FERS and CSRS are pure income and a wonderful core Federal benefit. The same can be said for Social Security. The flaw is that these income streams are not likely to keep up with the true cost of living over time. This is where TSP comes in. As a manageable asset TSP has the potential to pick up the slack. But relying on the stability of the market to fill the gap is a bit of a gamble.
Of course, the Thrift Savings Plan is a great benefit…additional savings with the matching funds and five of the lowest cost funds you will ever find. But five unmanaged funds are not enough to prudently manage the six figure balance most employees have beyond the age of 60. It’s possible the “C”, “S” and “I” funds might more accurately stand for “Crime Scene Investigation” again in the near future as it has been over six years since the last stock market correction. But hiding in the “G” fund is not a great alternative as that approximate 2% return puts yet another of your income streams in the same category as FERS/CSRS and Social Security cost of living adjustments (COLAs) as far as beating inflation is concerned.
One possible solution might be found by transferring part of your retirement investments, including TSP if you are over 59.5 or otherwise eligible for a transfer, to an outside IRA plan that addresses these issues.
Some insurance companies have specialty indexed annuity IRAs where your balance is linked to various stock market indices – but not really in those stocks, so there is no market risk. These plans have become quite innovative since their inception in 1995. One of the most important optional features is the ability to add a guaranteed minimum withdrawal benefit lasting your entire lifetime.
Essentially, you would be getting double duty out of this asset: On one hand, you have your underlying indexed account that is accessible and earning interest linked to market performance. On the other hand, you have the ability to pull monthly income for life from the account that does not end even if your actual account balance is spent down to nothing.
This creates a third source of “pension” type income: FERS/CSRS, Social Security, and the lifetime income from what were originally TSP dollars now held in your indexed annuity IRA. Yet unlike the first two income streams, your indexed annuity balance is still accessible and market linked for growth. The guaranteed payouts are referred to as “income riders” for short and calculated assuming growth rates over and above market gains called “roll ups” by many companies. This method of calculation insures your monthly income is based on annual growth no less than 4% in most plans even if the market provides no interest credits.
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