You may be surprised to learn that many federal retirees are being too frugal due to the fear of outliving their retirement savings. So how do you strike a balance between withdrawing too much from your TSP and ensuring your nest egg lasts a lifetime? With careful planning you can look forward to a financially-secure retirement and enjoying the fruits of your labor in your golden years.
The 4% Plus Inflation Strategy
Also known as the dollar-plus-inflation rule, the 4% withdrawal strategy can help ensure you won’t outlive your savings over a 30-year retirement. In the first year of retirement, you withdraw 4% of your TSP balance then in the following year you adjust the dollar amount for inflation. For all subsequent years, simply rinse and repeat.
This strategy is a good place to start if you expect your spending to be more or less the same from year to year. You can also adjust the percentage to more or less than the traditional 4% then add in inflation.
“Then again, since everyone’s financial situation is different, there’s no such thing as a one-size-fits-all retirement plan for federal workers.”
The Fixed-Dollar Amount Strategy
With the fixed-dollar withdrawal strategy you take the same distribution from your TSP every year for a certain window of time and then reassess how it’s working for you. If need be, you can adjust the amount based on your current financial situation. This strategy provides a predictable stream of income that’s easy to manage and budget. However, it may leave you vulnerable to the impact of inflation in addition to ups and downs in the stock market.
The Tax-Based Strategy
The tax-based strategy requires making withdrawals from retirement accounts based on your tax situation in a given year. Let’s say you find yourself in a higher-than-usual tax bracket in a given year, you can minimize your tax burden by making withdrawals from tax-exempt retirement accounts like a Roth IRA or Roth TSP. Since the Trump-era income tax cuts will expire on December 31, 2025, it makes sense to start making Roth TSP contributions now for tax-free distributions in retirement.
Consider Working With An FRC® Trained Advisor
As a federal employee, you can count on retirement income from your FERS annuity (pension), Social Security and the TSP. Then again, since everyone’s financial situation is different, there’s no such thing as a one-size-fits-all retirement plan for federal workers.
Every FRC® trained advisor has successfully completed a comprehensive course to earn the Federal Retirement Consultant℠ Designation. With a solid understanding of your federal benefits they’ll help you develop a TSP strategy that supports your retirement needs while leaving a legacy for your loved ones.
