Q: I am getting ready to retire from Civil Service in March 2013. I am a widowed military spouse. I have a TSP account. A friend told me that he took it in a lump sum and invested it through an investment company and gets a guaranteed annuity check each month for life.
With the economy in such bad shape is anything really guaranteed? Should I trust this idea? It makes me nervous to just hand this over to someone and then expect a check every month. Tell me more about annuities please. Thank you.
–Linda, Ekron, Kentucky
A: This is a big decision, so you want to make sure that you make the right call. The first thing you should know is that you don’t have to leave the TSP to get a guaranteed annuity check each month for life. Check out this link at the TSP website to get an idea of what’s available without leaving the program.
That being said, the most important question isn’t where you get an annuity check, rather it’s whether or not you should. The answer depends on your overall financial situation. Annuities can be attractive because they offer income for life. However, it’s a big commitment. In your case, you’d be buying this stream of income by giving up the lump sum in your TSP account. While some contracts have “outs,” but basically you would no longer have access to the thousands of dollars in the TSP and instead would have the comfort of knowing you’ve got a stream of income you won’t outlive.
That being said, ideally during retirement you can cover your fixed expenses (mortgage/rent, car payments, various types of insurance, utilities, food), with guaranteed income. In your case, examples of guaranteed income might include your CSRS or FERS pension, Social Security, DIC, and even SBP. Given the wide range of fixed income sources you may already have, I’m not sure that turning your TSP into an income annuity makes sense. You may already have things covered.
As you evaluate whether or not to buy an income annuity, understand that the amount of the income that you receive is based, in large part, on your age and prevailing interest rates at the time. As you get older and/or interest rates rise, payouts increase.
Take a look at your overall situation and determine if buying an income annuity makes sense and if it does, then first look at what the TSP has to offer. Good luck.
One other thing to consider. If you annuitize all or virtually all of your retirement savings, unexpected expenses such as a steep medical bill or a casualty loss (Flood at your home, Car accident, etc.) may be very difficult to handle financially. Just like most everything else, it is a good idea to not put all your eggs in one basket. Keep some money invested that you can get to if you need it “now”.