How Much Can I Withdraw From My TSP In Retirement? (Safe Withdrawal Rate Explained)

So, you’ve come to the conclusion that there is more of your career behind you than in front of you. This has led you to look into something you’ve been ignoring for the majority of your working life: retirement. Generally, the process starts with asking coworkers about annuities, sick leave credit, etc. But it eventually proceeds to a more formal stage revolving around a single phrase, “running the numbers.” As in, “I have a guy running my numbers to see when I can retire”, or “I’m running the numbers to see how much I need in...[insert retirement, TSP balance, pension, etc.]”

At some point everyone takes a good hard look at their TSP balance and thinks, “What am I going to do with this?”. Undoubtedly, how much you can withdraw without running out of money in old age will be one of your main considerations. (You have a lot of TSP options and that’s not the point of this article; what I’ll be addressing here is the question of how much you are able to withdraw safely each year, if that is the option you choose.) This is what financial planners term the “safe withdrawal rate”. It can be officially defined as the quantity of money, expressed as a percentage of the initial investment, which can be withdrawn per year for a given quantity of time, including adjustments for inflation, and not lead to portfolio failure; failure being defined as a 95% probability of depletion to zero at any time within the specified period.

Essentially it means this: how much money can I take out, and not run out?

There has been a tremendous amount of financial brainpower expended over the last 2 decades in an attempt to come up with a set percentage that one can withdraw from their retirement account each year and be reasonably confident that they will not run out of money in their later years. Some of these calculations are extremely technical and I won’t bore everyone with them. You all have Google (try “safe withdrawal rates” and work by Kitces, Bengen, or Cooley) if you want to really delve down into the math. But I will summarize so you understand the credibility behind the final number.

Studies were conducted over the worst 30 year periods for returns in stock and bond market history. Combined with that were the inflation numbers for the same periods. In essence, the worst financial times in 30 year periods were identified. Calculations were then performed for those periods to determine what the maximum percentage an investor could withdraw each year from his portfolio and be reasonably certain of not running out of money at the end of the 30 years.

The number 4.5% was arrived at as a safe rate of withdrawal each year. In fact, the 4.5% rate would have gotten you through the worst 30-year period in history. Many times, a higher rate could have been used with the same success, but the point is we are looking at the worst case scenario, not the best. In recent years, the 4.5% number has been rounded down to 4% in the interest of being extra safe by most financial planners.

So, what does all this mean to someone staring at their 6 or 7 figure TSP balance? It means that a withdrawal rate of 4% each year from a balanced portfolio (60/40 stocks/bonds), will more than likely leave you with substantial assets at the end of 30 years, not a balance of zero. Here are some of the statistics:

• 4.5% withdrawal rate gives the investor a 96% chance they will have 100% of their starting principal after 30 years. In other words, if you retire with a $300,000 TSP balance and you take 4.5% a year out, you have a 96% chance of still having $300,000 in your TSP after 30 years.

• 67% of the time, the investor will have more than double their original balance after 30 years. Example: Start with $300,000, take 4.5% a year for 30 years and end up with $600,000 balance.

• 50% of the time, the investor will have more than four times their original balance after 30 years. Example: Start with $300,000, take 4.5% a year for 30 years and end up with a $1.2 million balance.

(Understand that these are all nominal dollars, not inflation adjusted dollars, so the buying power of $300,000 30 years from now will not be the same, but it gives you an idea of how long your money can last, as you use it.)

So, what does this look like from a practical standpoint? Let’s do some figures.

Assume an ending TSP balance of $500,000. (Most employees getting ready to retire that I have spoken to recently have at least this balance). At a 4% withdrawal rate, that employee can safely take out $20,000 annually, or $1,667 a month and be reasonably sure that they will never run out of money. In fact, there is a very good chance that 30 years into retirement, their balance will still be $500,000. With a larger balance of $800,000, the safe withdrawal rate allows a $32,000 annual stream of income, or $2,667 a month. While this may not let you live a lavish lifestyle, remember this is in addition to your FERS annuity, Social Security (or supplement), and any post retirement employment money.

This is not necessarily advice to begin withdrawing TSP money as soon as you retire. Many of you don’t plan on touching your TSP balance until into your 60’s. (That’s my goal as well). Others intend on using it immediately. For example, some would rather get a monthly TSP check than a part-time job. I spoke to someone last week who is retiring later this year. He has no wife or kids, and has zero plans of leaving any money behind. He also has a very thoroughly planned strategy for maximizing his annual income each year using his TSP. It works perfectly for his situation.

The point is, there are numerous scenarios for how you deal with your savings in retirement; there is no one-size-fits-all. However, if you have been considering using your TSP to increase your annual post-retirement “salary”, and have been wondering what a safe amount is to withdraw each year, hopefully this article has shed some light on the issue.

I highly recommend you speak with your financial planner because he or she can take a look at your whole situation and help determine what is best for you to meet your goals.