Strategies for Taking Money Out of TSP
So the day has finally arrived! You made it to retirement and you are ready to access your TSP. Congratulations! You deserve it. Now you have some decisions to make. Nothing bad here. It's all good stuff. It's your money in your pocket. Let's see what you can do with your nest egg.
There are several different strategies you can use to pull money out of TSP. The first thing to consider is: How much did you save? That is the starting line. Once you reach retirement, that amount is set but in the end, it doesn't matter how much you have. It's what you do from now on that will determine how long it will last. The plan is to make TSP supply you money for 30 - 40 years.
Two major considerations control this process: How much do you need and will you be leaving any money to loved ones, charity, etc. The more you want to leave to others, the less you have to take out.
One more consideration: Life expectancy. Right now life expectancy is around 79 - 80 years of age. In 20 - 30 years from now, life expectancy could be 89 - 90 or more! Especially if the medical community has found drugs or cures for cancer, AIDS, Alzheimers. It's good to want to leave money to your loved ones but you may need to adjust your calculations to have the money last into your 90s for you. Always plan on taking care of yourself first.
There are two major schools of thought on how to access TSP funds. One says you will need more money in the beginning and less money near the end of your life. The other says you will need less in the beginning and more at the end of your life. There is no wrong answer. It is a personal decision, driven mostly by what is going on in your life. The main thing to remember is that TSP is there for you! You spend a long time gathering this money. Don't be afraid to access the TSP funds. You will not run out of money, unless you do some really crazy things, like develop a gambling problem. Seriously. Whatever your strategy, as long as it is reasonable, measured and you have put some thought into it, your money will last.
Strategy #1: Wait and do nothing. You don't have to pull out any money until you reach 70 1/2, then the IRS steps in and forces you to start taking out a certain sum because they don't want you leaving the TSP untouched for 30 years without getting taxed. The IRS will calculate what is called a Required Minimum Distribution (RMD), based on a life expectancy table that goes all the way to age 115! It will not be a large sum and that doesn't mean you have to spend it. You just have to take it out, so it gets taxed. Then you can put the remainder in some other account of your choosing.
RMD is important to remember. This is the MINIMUM that you will have to take out, so don't sweat this. You can probably take out 2 or 3 times as much as the RMD and still be safe. The main thing to consider is if you don't want to touch your TSP until 70 1/2, it will probably double from your retirement date, if you retire between 55 - 58. That's starts to really add up but most people either don't want to wait that long or more realistically, can't wait that long. You need the money for your retirement and you should access it for yourself and your family.
So things brings us to a simple principle to keep in mind, if you think this will work for you:
If you retire and you can wait a few years, maybe 3,4,5 years, you will see your money grow even after retirement. Perhaps you wanted to retire a few years early but you want to still build up your TSP a little more, so that you can start with a larger balance before you access your TSP. Maybe you plan on a job, part time or full time, after retirement or for whatever reason, you have enough from your pension that you can wait a few years on your TSP. Nothing wrong with that. One of the big points to remember is you can manipulate your TSP to make financially tactical decisions that will really make the most of your money.
Strategy #2: High/Low: You can take out a larger sum in the beginning for 3-5 years, to pay off bills, etc. Then bring it down to a much smaller amount. This will not break the bank. You need the larger amounts to get rid of some major expenses, then bringing it down makes the TSP last for years. Eventually you will get to 70 1/2 years of age and you can even bring it down to the RMD, which is really a smaller amount. Not a bad idea. If you really want to get rid of some nagging bills, it may solve that problem, then still have plenty at a smaller amount.
Strategy #3: Low/High: You start out smaller and increase over time. This works too. Your money lasts longer. This is one way to play it safe if you are worried about having money available in the future. Some people worry about medical issues. Some people want money to leave for the grand kids' college funds. It doesn't really matter why. Some people just want the back-up for the later years.
Strategy #4: Roller Coaster: This strategy gives you the best of the last two strategies. You take out a larger amount for a few years, then a smaller amount, then a larger amount. What this does is gives you your larger amounts when you need or want them every few years but still slows the rate of depletion while you are taking out the smaller amounts.
One major point to consider: TAXES. Think about this. Whatever strategy you choose, Social Security will be showing between 62 and 70 years of age. Whatever Social Security funds you are scheduled to get at 62 will double at 70! That is an 8% return. Pretty good but now you have to make that tactical decision. Do you want to use your TSP from 62 - 70, then bring it down to the RMD because you have a larger amount from Social Security showing up at 70? Or do you want to start taking your Social Security at 62 and minimizing your TSP? Or do you damn the consequences and use both. Remember the tax consequences. You could be pushed into a higher tax bracket if you don't pay attention to how much you are pulling out of TSP and/or Social Security.
Another tax point to consider: The current tax situation is only scheduled to apply for 5 years, then the old tax rates come back. You have to make some type of plan with your retirement. The issue will not be if you have enough money. The issue is how to manipulate your money so you are getting what you need and not being taxed unnecessarily.
These are just some strategies and issues when that time comes for you to use your TSP. The main thing is not to panic or get nervous about your TSP. If you are getting between 4 - 6%, which is the average returns for a Life Income retirement account, your money will last, as long as you are reasonable in your withdrawals. Use the same principles you used when building up your TSP pre-retirement. Don't move your money to try to time the market. Don't live in fear. Don't live in greed.
One point to think about regarding withdrawals: Don't use lump sums. They will distort all your calculations and possibly cause you huge tax problems by putting you into an immediate higher tax bracket. Use monthly withdrawals and you should not have any problems.
Next month I will discuss what the "Tools" section of the TSP does and does not do for you. This will help with your TSP planning.
Enjoy your retirement. You earned it!