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Retired Military Finances 201: TSP Annuities Thumbnail

Retired Military Finances 201: TSP Annuities

Retirement Funding TSP

There is a lot of information out there about accumulating wealth. The information about spending your money when you retire is a little more sparce and of varying degrees of usefulness. As an active or retired member of the military you may have accumulated funds in the Thrift Savings Plan (TSP). When you decide to start taking payments out of TSP, you have the option to elect to have some of your assets paid out to you in the form of an annuity. What does that mean?

What is an Annuity?

At the basic level, an annuity is an agreement between you and an insurance company. The type of annuity available to TSP participants is what is called a Single Premium Immediate Annuity (SPIA). In an SPIA you pay a lump sum to the insurance company and they promise to pay you a set amount for the remainder of your life (in most circumstances). The payment is guaranteed (based on the insurance company’s ability to pay). Most states have insurance guarantee funds as well that should cover you if the individual insurance company becomes insolvent. Whether the state can backstop multiple insurance companies’ failure is a little less certain.

The payments you receive from the insurance company can be level or increase with inflation. They can also last throughout your life or you and a spouse. In some cases, the payments can be guaranteed for a certain number of years (in case you die shortly after purchasing the annuity).

What Annuity Options are Available in TSP?

There are a lot of options and combinations that you can select when purchasing an annuity associated with the TSP.

The annuity can be single or joint. This means that the annuity will pay for as long as you live or as long as you and your spouse (or another designated individual) live. The amount paid to the surviving spouse can be 100% or 50% of the original annuity amount.

The payments can be level or increasing. You can elect to have level payments for the term of the annuity, or you can elect increasing payments. If you select increasing payments, the payment will increase by 2% per year (regardless of the actual inflation rate)

The annuity can have beneficiary options. There are two options. First, you can elect 10-year certain payments. That means if you (doesn’t apply with a joint annuity) die prior to 10 years from the origination date of the contract the beneficiary will continue to receive payments until the 10-year anniversary of the contract date. The other option is a cash refund. If you (and your spouse if applicable) die prior to receiving the amount you used to purchase the annuity, your beneficiary(ies) will receive the amount of payment you did not get paid.

How Much Will a TSP Annuity Pay Out?

This definitely an “it depends” answer. You will receive the highest initial payment if you select a single life annuity with no other options. The more options you add, the lower your initial payment will be.

We can make some estimates though. Another key variable is your age. The older you are, the larger your payment. If you load up with a lot of options, your payment could be around 4% and you could see payout rates as high as 8% to 10%. Or said another way, you could expect a payment of around $4,000 - $8,000 or so per year per $100,000 of coverage you purchase.

Should Military Members Select the TSP Annuity Option?

If you’re retired from the military, you have or will have a lot of annuitized income (military pension, VA disability, Social Security). Adding another annuity may not be your best option. On the other hand, if you separated from the military without retiring an annuity may make a lot more sense. It can certainly be argued that you should have guaranteed income (Social Security, TSP annuity) to cover your essential expenses so that no matter how long you live, you can live a life with dignity.

Military Finances are Different

TSP is similar to a 401(k), but it isn’t identical (tax exempt balances being an example). That hold true in regards to a lot of your finances. Financial planning for Active and Retired Senior Military Officers and NCOs is similar but not identical to financial planning for civilians. That’s why we think you should work with a financial planner/advisor that works with Active and Retired Senior Military Officers and NCOs each and every day. If you’d like to find out how we work with people like you, use the button below to schedule a free initial consultation.

If you found this article useful, you might like the following blog posts:

Watch Out for this TSP Tax Trap


I'm About to Retire From the Military. What Should I Do With My TSP?


One Reason to Consider Moving Your Assets Out of TSP - Estate Planning



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