“If I erroneously select an annuity from the TSP instead of a withdrawal from it, can I reverse that option? Thanks.” – Orlando.
Listen, we LOVE the Thrift Savings Plan (TSP) at Plan Your Federal Retirement. We think that the TSP is one of the best defined contribution plans we have seen. There are so many things that we love about the TSP like low cost, ease of use, clear effective choices for Federal Employees to choose what investment allocations are right for them. When we start working with Federal Employees that are in their early or mid-careers, we maximize as much benefits as we can from the TSP. The TSP becomes one of our major focal points as an employee is accumulating their retirement savings. The TSP is an amazing accumulation tool for you as a Federal Employee under the Federal Employee Retirement System (FERS) to have.
Knowing how best to use that tool and when, is a skill that becomes even more important for you to learn as you plan to draw towards the end of your creditable federal service. The only time that knowing all of your rules / options is even MORE important is when you retire from Federal Service.
Irreversible Decisions and Why Words Matter So Much…
The words that we use matter especially in finance. A Rollover and a Transfer of an account – not the same financial transaction. In fact, mistaking one for the other could mean that you accidently sent the Internal Revenue Service (IRS) a significant portion of the money that you’re moving.
This is also one of the reasons that we drive home that when you retire from Federal Service, your retirement is a PENSION even though the Office of Personnel Management calls your retirement income an Annuity. The reason that we are so particular about the terminology is because we do not want you to view confuse your pension with another financial product used in the insurance and investment world, called an annuity. They are vastly different financial tools – you wouldn’t use a saw to sand a piece of wood, knowing the purpose and use of the tools in your toolbox matters.
The words, “irreversible decision” sound ominous because it is! Nothing makes us throw up a red flag quicker for our clients than when they are on the brink of making an irreversible decision.
If you are filling out your TSP Form and elect that you want an Annuity you have now just made an irreversible decision. You have annuitized your TSP which cannot be undone.
Before you elect to annuitize your TSP you need to really evaluate whether or not making this permanent decision is in your financial best interest.
Annuitizing Your TSP
There are pros and cons with every decision that you make in your retirement planning. Here, we will discuss some of the pros and cons that we see when our Federal Employee clients talk about whether or not it makes financial sense for them to annuitize their TSP in retirement.
When you choose to annuitise your TSP you have elected to send the company that the TSP office uses for annuities, in this case MetLife, 100% of your TSP balance. In exchange the company, here MetLife, will provide you with an immediate annuity. An immediate annuity means that the annuity will start, yes immediately. Each month you will receive a check from MetLife for the rest of your life.
Immediate annuities are tied to current interest rates. When you are deciding whether or not to annuitize your TSP, you need to evaluate the current interest rate environment. Are rates high or low? Do you anticipate rates being higher or lower in the near future? How much interest are your bank accounts earning in interest?
Orlando elected to annuitize his TSP which is an irreversible choice.
Once his TSP was annuitized, he cannot undo that decision.
Annuities, like all investments, are not bad or good. They are just tools to use in retirement planning.
Before you decide if an annuity is the right option for you we strongly recommend that you talk with a financial advisor and weigh the pros and cons of all foreseeable scenarios.
Understanding how your benefits work in concert with your financial plan is an important aspect of planning for retirement as a Federal Employee.
If you have questions about how your benefits work, let us know.