How Much TAP Annuity Should I Purchase at Retirement?
How Much TAP Annuity Should I Purchase at Retirement?
At retirement, Washington state teachers, school employees, and state workers who are DRS Plan 3 participants have the option to purchase the TAP Annuity as a way to supplement their pension and Social Security income in retirement. This means they can use some or all of the funds from their TRS, SERS, or PERS Plan 3 account to purchase an annuity which will then provide them with a steady source of monthly income for as long as they live.
Before we get into the factors to consider when deciding if and how much of the TAP Annuity to purchase, it’s important to understand the basics of how it works:
Who is eligible for the TAP Annuity?
Anyone on PERS 3, SERS 3, or TRS 3 is eligible to purchase the TAP Annuity after they retire with some or all of their plan 3 investment account.
What are the restrictions related to the TAP Annuity?
The purchase can only be made once, and the purchase amount must be for at least $25,000. If you decide to use half of the funds in your Plan 3 Account to purchase the TAP annuity at retirement, you can’t go back and decide later to make another TAP Annuity purchase with the other half. Once you’ve made your decision, it’s final, and you will not get another opportunity to purchase the TAP Annuity. So, you want to make sure you’re making the decision about how much to purchase in as informed a way as possible.
Haven’t I heard the annuities are to be avoided?
While annuities sold on the private market are, in general, something we’ve encouraged clients to have a healthy level of skepticism about (which isn’t to say there’s never a time or place for them, just that they tend to be oversold in situations where they don’t make sense), the TAP Annuity has a lot of features that make it appealing as a potential supplemental source of income in retirement for a broader group of people.
How much will the TAP Annuity pay me per month?
It depends on your age, the purchase amount, and whether you elect a survivor benefit or not. You can run your own estimate using the TAP Annuity Calculator. But to give you a rough idea, a 60-year-old retiree not electing any survivorship benefit in 2025 could expect to receive about 5.7% of their purchase amount as their initial annual payment (divided by 12 to get the monthly amount), while a 70-year-old in the same scenario could expect to receive about 7% of their purchase amount as an annual payment. The calculator linked above also shows, in detail, how the 3% COLA will impact the payout amount over time.
In general, the 5.7-7% payout rate would exceed what you could expect to pay yourself using an annual “safe withdrawal rate” in retirement, which is why, for many people, it makes a lot of sense to consider using some or all of their Plan 3 Account to purchase the TAP Annuity. However, there are a lot of additional variables about each person’s specific retirement picture that need to be considered when making this decision.
Working with a financial planner who can walk you through the ins and outs of this purchase can add a lot of clarity to the decision. However, if you’re not planning to do that, here are some additional factors to consider as you’re deciding whether and how much TAP Annuity to purchase with your Plan 3 investment account:
Your Financials:
Your unique retirement financial situation, including the balance of your income sources, cash flow needs, and accumulated savings should be the primary driver behind the TAP Annuity purchase decision. So, when you’re considering if you want to purchase the TAP Annuity and, if so, for how much, it’s important to consider the following questions:
Different people will have more or less of a need for the TAP Annuity as a predictable, steady source of income in retirement. For example, someone who has worked for 45 years in a DRS covered job and retires at 70 with their highest possible SS benefit may have very little additional need for income replacement. A spouse’s retirement income, and other income sources like rental properties or additional outside retirement and investment accounts also come into play here. A big question you should be trying to get to bottom of is, how much additional monthly income beyond my pension and my Social Security benefit do I need in retirement? This should be one of the drivers behind how much, if any, of your Plan 3 account you want to use to purchase the TAP Annuity.
There’s always a balance between using your saved Plan 3 funds for a steady source of retirement income and keeping them around for a rainy day. And part of that balance is a thorough analysis of how many other “rainy day” funds you have in addition to the Plan 3 account. For folks who have been steadily saving a lot in DCP, a 403(b), or non-workplace accounts, it may be an easy choice to utilize their entire Plan 3 account to purchase the TAP Annuity because they have a substantial amount of backup assets to access if needed. For those whose Plan 3 accounts represent their only source of additional substantial savings for an emergency or a rainy day, they may need to be more strategic about this decision, with careful attention to balancing their income replacement needs with their emergency savings needs.
Getting the financials right is the most critical step in this process. No one should go into retirement without a year-by-year plan for how their assets and income sources are prepared to cover the entirety of the rest of their lives. It’s essential to get this part right, and if you’re not willing or able to take the time to map this out yourself, it’s critical to get a financial planner who is well versed in the DRS system to do this work for you.
The remaining factors below should be considered secondary to making sure the financials work to support you throughout your retirement. They’re worth considering, but only in conjunction with a well-developed financial and cash flow plan.
If the financials don’t give you a clear indicator one way or another (which is to say, purchasing or not purchasing the TAP Annuity appears to be a financial break-even either way) here are some additional factors to take into consideration.
Your Inheritance Wishes:
Although the TAP Annuity does come with a balance refund feature, typically, the initial funds that were used to purchase the TAP Annuity will be repaid, and the balance exhausted within 10-17 years (this number varies a lot, depending on the age at which the TAP Annuity purchase is made). Of course, the great news for you if you outlive that 10-17 year timeline is that your monthly payments don’t stop, they continue for the remainder of your life.
However, if leaving a substantial inheritance to your future heirs is important, a TAP Annuity purchase for the full amount of your Plan 3 account will most likely deplete or completely eliminate your Plan 3 account from your eventual estate. This may or may not be a big deal for you, but it is a factor to take into consideration.
Your Comfort Navigating Risk and Continuous Financial Decisions in Retirement:
One great thing about the TAP Annuity is that it is often a very simple and straight forward way to ensure that your cash flow needs are met in retirement. Once it is started, there’s nothing you need to do to ensure that it continues to provide you with monthly funds for the rest of your life.
Again, this isn’t a reason to override what the financials tell you is the best choice for you, but if you’re looking at retirement scenarios where there’s not a clear indicator that points you towards or away from the TAP Annuity purchase, it makes sense to consider just how much effort you want to put into managing retirement distributions, and just how much comfort you have with risk and market fluctuation in retirement.
After making the TAP Annuity purchase, you’re guaranteed the annuity amount, plus the 3 percent annual COLA increase each year for the rest of your life regardless of what the market is doing. On the other hand, if you choose to self-manage distributions in retirement, you need to be comfortable with the potential ups and downs of the market, and comfortable adjusting your distribution amounts accordingly.
If you are choosing not to utilize the TAP Annuity but do anticipate needing to make regular withdrawals from your Plan 3 Account to supplement your retirement income, have you mapped out a clear plan for withdrawals that will keep you from running out of funds in retirement? Do you know how much you can take out each year and continue to have enough for the remainder of your life? Are you comfortable adjusting those calculations as the market fluctuates? Is this how you want to spend your time in retirement?
The TAP annuity, combined with a Plan 3 Defined Benefit Pension and your Social Security benefit are something of a set it and forget it retirement plan. They require very little on your part, and for some people, that financial ease is a big part of choosing to purchase the TAP Annuity with their Plan 3 funds.
But there are also people who prefer a more active management type plan where they retain more control of their funds and investments. If that’s you, and you choose not to use the TAP Annuity to fund your retirement, you should still have a clear plan for exactly where your funds come from during your retirement AND be comfortable navigating and adjusting that plan as things like market conditions and inflation change the availability of your funds and the need for income.
There really isn’t a universally right or wrong answer when it comes to making a TAP Annuity Purchase. I have advised many clients to use their full plan 3 account to purchase the TAP Annuity, others to make a partial purchase, and some not to utilize the product at all because it just doesn’t make sense for their financial picture even though it is a good product. The most important thing is to consider your cash flow needs, savings balances, risk tolerance, and legacy wishes to decide if it’s the right product for you.
Image attribution: Photo by Kelly Sikkema on Unsplash, Image by Olya Adamovich from Pixabay