Tom Temin: And what is it and why is it so popular Art?

Art Stein: Well, Tom, thanks for having me. And yes, the TSP fixed annuity option is actually called the life annuity. And of course, it’s confusing because it’s an annuity. Federal employees and retirees are used to calling their pension an annuity, which is correct because an annuity in the classic definition is a fixed payment for a fixed period of time, which is what Social Security and the FERS and CSRS pensions are annuities. But there’s also an insurance definition. This is a product sold by an insurance company and you pay the insurance company to send you every month the payment for the rest of your life. And how much they will send you for the rest of your life depends upon how old you are when you purchase and prevailing interest rates and various other things. But once that purchase is made, the dollars used to purchase that fixed payment are the property of the insurance company. You don’t get them back. So because of that, it’s an advantage and a disadvantage. The advantage is because of that, it can generate a lot more income, especially for older people, than just having money in the TSP, depending upon how it’s invested and various other things. Normally, this is not been a popular option, and I still don’t think it’s a major choice. But according to Federal Retirement Thrift Investment Board, purchases of this TSP option by retirees are way up this year. And if the next four months are like the first eight months, actually the increase in purchases is going to be about 44%. So, of course, the question is does this make sense for FERS retirees and how does it work?

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Tom Temin: Yeah. Let’s go into how it does work. You have to take money out of your TSP. And I guess maybe that can entail penalties or do these exempt that?

Art Stein: No, absolutely not. Because this is an option offered by the TSP. One insurance company offers it inside the TSP. So you’re not taking money out and you can only do one when you’re retired. And so what you would do is say, ‘Hey, I want to put $100,000 into a fixed payment for the rest of my life.’ And you do it inside the TSP. And then those monthly payments are going to start 30 days after you make the purchase. The money used is gone, and then you get the purchase for the rest of your life.

Tom Temin: Well, then the question becomes, what does it pay you? Because if you have 100,000 in your TSP and say you’re withdrawing 4% of that every year, that’s 4,000 from that 100,000. So does this thing give you more than 4,000, I guess, is the question?

Art Stein: Yes. If you put 100,000 into the TSP fixed annuity, they would pay you $639 a month for the rest of your life if you were 62. If you were 72 when you made the purchase, they would pay you $817. And if you were 82 when you started and made the purchase, they would pay you $1,241 a month. So there, you’re looking at about a 14% payout for someone who purchases it at 82. And that’s the power of a fixed annuity is because the insurance company gets to keep the money. And because they know that the people who buy this, some of them will die early, some will live a long time. They can afford to offer a very high payout. And especially for older people who obviously have a shorter expected life span when they purchase. Now, there are a variety of options you can make when you purchase. All of which will reduce your monthly payments. But you can get a joint annuity, 50 or 100% joint annuity. You can get 1 years of guaranteed payments. So if you died in five years, your heirs would get the remaining payments and you’ll also have a cash refund option so that the insurance company will say, ‘OK well we’ll continue payments after you die up to the point where all the money you put in is paid out to your heir so they at least break even.’

Tom Temin: We’re speaking with certified financial planner Art Stein of Arthur Stein Financial. And you mentioned some disadvantages. I guess one of it is that it’s a one-way trip for your money. You’re not going to get that principle back.

Art Stein: And the other one, and this is really a bigger one is that it’s a fixed payment. So the purchasing power goes down every year. There’s a positive inflation rate, which is every year in the United States. And the higher inflation is, the more your purchasing power is going down. There is an option for an increasing payment, but it really doesn’t compensate for inflation. The way I feel about this Tom is that there might be circumstances where it was appropriate, but for most FERS retirees, they already have to fix payments for the rest of their life. They’ve got Social Security and they have their FERS annuity, their pension. And both of those have cost of living adjustments that are far better than anything you can get from this fixed annuity option. And what FERS retirees need to think about is not putting more money in a fixed annuity, but increasing the purchasing power of the other money that they have, i.e. their investments in the TSP. Because the FERS annuity, the pension, the cost of living adjustment is not going to be what inflation is anytime inflation over 2%. So basically, FERS retirees should assume that the purchasing power of their pension is going to decline over time. Social Security has a full cost of living adjustment, should maintain purchasing power, but the money they have in the TSP if invested correctly, which means a significant amount in the stock funds, historically, that would have increased purchasing power. So I prefer that my clients keep the money in their TSP invested in the stock funds, in the bond funds and not put it in the fixed annuity because in a way is just duplicating something they have with a product that really isn’t as good.

Tom Temin: Right. There is also the issue of the offer of this annuity. I mean, no company is 100% surety that it’s going to exist or that it doesn’t get into some kind of a scandalous situation. I mean, I’m not saying this will happen with these companies, but we’ve seen this in insurance and other industries where something turns out to be a house of cards and then everything’s lost.

Art Stein: That’s a good point Tom and because I want to emphasize that these payments are not going to be guaranteed by the TSP or any branch of the federal government. The payment guarantee is from the insurance company that is offering the annuity. And so the TSP, they’ve authorized MetLife to offer the annuity. It’s a great company, has good ratings. But there is that risk.

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Tom Temin: All right. So again, then your advice is maybe take a look, but probably not a good idea, especially if you’re only 62 or 72 and you’ve got that 30-year or 20-years average left for your life.

Art Stein: I agree, Tom. And if you’re 82 and you need more money from your TSP, well, a fixed annuity might give that to you. And of course, because you’re 82, even if you live to 100, I mean, your life span is not so long. Inflation is not going to be as important an issue for you.