Are You Ready to Spend Your Retirement Savings?

Have you started to think about how you’re going to use your Thrift Savings Plan investments once you retire from federal service? Are you already retired? If you’re among the many people who have accumulated a small fortune, what are you going to do with it?

Many federal employees have used some of their retirement savings during their career by borrowing from their accounts using the TSP loan program. According to recent statistics, more than 250,000 TSP loan transactions are processed every year. In addition, more than 120,000 in-service withdrawals are processed for financial hardship as well as age-based withdrawals for employees age 59 ½ and older. Over the past few years, only about 35,000 separated participants per year have initiated monthly payments from their TSP accounts. Meanwhile, the Office of Personnel Management processes about 100,000 federal retirement claims every year.

Over the years, you’ve had to decide how much of your salary to save in the TSP and in which funds to invest those savings. Considering the TSP had a balance at the end of January of $559 billion, the 5.2 million TSP participants have done an amazing job of accumulating retirement assets. More than 90 percent of all FERS employees are actively participating in the TSP. The Life Cycle funds represent more than 20 percent of total TSP assets, and allow simple diversification across the C, G, F, S, and I funds by allocating assets according to a time horizon based on when you intend to start using the funds. The size of the C Fund now matches the G Fund, with each fund holding a balance as of the end of January of approximately $205 billion.

If you’re nearing retirement, you face some decisions about how to use this important piece of your retirement benefit. Will you choose a monthly payment to supplement your federal retirement benefit and Social Security? Are you going to purchase a life annuity, or will you take payments directly from your account balance? Will you continue to allow the account to grow and decide later on how to draw on your funds? Are you planning to “peck” at it as needed for major expenses that come up along the way? Have you considered how you will continue to manage your wealth of savings once you begin to spend this valuable asset? Are you worried about running out of money at some point? These are important questions to consider as you plan your transition to full retirement.

A few weeks ago I provided an update on the TSP Modernization Act changes that are slated to go into effect by November 2019. They will provide more withdrawal flexibilities for TSP participants, allowing them to take partial withdrawals, change the amount of monthly payments, and choose whether withdrawals should come from a traditional TSP account or a Roth account.

The Employee Benefits Research Institute released an issue brief on how people spend their retirement savings. The study was limited to retirees from private companies with 10 or more employees. Among its findings:

• Within the first 18 years of retirement, those with $500,000 or more saved spent down 11.8 percent of their accumulated assets. Those with less than $500,000 saved spent about a quarter of their savings.
• While some retirees do spend down most of their assets in the first 18 years following retirement, about one-third of all sampled retirees had increased their assets over that period.
• Individuals with a pension were much less likely to have spent down their assets than those without pensions. In the first 18 years of retirement, the assets of retirees with pensions only went down 4 percent. For those without pensions, the figure was 34 percent.

According to the report, retirees face several factors—including uncertainties about life span, medical expenses, and market returns—that cause many of them to spend their retirement assets slowly.

Those covered by the Federal Employees Retirement System have the traditional “three-legged stool” of a retirement benefit (a form of pension), Social Security and retirement savings in the TSP. Some FERS retirees are currently living on only one or two of those legs, while others have left federal employment, but are not fully retired. In the Civil Service Retirement System, by contrast, many people retired and lived on their federal retirement benefit alone long before the TSP was available.

The TSP has been around for more than 30 years. Until recently, the focus of its participants has been on accumulating retirement assets. Now many of them are thinking about how and when to spend them. They’ll soon have more options for doing that, but that will mean they may need additional education and resources to be confident that their life after retirement will be financially comfortable for as long as they live.

Here are some tools from the TSP to help you as you assess your withdrawal options:

• Retirement Income Calculator
• Withdrawing Your TSP Account After Leaving Federal Service
• Withdrawal Strategies
• Video: Five Tips for Completing Your Requests Correctly, The First Time
• Pre-Separation Workshop: To Retirement and Beyond (conducted by TSP training specialists at federal agencies)

You can also listen to the podcast of TSP Updates From the Experts, which aired on Federal News Radio on May 2. In addition, members of the National Active and Retired Federal Employees Association can access a library of webinars on retirement savings.

Photo: Flickr user frankieleon