Use Your Savings Savings Plan to Increase Your Social Security Retirement | FedSmith.com

I’d like to share two resources on how annuitants in the Federal Employees Retirement System (FERS) or retired members of the armed forces can use their Thrift Savings Plan (TSP) to extend their Social Security retirement Social.

Steve Vernon holds the designation of Fellow of the Society of Actuaries (FSA). His, How to “retire” any IRA or 401(k) plan. was written in 2017 while serving as a research fellow for the Stanford Center on Longevity.

What is “Retirement?”

The essence of “retirement” is that individuals generate a lifetime retirement income stream without buying an annuity and without significant involvement from financial advisors. Vernon also refers to this method as the “Spend Safely in Retirement Strategy.”

Alicia H. Munnell and Gal Wettstein both received their PhDs from Harvard University. Working at the Center for Retirement Research at Boston College in 2021. They co-authored, Would 401(K) Participants Use a Social Security “Bridge” Option?

Munnell and Wettstein’s research showed that 401(k) participants may be willing to use their plan to purchase an annuity if it is offered as an option to increase delayed Social Security retirement benefits. Such an option, if exercised, would pay participants through the plan an amount equal to their Social Security benefits, thereby increasing their monthly Social Security payment when they eventually claim.

How would this apply to federal retirees?

What is interesting is that Vernon, Munnell, and Wettstein did not consider the unique situation of FERS annuitants or retired military.

Federal annuitants and military retirees, unlike most Americans, have a defined benefit plan that is based on a formula of years of service and their highest three years of salary — in addition to Social Security and a 401(k) equivalent, TSP . This source of immediate retirement income for federal and military retirees can be very helpful in “rolling over” or “retiring” the TSP to extend your Social Security retirement.

Your TSP is designed similar to a 401(k). These are defined contribution plans. A percentage of voluntary contributions is matched by your employer, and all your contributions and matching contributions are allowed to grow tax-deferred until you choose to withdraw them. You are allowed to decide within the parameters of the plan how the investments can be distributed.

Your Social Security withdrawal is a defined benefit plan designed so that the longer you wait to start collecting benefits, the more you will receive each month. If you claim those benefits at age 62, rather than waiting until your full retirement age (FRA), you can expect a reduction of up to 30% in monthly benefits. For every year you delay passing FRA until age 70, you get an 8% increase in your benefit.

When you have been successful at the end of your career in contributing and distributing your TSP investments, there is an opportunity to take advantage of the “bridge” or “retirement” option to fund late to claim your Social Security pension.

FERS or military pensions with TSP accounts may be enough to take advantage of delaying Social Security retirement benefits when you have a significant TSP account for some reason.

A planned withdrawal process for a large TSP balance becomes important due to the minimum required future distributions. Sometimes we are good at building a TSP balance. The proceeds must eventually be withdrawn or you will face penalties as well as taxes. The “bridge” strategy does this by providing an incentive for a larger Social Security retirement as a result of drawing down the TSP balance.

A “bridge” strategy allows you to use your TSP as needed. At first, you are not bound to a certain age to claim Social Security. One has the flexibility to delay Social Security anywhere between age 62 and 70.

Is a bigger Social Security pension a good deal? Social Security retirement income unlike a TSP is an annuity. She receives a cost of living adjustment each year. Social Security is also a guaranteed pension that will increase for each year delayed and will be at least 15% federally tax-free, with the remainder not taxed by all but 12 states at this time.

Other considerations

Are you single or married? What is your family and medical history? Do you want to leave a legacy to your children? Read one AARP ARTICLES What is the Social Security withdrawal age? If you have a financial planner, you should discuss a “bridge” strategy before considering it as appropriate for your circumstances.

Delaying Social Security can also increase your spouse’s Social Security retirement benefit. He or she may have a larger spousal pension from the spousal benefit and also from the survivor’s benefit. A spouse may also want to wait until his or her full retirement age to claim a Social Security benefit. AARP shares in his article, How much will the spousal benefit be if I claim it at age 62 and my spouse retires at full retirement age?

I am not endorsing the “bridge” or “retiree” concept as a general recommendation for those with large TSP account balances. Research by Vernon, Munnell and Wettstein offered the idea of ​​increasing your retirement income without buying an annuity. Some of you may already be doing this or thinking about it after retirement.

Will Social Security continue to exist in the future as it exists today? The future of Social Security is subject to political risk. Remember your TSP account as an investment is subject to:

• Systematic risk
• Unsystematic risk
• Credit risk
• Interest rate risk
• Reinvestment risk
• Inflation risk
• Liquidity risk
• Company risk
• Sector risk
• Business risk
• Political risk
• The danger of the horizon
• Foreign investment risk
• Currency risk

and most importantly:

• Your emotional and behavioral risk