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Veteran Services: Finance Questions

Finances

You're working, and you've got a family that depends on you - both now and down the road. Where do you invest your money? Do you borrow against the equity in your house? Through a preferred provider relationship with USAA, The American Legion can provide expert financial advice to just about any question.

Questions & Answers

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Financial Questions & Answers

Question:

I am a federal employee. At retirement, I will have approximately $250,000 in my Thrift Savings Plan (TSP), which I plan to convert to an annuity. Is that a smart thing to do?– Anna

Answer:

An immediate or income annuity might be an excellent choice for you. However, I think you need to take a broad look at this question in the context of your overall retirement game plan. A fee-only financial planner should be able to help you make the right decisions – and this is a big one – to ensure that you are on track for a comfortable retirement. In the meantime, I’ll address your specific questions.

First, my inclination is that turning your $250,000 into an annuity is not the best thing to do. Here’s why. Typically, I like to see all of your core expenses at retirement covered by various “retirement paychecks” (government pensions, Social Security, annuity payments). Since you have probably earned a substantial government pension, you may be able to cover your expenses without turning your entire TSP into an annuity. The TSP would give you a nice nest egg to draw from to supplement your fixed income streams. If you turn your $250,000 into an annuity, you lose your lump sum – and the flexibility it provides – and replace it with a stream of income. Both have advantages, but a combination of available assets and a solid stream of income will give you the most flexibility.

Annuities can be broken up into two general types: deferred and immediate. In your case, we are discussing immediate or income annuities. With an immediate annuity, you purchase a stream of income. Insurance companies provide annuities. How much of an income stream $250,000 will purchase will vary from insurance company to insurance company. The bottom line is that if an annuity makes sense, you need to check with various highly rated, quality insurance companies (including USAA) before making a decision. Be advised that you may pay substantial fees if you work with a commission-based salesman. You may be able to get a better deal than is offered through the insurance company the government currently uses.

I hope this helps, and I encourage you to seek assistance as you map out your future.