9160 / What risks do retired servicemembers who rely upon thrift savings plans face?

Because their base retirement pay and Social Security are taxed at a higher rate than many anticipate, retirees could have to liquidate their TSP more quickly than planned to make up the difference between projected and actual available income. Without proper planning, this could have a significant impact on the longevity of the retiree’s TSP savings.

If a retiree relies solely on a traditional, tax-deferred TSP for retirement savings, an increase in federal income tax rates will serve as a triple whammy. The first whammy is the increased amount that the retiree must withdraw due to an increase income tax on base pay. The second whammy is the increased amount the retiree must withdraw to make up for the increased income tax on Social Security benefits. The third whammy is the decreased amount available to the retiree in his or her TSP account since an increased income tax results in smaller share of available dollars in the TSP.

Assuming no other retirement savings vehicle is available for the military retiree, the TSP is the obvious account of last resort to make up for the impact of an increased income tax on base pay and Social Security wages. In a tax-deferred, traditional TSP, the retiree knows how much he or she has in the account, but cannot always anticipate income tax liability. The amount that the retiree gets to keep is determined by the share that the government taxes at the time of withdrawal.