Upon retirement, participants in the Thrift Savings Plan (TSP) have two main options for receiving income: the TSP Annuity or TSP withdrawals.
The TSP annuity, underwritten by MetLife, provides guaranteed income for life to the annuitant with a period certain feature to ensure a full refund of the deposit in the event of premature death. The advantage of the annuity option is the guaranteed income for life, but the biggest drawback is the loss of liquidity of the TSP money. Once you start the plan, you’re stuck. If you ever need any of your former TSP proceeds, then you are out of luck. This negative prevents a super majority of TSP participants from selecting this option.
Meanwhile, TSP account holders can forego the annuity option and instead choose the regular withdrawal option. By choosing regular withdrawals, the retiree can receive a regular income from their TSP money. Plus, the amount of withdrawal can be changed each year. The TSP withdrawal option would allow someone, for instance, to take $1,000 per month from their TSP. The main negative of this option is the fact that the withdrawals are not guaranteed for life and the withdrawals make the TSP more vulnerable to market fluctuations. In other words, withdrawals over 3-4% may ultimately result in the funds running out before death.
If income is a primary objective, then a preferred option may be for TSP participants to establish an IRA with a hybrid annuity. A well designed hybrid annuity offers the features of both TSP options: the safety of the TSP annuity and the flexibility of the TSP withdrawals. You could have your cake and eat it too. Hybrid annuities, in retirement, can function like the TSP withdrawal option. In this case, the account funds remain accessible for use and can be passed on to beneficiaries. Yet, the withdrawals are protected from the possibility of running out of money similar to the TSP annuity option. Of course not all annuities are alike. A solid hybrid annuity can give retirees certainty and flexibility in retirement by combining the two main options available from the Thrift Savings Board.
It should be noted that an income generating hybrid annuity may not be appropriate for those who do not intend to use their TSP for retirement income.