This article was originally published here
What is Thrift Savings Plan (TSP)
The TSP is mainly a retirement savings plan for federal employees and service members. The TSP, like a 401(k), allows participants to contribute to a low-cost retirement savings and investment account while receiving automatic and matching contributions from the government.
It is critical to regularly contribute to your TSP account to build your retirement savings. When you reach retirement age, the total value of your TSP account will be determined by the number of contributions you made during your career and the growth of the investments within the account.
Life at Retirement
According to statistics, people are living longer and healthier lives. Retirement could easily last two decades, if not three. Your TSP account funds are critical to your retirement plan. You’ll need those savings to supplement your income when the time comes. However, federal employees may be unsure of the best way to do so.
Retiring with a sizable TSP would be fantastic. However, there is an issue.
We’re not used to living on a huge amount of income. We are accustomed to receiving a paycheck every two weeks.
How do you safely convert your TSP into a paycheck without going bankrupt?
In this article, this very question will be examined in detail.
The most significant mistake on TSP paychecks
With the help of the 4% rule, you can determine how much of your salary can be supplemented by your 401(k) or other tax-deferred savings plan (like TSP) without jeopardizing your retirement savings.
However, the vast majority of people aren’t aware of how the 4% rule is supposed to function, so they end up misapplying it (which results in them leaving much money on the table!).
The Actual 4% Rule
Most people think the 4% rule says you can only take out 4% of your yearly TSP balance.
The 4% rule states that retirees should withdraw 4% of their TSP balance upon entering retirement and then increase that amount annually by the rate of inflation.
Here’s an Example
Assume you have $500,000 to retire with. 4% is $20,000, so you can withdraw $20,000 in your first year of retirement.
Most people believe that in year 2, you must multiply 4% by your new TSP balance, but that is not what the 4% says.
According to the actual 4% rules, you take the first year’s withdrawal amount and multiply it by the year’s inflation rate in year two.
So, assuming 5% inflation, your year 2 withdrawal would be $21,000 ($20,000 x 1.05).
The chart below depicts how a withdrawal would change over time with different inflation rates, assuming a $10,000 initial withdrawal.
But you’re not finished yet.
You want to withdraw $20,000 from your TSP in your first year; how much of that $20,000 will you get to keep? If your TSP balance is $500,000.
Uncle Sam appears. We must not overlook taxes!
Assuming a 20% effective tax rate, a $20,000 first-year withdrawal would result in $4,000 in taxes and $16,000 in spending.
Your overall tax rate during retirement will, of course, depend on the type of retirement account from which you are taking distributions and any other income you may have.
That’s rightâ€”zero dollars!
That is one of the many benefits of the Roth TSP, and you can read about the Roth TSP’s pros and cons here.
Making TSP Paychecks
After determining how much you can withdraw from your TSP each year, decide how frequently you want to receive payments (monthly, quarterly) and divide the annual amount accordingly.
Most people prefer monthly payments because they must pay most bills (such as utilities and credit cards) must be paid monthly.
So a $20,000 annual withdrawal would be approximately $1,666 per month or roughly $1,333 after tax.
However, you can modify your payment schedule to meet your specific requirements.
M. Dutton and Associates is a full-service financial firm. We have been in business for over 30 years serving our community. Through comprehensive objective driven planning, we provide you with the research, analysis, and available options needed to guide you in implementing a sound plan for your retirement. We are committed to helping you achieve your goals. Visit us at MarvinDutton.com . Tel. 212-951-7376: email: [email protected]