What Should Federal Employees Do With Their TSP At Retirement?

As federal employees prepare to retire, they face a critical decision; what should they do with their TSP?

This challenge can typically be addressed by answering the following questions: should you transfer your TSP to an IRA? And how should you invest your TSP in retirement?

While these questions are by no means easy to answer, we will cover some general rules and strategies that, when paired with proper planning, will help ensure you have the retirement you envisioned.

So, without further ado, let’s dive in!

Should You Rollover Your TSP To An IRA

The first question federal employees must answer is whether they should transfer their TSP to an IRA. For most Feds, moving most of their TSP to an IRA will make sense for two major reasons: withdrawal flexibility and broader investment options.

This is not to say that there are no disadvantages to moving your TSP to an IRA because there certainly can be. However, for most Feds, the move will make sense. Yet, you’ll notice that I said “most” of the TSP and not the entire TSP. This is because you must leave at least $200 in your account for it to remain open so that you can maintain access to the G fund. This fund is unique to the TSP and is a great place to park the money you’ll use for immediate retirement expenses.

If you’d like to review a more exhaustive list of the advantages and disadvantages of moving your TSP to an IRA, read this article.

1. Withdrawal Flexibility

The number one reason Feds move their TSP to an IRA is for withdrawal flexibility. Because the major shortfall of the TSP is its withdrawal limitations; for example, you can only request a withdrawal every 30 days. So, if an unexpected expense came up and you had just made a withdrawal, you’d have to wait up to 30 days before you could submit another request. Needless to say, being unable to access your money when needed could be a significant issue in retirement.

In contrast, if you meet basic criteria, mainly being age 59 ½ or older, you can pretty much withdraw money from an IRA whenever you would like.

2. Broader Investment Options

The second reason Feds decide to move their money is for the broader investment options in an IRA. While the new TSP mutual fund window does provide access to thousands of mutual funds, these investments are significantly more expensive than the core TSP funds or what you’ll pay for an identical investment in an IRA. Thus, for those Feds looking for a broader selection, transferring the bulk of their TSP to an IRA is really the only option.

How Should You Invest Your TSP

Because the goals and risks in retirement are entirely different from those during your career, your investment strategy should also be different. While you have numerous options for turning your TSP into an income stream, ranging from the 4% Rule to the Income Floor, my preferred method and the strategy that I implement for my clients is the Bucket Strategy.

I prefer this strategy over the others because it effectively mitigates three of the major risks federal employees will face in retirement: longevity, market, and inflation risks.

This strategy divides assets into different “buckets” based on time horizon – short, middle, and long-term. The idea is that as you use money in your short-term bucket (cash bucket), you’ll replace it periodically by selling assets from your medium-term bucket (bond bucket); and when growth assets are performing well, you’ll sell a portion of your long-term bucket (stock bucket), and invest that money in the other buckets.

Thus, this approach provides an alternative to selling shares when the market is down via the short and mid-term buckets, mitigating stock market risk. While allowing your assets to grow via the long-term bucket, mitigating the risk of outliving your assets and the risk of having your assets grow slower than inflation.

For instance, when there is a 50% decline in the stock market, you can rely on your short and mid-term buckets, which hold safer assets, and allow your stocks in the long-term bucket to recover. For a deeper dive into the Bucket Strategy, read this article.

Final Thoughts

Deciding what to do with your TSP at retirement will likely be one of the most important retirement decisions you make, and by taking the time to plan early, you’ll be much more likely to have the retirement you envisioned.

Planning your retirement can be challenging and stressful, which is why I recommend every federal employee works with fee-only Certified Financial Planner™ to develop their personalized retirement plan. The goal, after all, isn’t to worry about running out of money in retirement; it’s to enjoy your next chapter.

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Author: Jose Armenta, MsBA, CFP®, ChFC®, EA

Hi, I’m Jose Armenta, a Certified Financial Planner practitioner. For over 14 years, I have worked with or among federal employees, from serving in the Marine Corps to my stint as a police dispatcher and now as a financial planner specializing in helping FERS federal employees. In that time, I have spoken to hundreds of federal employees about their benefits and retirement. Helping federal employees maximize their benefits, reduce taxes, and live confidently is a passion of mine. When I am not perfecting financial plans, you’ll find me at the shooting range, playing the drums, or breaching blanket forts with my three little ones.