The Thrift Savings Plan (TSP) Life Annuity is a retirement income option available to federal employees participating in the TSP. Increased longevity and fear of outliving their retirement savings have prompted more retirees to explore this option to convert their TSP savings into a stream of lifetime income.
What’s An Annuity?
Not to be confused with your pension annuity, an insurance annuity is a contract between you and an insurance company. You provide them a certain amount of money, known as a premium, in exchange for a guaranteed income stream. In short, the life annuity ensures that you receive a fixed monthly payment for as long as you live. If you choose a joint annuity, payments continue for the lifetime of a designated joint annuitant, such as a spouse.
Life Annuity 101
The TSP life annuity is provided by MetLife, a private insurance company contracted by the TSP to manage the annuities. You can purchase a life annuity if you are retired and have at least $3,500 in your TSP account. A single-life annuity provides income based on your life alone, while a joint-life annuity provides income for both you and a joint annuitant, such as a spouse or another individual.
How It Works
Depending on your needs, you can choose:
- Level Payments: fixed monthly payments that do not change over time.
- Increasing Payments: start at a lower amount but increase annually by a fixed percentage to account for inflation.
Choosing the cash refund option allows your named beneficiary to receive your remaining balance if you die before receiving the total value of your initial purchase. The 10-year-certain option guarantees payments for at least 10 years, even if you pass away before the period ends. If you live longer than 10 years, payments continue for your lifetime.
Potential Drawbacks
Once you purchase a TSP life annuity, you cannot cancel or change it. This is an irreversible decision. You’ll lose liquidity because your savings are converted into income, meaning you cannot withdraw extra funds for emergencies or large expenses. Other annuity products may better fit your needs and offer more competitive interest rates.
While annuities are becoming increasingly popular among retirees who fear outliving their savings, they can be complex and carry extra fees. An FRC® trained advisor can help you navigate these products and find an option that’s best for you.
