Look before you leap: don’t bail on TSP without doing homework

Q: I am get­ting ready to retire from Civil Ser­vice in March 2013. I am a wid­owed mil­i­tary spouse. I have a TSP account. A friend told me that he took it in a lump sum and invested it through an invest­ment com­pany and gets a guar­an­teed annu­ity check each month for life.

With the econ­omy in such bad shape is any­thing really guar­an­teed? Should I trust this idea? It makes me ner­vous to just hand this over to some­one and then expect a check every month. Tell me more about annu­ities please. Thank you.

–Linda, Ekron, Kentucky

A: This is a big deci­sion, so you want to make sure that you make the right call.  The first thing you should know is that you don’t have to leave the TSP to get a guar­an­teed annu­ity check each month for life. Check out this link at the TSP web­site to get an idea of what’s avail­able with­out leav­ing the program.

That being said, the most impor­tant ques­tion isn’t where you get an annu­ity check, rather it’s whether or not you should. The answer depends on your over­all finan­cial sit­u­a­tion. Annu­ities can be attrac­tive because they offer income for life. How­ever, it’s a big com­mit­ment. In your case, you’d be buy­ing this stream of income by giv­ing up the lump sum in your TSP account. While some con­tracts have “outs,” but basi­cally you would no longer have access to the thou­sands of dol­lars in the TSP and instead would have the com­fort of know­ing you’ve got a stream of income you won’t outlive.

That being said, ide­ally dur­ing retire­ment you can cover your fixed expenses (mortgage/rent, car pay­ments, var­i­ous types of insur­ance, util­i­ties, food), with guar­an­teed income. In your case, exam­ples of guar­an­teed income might include your CSRS or FERS pen­sion, Social Secu­rity, DIC, and even SBP. Given the wide range of fixed income sources you may already have, I’m not sure that turn­ing your TSP into an income annu­ity makes sense. You may already have things covered.

As you eval­u­ate whether or not to buy an income annu­ity, under­stand that the amount of the income that you receive is based, in large part, on your age and pre­vail­ing inter­est rates at the time. As you get older and/or inter­est rates rise, pay­outs increase.

Take a look at your over­all sit­u­a­tion and deter­mine if buy­ing an income annu­ity makes sense and if it does, then first look at what the TSP has to offer. Good luck.

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Scott Halliwell and JJ Montanaro are CERTIFIED FINANCIAL PLANNER™ practitioners with USAA Financial Planning Services, one of the USAA family of companies. Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and Certified Financial Planner™ in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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