The annuity choice is designed to give you (and in some cases a joint annuitant) monthly payments for exactly as long as you live.
However, annuities aren’t the only way to receive monthly payments from your TSP. Installment payments are a far more popular way to get a monthly income.
So what is the difference between installment payment and an annuity option? After all, they both pay you a certain amount every month?
The biggest difference is who’s in charge. When paying in installments, you have a choice of two methods (fixed amount or IRS life expectancy table) and can change the number and amount of your payments at any time. You can stop paying in installments if you wish. You can also cash out at any time by making a one-time payment of your remaining account balance.
Purchasing a TSP Life Annuity is an irrevocable decision that cannot be changed even if your situation changes.
Another difference is how long your monthly payments last. If you choose monthly installments and choose a fixed dollar amount instead of the IRS life expectancy table, you can choose any dollar amount you want. If you choose a large amount, it is possible that you will run out of money before you die; Choosing a small amount can leave money for your heirs after you die.
With the annuity option, your monthly payout amount is determined by a formula and no longer applies exactly as long as you (or the joint annuity) live. There are three types of TSP life annuities; Living single, living with a spouse, and living with someone who has an insurable interest in your life.
Within cohabitation and cohabitation with spouses, you can choose between staggered or increasing payments.
If you decide to share an annuity with someone who is a insurable interest In your life you can only choose Level Payments.
With incremental payments, your monthly payment never changes; your last payment will be the same as your first payment. With increasing payments, your payments start at a lower level and increase annually (maximum by 2%) based on inflation. If you choose to pay in increments, you lose ground to inflation each year. If you choose increasing payments, the payments you receive in your earlier (generally higher-spending) years of retirement will be less, although you’ll only lose ground in years with inflation above 2%.
If you choose one of the joint annuities, you can choose the amount of payment the survivor will receive on the death of the first joint annuitant.
You can choose between 50% or 100%. If you choose the 50% Survivor’s Pension, the amount of the TSP annuity will be halved if the first joint annuitant dies. If you choose the 100% Survivor’s Annuity, the amount of the TSP Life Annuity will remain the same after the death of the first joint annuitant. Note that during the time that both annuitants are alive, the monthly payment from the 50% option will be higher than the monthly payment from the 100% option.
There is one other area where you have choices when choosing a TSP life annuity. whether or not you wish to select any type of “money back” feature.
If you do not select any of these functions, no money will be paid to a survivor after your death. If you choose any of these traits and are lucky enough to have a long life, there will still be no money paid out to a survivor after your death.
However, these features are beneficial for those who don’t live long after receiving their TSP Life Pension. A ‘ten-year secure’ feature is only available on lump-sum lifetime annuities and provides that if the annuitant dies before ten years have elapsed, a beneficiary will continue to receive payments for the remainder of that ten-year period.
A “cash refund” feature is available to both sole and community annuitants and provides that if the annuitant (and the community annuitant) dies before recovering the purchase price of the TSP Life Annuity in monthly annuity payments, a beneficiary will receive the remainder of the purchase price. These features slightly reduce the monthly payment.
FERS and social security considerations
Why are so many people choosing to pay in installments instead of an annuity? Perhaps the main reason is that our FERS pension and Social Security guarantee lifetime income; why tie our savings plan, another important source of income, into inflexible lifetime payments?
Accepting installment payments gives us the flexibility to make individual payouts for other reasons. The annuity is an irrevocable decision and you are bound by certain payments no matter how your circumstances might change.
Another reason why installment payments are more popular is that we are (generally) optimistic about our TSP investments and expect to have enough money for the rest of our lives and still have money left over for heirs.
Report: Understand TSP Payouts