The Thrift Savings Plan (TSP) Life Annuity has become an increasingly popular option for federal retirees. With rising life expectancies and concerns about outliving their savings, more individuals are turning to this solution to transform their TSP funds into a steady stream of lifetime income.
What Is an Annuity?
An annuity, distinct from a pension annuity, is a financial contract with an insurance company. You pay a premium, and in return, the company guarantees a regular income stream. With a life annuity, you receive fixed monthly payments for as long as you live. If you opt for a joint annuity, those payments continue throughout the lifetime of a designated joint annuitant, such as your spouse.
Understanding the TSP Life Annuity
Offered through MetLife, a private insurance provider contracted by the TSP, the TSP life annuity is available to retirees with at least $3,500 in their accounts. There are two main types:
- Single-Life Annuity: Provides income based solely on your lifetime.
- Joint-Life Annuity: Extends income to a joint annuitant, ensuring payments for both lifetimes.
How It Works
Retirees can tailor the annuity to their preferences by selecting:
- Level Payments: Fixed monthly amounts that remain constant.
- Increasing Payments: Start lower but grow annually by a fixed percentage to help combat inflation.
Additional options include:
- Cash Refund Option: Ensures your beneficiary receives any remaining balance if you pass away before the annuity equals your initial purchase amount.
- 10-Year Certain Option: Guarantees payments for at least 10 years, even if you die before that period ends. If you live longer, payments continue for life.
Considerations and Drawbacks
While the TSP life annuity offers peace of mind with a guaranteed income, it comes with important limitations:
- Irreversible Decision: Once purchased, it cannot be canceled or modified.
- Reduced Liquidity: Your savings are converted to income, meaning you lose access to funds for emergencies or significant expenses.
- Potentially Better Alternatives: Other annuity products may provide higher interest rates or features better suited to your financial needs.
Annuities are gaining traction among retirees seeking financial security, but they can be complex and may involve additional fees. Consulting an FRC® certified advisor can help you evaluate the pros and cons of a TSP life annuity and determine whether it aligns with your retirement goals.
