Federal employees approaching retirement rely on a three-legged stool: their annuity (pension), Social Security, and the Thrift Savings Plan (TSP). While each plays a part in providing financial security, the TSP stands out as the pivotal element that shapes whether retirees can sustain their desired lifestyle.
Planning Your Retirement Budget: TSP as the Key Variable
Calculating monthly inflows from your annuity and Social Security is a fairly clear-cut exercise. The annuity hinges on creditable service and the “high-three” salary, while Social Security reflects lifetime earnings and claiming age. The TSP, by contrast, is the dynamic component. It fills the gap between these predictable streams and the cost of maintaining your lifestyle — be it a quiet life in a rural haven or a jet-setting existence in a bustling city. These variations mean there’s no one-size-fits-all TSP target; individual goals dictate the number.
Debt Management vs. TSP Preservation: A Strategic Trade-Off
Shedding debt before retirement lightens the load on a fixed income. Yet, raiding the TSP to erase obligations, such as a mortgage, can unravel that plan. Withdrawals trigger an immediate 20% IRS tax bite, and since that sum counts as income, it might catapult you into a steeper tax bracket, inflating the real cost. More critically, cashing out diminishes your TSP’s growth potential. The short-term relief of zero debt should be carefully weighed against the long-term value of keeping your nest egg intact and accruing growth.
The Timing Dilemma
A 2021 National Bureau of Economic Research study underscores that retiring earlier, even with leaner monthly payouts, can elevate well-being. Exiting the grind while still fit for adventure or leisure often outshines chasing a bigger paycheck in later years. For federal employees, this choice requires the strategic coordination of Social Security, annuity payments, and TSP strategy.
Calling it quits at your MRA may entitle you to the Retirement Annuity Supplement, but if you wait until age 62 your pension calculation jumps from 1% to 1.1% of the high-three average which will likely have increased several percent.
Full Social Security awaits at 67, but early retirees might opt for 62, accepting reduced payments to spare dipping into their TSP. Unlike Social Security’s modest annual bumps, TSP funds thrive on compounding growth — and can pass to heirs, a perk limited in Social Security to spouses or dependents.
To tailor a retirement strategy that maximizes your benefits and best meets your needs, schedule a complimentary consultation with a Federal Retirement Consultant®.
