Ask The Experts: Money Matters

By Mike Miles

TSP and annuities

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Q. I have been a federal employee for 27 years, just long enough to have been one of the first forced into FERS. About seven years ago, I looked at my Thrift Savings Plan statement and learned that the prediction was that if I retired at age 62 and bought an annuity, I would have a pretty good monthly salary. Now, I notice that the prediction is that if I use my TSP savings, with about the same amount predicted for me at age 62, to buy a monthly annuity, that annuity will be about one-third of what was predicted seven years ago. Not a very good deal now.

My belief is that the years of low interest rates are responsible for the change in what the same amount of money will buy now. I wonder if that is true. I also wonder if these annuity companies that agreed to pay the larger amounts when they signed people up seven or more years ago are going to have to have massive bailouts by the federal government if interest rates continue to remain where they are. Finally, if I retire soon, I will not want to buy an annuity at that time, but if interest rates go up in five years, how much more attractive are monthly annuities going to be? If the interest rates go back to where they were 10 years ago, will the price of annuities go back to where they were, or have annuity companies learned a lesson and are likely to be more conservative in pricing?

This also might be a good topic for one of your columns for other FERS feds who have to decide about using some of their savings to buy annuities.

A. I have written columns about the pros and cons of using your savings to buy an annuity, and about the dangers of using the calculators provided by the TSP. You’re a witness to the problems. There was never a promise by the insurance company to provide a certain payout for a future annuity purchase. The payout is always calculated at the time of purchase. Annuity payouts are dependent upon the prevailing interest rates at the time of purchase, and those rates are now at historic lows. Same with the payout rate. If interest rates increase in the future, the payout you will be offered should also increase. In addition, as you age, the payout will go up since the number of payments the insurer expects to make will decrease.

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