Benefits and Drawbacks of the (Antiquated) TSP Annuity by Michael Wood

Michael Wood
December 13, 2018

[vc_row][vc_column width=”2/3″ el_class=”section section1″][vc_column_text]Michael Wood has been a licensed professional for almost 20 years, and he has focused exclusively on those consumers who are close to or already retired.

An annuity is a form of investment where a group of people each contribute a specific amount of cash and at the end each is guaranteed a stream of income. The primary purpose of such a program is to minimize the risk of exhausting your life savings. No one can really predict how long they will be alive, so the essence of annuity is to collect money as a group, so that the participants don’t reach a point where he/she has to use up all of their personal life savings.

Annuities are available in different forms, and each has its shortcomings as well as advantages, but the most important thing to note is that you continue to get payments for life even after your account balances reach zero. Whichever line of work your in, once your paycheck stops, any plans to invest are significantly affected. However, it’s crucial to note that after retirement:

The only thing that counts is your income

Many people wonder where to get income from after retirement, but it’s easy as long as you invest in the TSP and retire in a bull market. The most laborious task comes when you retire in a bear market, and the interest rate environment is entirely suppressed. It becomes very tough trying to generate a safe, sustainable income because most of the time you’ll be spending more than what your account can handle. This is why nowadays many people fear to exhaust their savings.

TSP annuity

To counter the fear of outliving personal savings, the TSP provides a solution to all its participants by providing them with an option to buy a Single Premium Immediate Annuity (SPIA) with their TSP balances. This allows for the generation of income for life and secures the participant’s future as well as acts as a supplement to a personal pension. It is worth noting that the SPIA model has not changed for ages now and guaranteed participants that they won’t outlive their payments no matter the market conditions. However, you will have to forfeit all your contributions to the SPIA.

The rigidly inflexible approach present here is what is often referred to as an annuity, and many people don’t like the idea of having to give up hard-earned cash to acquire it. In as much SPIA requires you to surrender control, you get a chance to select what works for you from various options.

TSP annuity payout options

Single life only- this provides the most prominent monthly payment option. However, you only get paid when you’re alive, and as soon as you are gone, everything you leave is kept. So it’s not always a good choice for people with families.

All other options provide participants with an opportunity to continue offering payments to loved ones even after you pass but that means your monthly benefits are reduced when alive.

More Innovative Annuity Options

In as much as annuities are often referred to as restrictive and inflexible, not all of them are. One of the significant innovations is that insurance companies no longer require you to give up your contributions to get a lifetime income benefit. It is an excellent deal since you don’t need to worry about outliving your annuity income and you still get to access your remaining balance.