TSP or an annuity? Look before you leap!
Friday - 5/1/2015, 2:30am ET
Senior Correspondent Mike Causey is away on assignment. Here's a Best-of-Causey column that originally ran on Feb. 26, 2015.
Wanna make your neighborhood financial planner happy? If so, tell him or her you are a federal or postal employee and you want to maximize your retirement income. Say you are not happy with the choices in your federal Thrift Savings Plan, the ups and downs of the stock market (now at an all-time high) and you want guaranteed regular income.
If you do all of the above, many financial planners (particularly those who sell products like mutual funds and annuities) will suggest converting your TSP balance into a guaranteed annuity. It will pay you X dollars per month for life. No more worries about the stock market or the economy, right?
Not necessarily.
As the federal Thrift Savings Plan (Uncle Sam's in-house 401k plan) gets bigger and bigger (it is now worth $436.8 billion) a growing number of federal workers and retirees are being courted, in some cases very aggressively, by financial planners who want to sell them annuities. After last week's Your Turn radio show on financial planning for feds, we got a number of calls and emails. One of them, Saundra, asked the following:
"Recently , I have been talking to a financial planner regarding moving my TSP to an variable 6 percent annuity for 12 years. I'm told 6 percent will stay constant. Are these funds FDIC insured?"I'm confused as to what happens when I die with my principle from my TSP/annuity and the interest. Does it all go to my beneficiary or not? Also, what fees are reasonable?"
We passed her email on to Tom O'Rourke. He's a D.C. area attorney who specializes in estate planning. Many of his clients are current and former feds. Here's what he told Saundra:
I have dealt with many federal retirees and rarely conclude that an annuity is a good place to invest their TSP."Depending on the type of annuity you buy, the annuity payment ends when you die. Thus, if you invest $50,000 and get 1 payment of $1,000 and then die, your estate or heirs get nothing. You can buy an annuity with a survivor benefit, but this decreases the amount paid to you. If you are one of the very few federal retirees for whom an annuity is appropriate, I would suggest that you at least consider using the annuity available under the TSP.
"I would encourage to discuss your goals, and overall financial objective with a financial adviser who is not selling you a product that will generate a large commission for them without benefiting you." — Tom O'Rourke
Another expert in the federal TSP program said, "I agree 100 percent with Tom — this lady definitely needs to pay for unbiased advice, so she isn't sold a product that doesn't meet her needs. Federal employees are going to get an annuity (indexed to inflation for life) through FERS or CSRS — they need to think through whether they want to lock up their TSP in an irrevocable annuity." — T.O
Posted by: sarah_oz@yahoo.com
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