Your TSP options in a nutshell

The TSP is an efficient accumulation vehicle. Between it being payroll deducted, offering a match up to 5% and having low fees the TSP can be a great investment vehicle to save for retirement. What about the second phase of your life which is the distribution phase. What are your options to withdraw your funds and what are the pros and cons of each option?

Option 1: Lump Sum Withdrawal

The first withdrawal option you have available with the TSP is a lump sum withdrawal. With this option you can elect to choose any amount, some or all, of your TSP in a lump sum withdrawal. You are allowed to take out a one-time one lump sum amount but after that, if you plan on taking another withdrawal, you must take out the entire remaining TSP balance. So you cannot use your TSP as a “rainy day” or emergency fund pulling withdrawals as you need them. Also keep in mind if you took an Age Based In Service Withdrawal while working, that counts as a lump sum withdrawal and in retirement you must take your entire balance out if you need a lump sum withdrawal.

Option 2: Monthly Payments
The second withdrawal option you have with the TSP is monthly payments. You are able to select whatever monthly dollar amount you need and receive it on a consistent monthly basis. The nice thing about this option is you can choose any amount you would like. There are things you need to be aware of though, such as you can only increase or decrease your monthly payments once a year. Also depending upon how much you’re taking out and how much interest your fund choices are earning, you could run out of money at some point. Your entire TSP balance could fall to zero.

Option 3: Lifetime Income

The final option available to you with your TSP funds is to elect a lifetime income stream. With this option TSP actually uses Metropolitan Life Insurance Company to annuitize your TSP balance to provide you income that is guaranteed to last you for the rest of your life. This can be a great option to insure you don’t ever run out of income in your lifetime but like anything there are potential cons you need to consider. The first and most obvious negative is you lose access to your assets. If you choose the lifetime income option you no longer have access to your asset, it is strictly income. Also if you choose the income option for your life only and something happens to you early on in retirement, there will be no death benefit for your spouse or loved ones. Another thing that must be considered is inflation. If you choose this option and do live a long healthy retirement of 20 to 30 years, your income will lose a lot of its purchasing power. Your lifetime income does not increase over time.

So before you choose which withdrawal option is best for you, analyze all the pros and cons for each option and see if they work for you. Ask yourself “What do I want my TSP funds to accomplish for me?” Then see if one of these options works for you. If not, you also have the option of rolling your funds into and individual IRA that may give you the ability to achieve your goals more efficiently.