Thrift Plan Withdrawal Strategies

January 12, 2016

Building wealth can often be thought of in having three phases. The first is the accumulation phase. The second is the preservation phase, which entails keeping what you’ve built. The third is the harvesting phase. It’s this harvesting phase that we often don’t give enough thought to until it’s upon us.

Several strategies can provide retirement income streams in retirement. Here is one of the most popular. Take a portion of your TSP in equal payments. Let’s say you retire at 66 and you’re under FERS. You have decided to begin taking Social Security. You’ve gone on to the Social Security Administration website (www.ssa.gov) and determined that your Social Security benefits will not be enough to cover your needs. You could decide to take a portion of your TSP in equal payments during your first 2 or 3 years of retirement to augment your FERS pension and your Social Security.

Another strategy might be to increase the size of your equal payments and forgo taking your Social Security until perhaps age 68 or 70. For example, if your full Social Security retirement age is 66, between age 66 and age 70, Social Security benefits increase 8% a year. That’s an excellent guaranteed return on your money.

Another option of an income stream, although often not as attractive as equal payments, is choosing to annuitize a portion of your TSP. That way you have steady predictable income each month. Each of these options provides the income stream that can augment both your FERS pension and your Social Security.

Ad you prepare for retirement, you may want to consider a “bucket strategy” for your total retirement portfolio. Here is how it works. Each of the four buckets is composed of different assets. The objective is to provide income over a long period of time with good growth potential.

The first bucket is the most important because it will sustain you for the first 2 to 5 years of your retirement. It’s made up of cash, short term treasuries and CD’s, and perhaps money market accounts. This bucket is used to cover your basic needs. If you retire at a particularly bad time economically like 2008 or 2009, this bucket sustains you until markets improve.

The remaining buckets are composed of increasingly aggressive assets. Each of these buckets grows in both aggressiveness and maturity. Bucket 2 begins to meet your needs 3 to 6 years after you retire. It’s composed of investments grade bonds, longer CDs and a sprinkling of well rated blue chips with good dividends.

Bucket 3 shouldn’t be accessed for 5 years. To keep it inexpensive, it’s composed of an S& P 500 index, a broadly based international stock index fund, and a broadly based U.S. or world bond fund.

The final bucket, bucket 4, swings for the fences. This is the most aggressive because your time lines are a long way out. In this bucket, you might have an index of small cap stocks, emerging markets, and a global bond bund typically 10 or more years. Increasingly, people are realizing that this simple strategy has the potential for providing for long term needs.