The Importance of Timing TSP Withdrawals vs. Early Social Security

This is the third blog in our 3-part series: What FERS Retirees Should Know Before Starting Social Security Retirement Benefits & TSP Withdrawals

Read Part 1: When Should You Apply for Social Security Retirement Benefits?

Read Part 2: The Purpose of a Thrift Savings Plan & The Rule of 55

You’re nearing retirement and starting to think about your options. Once you retire your annuity is paid monthly starting the second month after retirement, but it’s entirely up to you when you begin to withdraw from your TSP and when to begin Social Security Benefits. How do you know what’s best?

Let’s say you are 62 years of age and your FERS annuity is not enough to cover your current expenses. Should you begin Social Security or take income from your TSP?

In some circumstances it may be beneficial to start early withdrawals from the TSP, here are a few reasons why:

Reasons to Possibly Withdrawal from the TSP Early:

• From age 62 (the earliest age) to age 70 (the latest age) waiting can increase your lifetime benefit by almost 100%. The longer you wait, the higher the benefit.
• Social Security benefits are indexed to inflation, which means your ultimate income will be growing with the cost of living in retirement.
• Another reason to allow your Social Security to grow is to possibly provide a higher benefit to a surviving spouse. In the event of a spouse’s death, the survivor can claim 100% of the retirement benefit of a deceased spouse if it’s higher than their own. In other words, the higher of the two date-of-death monthly Social Security Benefit amounts.
• If you are working between the age of 62 and Full Retirement Age (FRA) remember there is an earnings penalty we discussed in this article.
• When you reach the age of 72 you will be required to begin required minimum distributions (RMDs) from your TSP and most other retirement accounts. Depending on your strategy and expectation of future tax rates it might make good economic sense to draw these TSP funds early at known values and today’s possibly lower tax rates.

Reasons to Possibly Take Social Security Early:

Here are a few situations that could lead to taking Social Security before full retirement age and allowing the TSP to grow and remain tax-deferred.

• If you believe taxes will not be higher in the future, deferring the TSP funds could make more economic sense because neither you nor your beneficiaries will not have to pay higher taxes in the future.
• If you have poor health and a likely shorter life expectancy, delaying Social Security could have less benefit so claiming the benefits sooner may be best.
• If you have no spouse, delaying Social Security for the potential survivor benefits is not an issue. So, taking earlier benefits could be a better option.

With Social Security, as well as retirement planning in general, there is no “one-size-fits-all” solution. Variables to be considered include current and anticipated cash needs, other sources of retirement income, whether you plan to work after you begin benefits, and what the advantage of delaying the start of Social Security would be.

CONTINUE READING OUR SERIES WITH PARTS 1 & 2:

Read Part 1: When Should You Apply for Social Security Retirement Benefits?

Read Part 2: The Purpose of a Thrift Savings Plan & The Rule of 55

When you work with any of the advisors at Medallion Financial Group, you will get help charting a course through the complex world of wealth management and tax planning. We work together to build a dedicated, long-term, and disciplined approach that is tailored to your unique needs and objectives. Are you ready to start a conversation?

About the Authors

John and Laura Stohlman have been working with clients to help them achieve retirement success since 1987. Both John and Laura have the following designations: Certified Financial Planner (CFP®) and Chartered Federal Employee Benefits Consultant (ChFEBC®).

For over 30 years, federal employee retirement planning has been a key focus of Medallion Financial Group. We recognize that FERS retirement benefits have extra layers of complexity, such as the Thrift Savings Plan (TSP), 401K, Pension plan, FEGLI and more. It’s easy to get lost in a sea of bad advice when so few people understand the basics. We help with the basics and beyond to enable our clients to get the education and advice they need to retire with confidence.

Our focus is twofold: first and foremost, we are fiduciary advisors. We stand against any violation of laws, values, and ethics. Second, we treat our clients as part of our family, not only those who call Maryland and Georgia home, but clients across the US who have benefited from our reputation of personal service, integrity, and expertise.

We strive to exceed client’s expectations – because we have high expectations of ourselves.