this month, I can change it next month. Theoretically, yes. Reality is it’s taking six weeks to two months for that actually to go through. This again is another reason we want you to have a cash reserve, have a cushion. I want my clients to simulate retirement two years before they’re retired. I want everything set up as if they were retired in advance of retirement. Not only does it give us confidence going into retirement, when something bad happens, we’re going to figure it out.

Micah Shilanski: We have a great client that TSP lost his check. Well, the Postal Service lost his TSP check. It’s a seven figure TSP check that didn’t make it where it was supposed to make it. So we’re having to fix that. Now, the good news is we’re doing that before he retired because his plan is, and we were chatting about this, he’s like Micah, “When I retire, I need to take money off right away to live on.” I said, “Great. We need it in an IRA account that you can live off of in case something happens.” So we’re doing this well in advance, and sure enough, there was an issue. Good news is we have plenty of time to fix it so he can still move forward with retirement. But Tammy, if we had tried this right at the time of retirement, oh man, that would have been a nightmare.

Tammy Flanagan: It would have been. A lot of stress involved.

Micah Shilanski: Yeah.

Tammy Flanagan: Yeah, I think the liquidity of the TSP, like you said, can be weeks, if not months, of time in between making your request and actually getting the money, so I do think that there’s something to be said for having at least some of your savings available within 24 hours notice just in case something comes up. Consider it your emergency fund. Consider it any type of last minute changes you want to make. Because I know with my money in an IRA, if I need it tomorrow, within 24 hours, I can have it in my bank account. That’s not true with the Thrift. You do have to make some allowances both ways.

Tammy Flanagan: There’s nothing wrong with the Thrift. I think it’s a great place to save money.

Micah Shilanski: Oh, it’s amazing.

Tammy Flanagan: Very low cost. It has some nice broad investment choices. But there are some limitations. We’re not picking on the Thrift, but I think we’re trying to point out some of the things to be aware of that you just simply can’t do when it comes to TSP.

Micah Shilanski: Thank you for clarifying that, Tammy. I recommend highly every federal employee I’ve ever talked to save money in the TSP. I can’t think of one exception. I think it’s a phenomenal savings tool, but like any tool it’s designed to do certain things. Know it’s limits, right? That’s all we’re suggesting.

Tammy Flanagan: That’s right.

Micah Shilanski: All right. So let’s pivot this a little bit and go back to the title of our conversation, our podcast today, which was how much money can you actually take out safely from the TSP and not outlive your money. There’s a lot of different thoughts about this. You know, there’s people talking about the 4% rule. Now they’re saying with low interest rates, it’s really not 4%, it should be 3%. There’s talk that it shouldn’t even be 3% because interest rates are so low. So what is that number?

Micah Shilanski: Now broad disclosure here, this is going to be a little bit different for everyone. Really what we’re going to look at is, Tammy, the two biggest things that come into play here, is one, what is your age, and number two, what is your allocation? That means how are you invested? So easy example here, let’s say you retire when you’re 60 years young, but you put a hundred percent of your investment inside of the G fund. The G fund is great because it’s guaranteed. It can’t go down in value and it’s a good money market rate of return, but it’s not going to grow that much over time. Well, if you’re taking out 4%, and let’s be generous right now, let’s say that TSP is paying you one, then that means you’re losing 3% every single year on your TSP investment. Okay, that money’s not going to last for your lifetime if we make it to age 100.

Micah Shilanski: So we’ve got to be thinking about this, all right? So what’s our age? Now, maybe if we’re 95 and we do that, okay, that might work at 95, but that’s not going to work when we’re young in retirement. So we’ve got to figure out age and we’ve got to figure out allocation.

Micah Shilanski: Now, if you haven’t gone through, it’s a program we have on our website called the three critical concepts of retirement. I know, Tammy, you and I chatted about this a bunch. You need to jump on our website and go through that. It’s a free course you get to go through and it really talks about saving and investing into retirement and three critical concepts you have to have going into it.

Micah Shilanski: But one of them is really called our buckets, and buckets is so, so important because any money you need to spend, taking me back to what you were saying earlier, any money we need to take out of the stock market in the next five years doesn’t belong in the stock market. The reason we say that is 2008, 09, 10, 11, 12, 13, it took about five years to get back to even when the stock market crashed.

Micah Shilanski: So where people get in trouble with the allocations with investing is they get in trouble in one of two camps. They either say, well, Micah, I’m 57 years old and I’m retiring, I’m going to keep all of my money invested, and they put a hundred percent of it invested, but they’re taking money out every month and the stock market crashes. That means the market goes down and they’re selling out every month for a lifestyle. Ooh, this could be painful.

Micah Shilanski: Number two, they say, well, Micah, I’m retiring, therefore I have to be uber conservative. All of it needs to go in the G fund. The reality is both of those are probably wrong. You need a blend between these. A easy way to look at it is with our clients a lot of the times we’re actually looking at a 5% distribution, Tammy. So that means if you had $500,000 in your TSP, 5% is $25,000 a year. Let’s call it $2,000 a month to make my math easy. So you could be pulling out $2,000 a month out of your accounts as long as you have the majority, that means about 70% of your money, invested in the long-term. Then that means, great, now we can probably outpace inflation. Now we can probably keep that money growing over time.

Micah Shilanski: By having 30%, maybe, in the G or the F, 30% kind of on the sidelines, guess what? We’re taking out 5% a year, sorry, I know I’m going through a lot of math here on a podcast, but if we’re taking out 5% a year and we have 30% in the G fund, guess what? That’s six years. We have time to weather the storm. This is the most important thing in retirement planning is designing a plan that is flexible and a plan that has time to weather the storms and the downsides of the market.

Tammy Flanagan: Well, what you said that hit me very hard was the fact that you’re saying I have to have a plan. Because a lot of the clients I talk to, they don’t really have a plan. They have told me that they’ve been following one of these websites. I don’t want to name any of them because there’s many of them out there that give advice on put all your money in C fund and next week we’re going to put it all over to the F and the G, so that you’re moving money kind of based on what the market has done in the past, hoping that it kind of follows that pattern. If you’re doing that, that’s called timing the market. I call it gambling. So you don’t necessarily want to do that with your hard earned retirement savings.

Tammy Flanagan: So what you’re saying that’s different from what I hear people doing is that I’m planning ahead of time. I’m not doing it based on what I think the market’s going to do or what I don’t think it’s going to do, I’m doing it based on what I know I need to do. I need to spend money in the next five years so I’m going to put that money someplace where it’s kind of safe, where it’s not going to lose too much, if anything, and the money that’s more than five years down the road that I’m investing still, even though I’m not necessarily adding to it, but I’m still keeping that money invested, is diversified. It’s in the market. It’s in different types of investments, different sectors of the market.

Tammy Flanagan: So that makes perfect sense because now I’m not going to have a heart attack if the stock market falls because I have five years to recover because I have money that’s safe that’s not affected by that crash of the market. So if people hear that and really take that to heart, it’s really going to make a big difference in your success in living out your retirement life without worrying about running out of money, without having that feeling of, oh my goodness, if I live past 85 what am I going to do? You don’t have to worry about that. You’ll have money to last you.

Micah Shilanski: Tammy, so much about retirement planning is emotional, right? Money is so emotional. So as you said, we’ve got to have a plan, so what’s our main plan we’re going to go with, and what are our two backup plans? What if all of a sudden we have another 2008, what are we going to do different?” Maybe we need to change distributions. Maybe we can’t take 5% out any more. Maybe it has to be reduced by a little bit. That’s an option, right? Great. What’s going to happen? What is that triggering event that makes that the reality? Not speculation. Not saying, oh, when I feel like it’s too much money. No, I want a math formula. This is great. If the markets go down by X, if my account drops by Y, then I need to re-look at my distributions.

Micah Shilanski: I also want it on the opposite side of this as well. I want to say, great, maybe if the markets go up a lot, maybe I can take some more out, right?

Micah Shilanski: So what are our plans? I want, number one, what’s our primary plan for retirement, what happens when the market goes down in retirement, and what happens when the market goes up in retirement? Now all of a sudden we feel empowered about our retirement because we’re not emotionally responding reactively to the stock market. We say, great, we know the stock market’s going to go down. Great, it went down. Guess what? We have a plan for that. We know exactly what we’re going to do. It takes away so much anxiety.

Micah Shilanski: Our clients, luckily we were blessed, especially last year when the market dropped with COVID, we didn’t have any clients panicking because we had a plan for what we were going to do when the markets dropped. No, we did not know that COVID was going to happen and the markets were going to fall 30% within a few weeks. Nope, so sorry, our crystal ball did not show us that. But we knew something will happen and the markets will drop because they always do and you’ve got to have a plan to get through that.

Tammy Flanagan: Yeah. I think that’s kind of like, it reminds me, I don’t know why I was thinking of this when you were talking, but it’s like my Keurig machine, my coffee maker. Some days I’ll turn it on, it just doesn’t make a cup of coffee for me. So I pull out my manual, in the back there’s a troubleshooter guide, and I say, well, if it doesn’t do this, here’s what I do to fix it.

Tammy Flanagan: So what you’re saying is the same thing with our money. If our money’s operating differently than what we were seeing it do yesterday, we have to open up our troubleshooting guide and see what do we do to fix that. Because like you said, there are things you can do and there’s things that we’ve kind of set into place that if it goes one direction, we’ll do this, if it goes the other direction, we’ll do that. So it’s not a set it and forget it in retirement, just like it wasn’t set it and forget it while we were working. We had to keep revisiting the plan that we made. Our life changed, our plans changed, the markets changed. So I think it’s something that we don’t have to do on a daily basis, we don’t have to wake up every morning like Old King Cole and count our money.

Micah Shilanski: That’s right.

Tammy Flanagan: But I think maybe once a year, once every couple of months or so, we need to revisit that plan, make sure it’s still doing what we had set it up to do.

Micah Shilanski: I like that. One of the things that as we talk about this and this plan that’s so important that we’re going to go through is it brings just awareness to how you’re spending money. It brings awareness to how you’re investing money, right? Again, it just gives you that confidence because you’re going through that. So I love it.

Tammy Flanagan: I like to do, I always like to simplify things since I’m not a financial advisor, but I try to look at things with a little common sense. So one of the things I tell my clients to do to give them more or less a reality check is if you go on TSP’s website, they have calculators, and there’s one where you can calculate your monthly distribution based on your age or your life expectancy.

Tammy Flanagan: So it’s not necessarily that I’m recommending they do that, but I want them to go in there and run that calculator to what if my return in the future is 3%, what if it’s 5%, what if it’s 10%, to see what the difference in those monthly payments are based on whether or not I’m getting a more realistic rate of return in the future or whether or not I think it’s going to do the same thing as it did for the last 10 years. What if I put in 20% rate of return? I’ll have money to spare, but I wouldn’t count on that actually happening over the next 20 years.

Tammy Flanagan: So that’s a tool you can use if you’re just trying to get a feel for what are the realistic distributions I can take and how long will it last? Because you can play that calculator out till you’re 115 to see what your payments would look like going forward based on that rate of return. It’s pretty simplistic, but it at least gives you a little bit of a feel for that, that distribution.

Micah Shilanski: It’s a great starting place. Now keep in mind as you’re looking at that, we’ve got to remember our favorite aunt whenever we’re doing planning, right? Aunt Iris, the IRS, because she is an active part of your retirement, whether you want her there or not. So most people’s TSP accounts are pre-tax. So what that means is you’ve got to remember if you’re doing those distributions, and again, I love the TSP calculators, you take the 5% rule, 4%, 3%, whatever rule, that’s a gross rule. So what does that mean? That’s the total amount coming out. But Aunt Iris is the first one that gets a piece of that pie. That is not how much it gets deposited in your bank account. So we’ve talked about this many times, but make sure you’re knowing the difference in gross versus net and making sure you’re making the right decisions.

Tammy Flanagan: Yeah. Another question that comes up when it comes to taxes is I think some people aren’t sure how the TSP is taxed. They think there’s some special TSP tax, but it’s just income tax, right?

Micah Shilanski: That’s right.

Tammy Flanagan: It’s just earned income tax. You may owe state income tax depending on where you live, although you and wouldn’t know it in Alaska or Florida. But states like Virginia, Maryland, they will have to pay state income tax on those distributions as well. So something, like you said, something to very much be aware of when you’re trying to figure out what the net income is you’re going to need to support your retirement lifestyle.

Micah Shilanski: Yes, ma’am. All right, Tammy, let’s make a quick little transition. Now there’s a lot more to talk about this, and I think our next podcast, we’re going to break in a little bit on how the TSP works with Social Security planning as well. Because we were just talking about distributions today, but this podcast is all about action items. It’s not just enough to know about your benefits, you have to take action on your benefits to get the most out of retirement. So Tammy, let’s run through a couple action items for our listeners that they could do this week to improve their odds of successful retirement.

Tammy Flanagan: Yeah, there’s a lot you can learn. So I think educating yourself on the different distribution options that are from within the TSP. You can go to tsp.gov. There’s a lot there you can learn on the withdrawal options and that calculator is there as well. So I would recommend, if nothing else, just kind of run through that and take your pick in a few different topics there and take a look.

Micah Shilanski: I love it. You know what? The second thing I’m going to say is what’s your plan? What’s your distribution plan? If it’s to use your money like it’s a checking account and randomly reach in there and take money out, that’s a bad plan. That is not a plan with a high odds of success in my 20-plus years of doing this. Right? So I would really encourage us to say, great, what is our distribution plan for retirement and what are you going to do when the plan doesn’t work? So what’s plan B? That’s when the market goes below where you thought it was going to go, and what’s plan C when the market goes up, right? So what’s our default plan and what are two other plans that are going to be out there making sure we’re on a successful path in retirement?

Tammy Flanagan: I would say you have to kind of calculate not just the TSP in a silo, but you have to think in terms of you’ve got the FERS retirement. So what’s that net income? We know that’s a fixed amount. So how much is that going to be after withholdings for taxes and insurance comes out? If we’re going to take Social Security, then what’s the net of that benefit after Medicare and taxes have come out of that? Then what else do we need to live on?

Tammy Flanagan: So like you were saying, Micah, live on your retirement income two years before you retire to see if you can do it or to see what it is you’re going to need to withdraw to pay your bills every month to have that retirement lifestyle. Because that might give you a reality check that this isn’t the time to retire. Maybe you’ve got to work another year or two. Or maybe you’re well off enough that you should have retired last year, and I do see people that are better off than they really think they are.

Micah Shilanski: Very much so. The last action I’m going to throw out there, jump on our website and look at that three critical concepts. It’s a great class for you to walk through to really help get you geared for retirement.

Micah Shilanski: If you wanted one more action item because you’re a rock star and you’re getting everything done, feel free to jump on iTunes, give us five stars, share the podcast with a friend, leave us a review that lets us know that you love us, that you like the information we’re producing. We’re growing because of you, because of our listeners are sharing our podcast with more and more people. So thank you for taking the time to listen to Tammy and I and to go through.

Micah Shilanski: Until next time, happy planning.