Dana retired from a federal agency last spring at 57 with 30 years of service. Her FERS annuity came to about $2,375 a month. Her TSP held $700,000. Her first instinct was to take a big chunk of the TSP, pay off the remaining mortgage, and "see how it goes." Then her tax preparer ran a projection and showed her what that single withdrawal would do to her bracket for the year. She rethought the whole plan.

That conversation happens in some form with nearly every new retiree. The FERS annuity arrives automatically. The TSP is the part you have to manage, and how you manage it determines your taxes, your flexibility, and how long the money lasts.

Start with what the annuity already covers

Before deciding what to pull from the TSP, add up the income that shows up without any effort. For most retirees that is:

  • The basic FERS annuity, generally 1% of your high-3 average salary for each year of service (1.1% if you retire at 62 or later with at least 20 years)
  • The FERS Special Retirement Supplement, if you retire under an immediate, unreduced option before 62
  • Social Security, once you claim it
  • Any pension or part-time income outside federal service

Subtract that total from your realistic spending, and the gap is the number your TSP has to fill. That gap is more useful than any rule of thumb about withdrawal percentages. It also tends to change over time, which is the heart of coordination.

The bridge years before 62

The Special Retirement Supplement approximates the Social Security benefit you earned during federal service, and it is paid until you reach 62. If you retire at your minimum retirement age with 30 years, or at 60 with 20 years, you generally qualify.

Say Dana's estimated Social Security at 62 is $2,000 a month. With 30 of a possible 40 years counted, her supplement would run roughly $1,500 a month, or $18,000 a year. Her annuity is $28,500. So she starts with about $46,500 a year before touching the TSP.

If she needs $75,000 before tax, her TSP withdrawals might be around $28,000 to $32,000 in the early years, which is about 4% of the balance. That is a very different picture from the lump sum she first imagined.

Two cautions about the supplement:

  1. It is subject to an earnings test. If you work after retiring and earn above the annual limit, the supplement is reduced by $1 for every $2 over the limit. The limit changes every year, so check opm.gov for the current figure.
  2. TSP withdrawals do not count as earnings. Pulling money from your account will not trigger the test. Wages and self-employment income will.

The supplement also gets no cost-of-living adjustments and disappears at 62. Your income steps down on that birthday unless you start Social Security, which brings us to the biggest decision in the plan.

Using the TSP to delay Social Security

Many retirees claim Social Security at 62 simply because their income dips when the supplement ends. That is often the more expensive choice. Each year you wait past 62, up to 70, increases your benefit permanently, and the increase is adjusted for inflation like the rest of the benefit.

The TSP can fill the gap. If Dana draws a bit more from her account after the supplement stops, she can let her Social Security grow. She spends down some TSP money in exchange for a larger, inflation-adjusted, guaranteed check later. For someone with average or better longevity and a healthy balance, that trade often works. For someone with health concerns or a smaller balance, claiming earlier may make more sense. This is a personal call, and a fee-only planner or your Social Security statement at ssa.gov can help you run the numbers.

Taxes shape the order, not just the amount

Everything from a traditional TSP balance is taxed as ordinary income when it comes out. Your annuity is also taxable, apart from a portion that represents your own contributions, which is recovered tax-free under the Simplified Method. The supplement is taxable as well. Stack them all together and you may be in a higher bracket than you expected.

A few practical points:

  • Fill the lower brackets on purpose. In years when your income is low, such as the bridge years before Social Security and required distributions, you may be able to withdraw more than you need or convert some traditional money to Roth at modest rates. Bracket thresholds change yearly, so see irs.gov.
  • Use your Roth balance as a pressure valve. Qualified Roth withdrawals (generally after 59½ and five years from your first Roth contribution) do not raise taxable income. Saving them for high-expense years, like a roof replacement or a new car, keeps the bracket in check.
  • Mind the early withdrawal penalty. The 10% penalty generally applies to withdrawals before 59½. There is an exception if you separate from service in or after the year you turn 55 (50 for certain public safety employees). Dana separated at 57, so she was fine. If you retire earlier, think carefully before moving money to an IRA, because the age-55 exception applies to the TSP but not to a rolled-over IRA.
  • Watch withholding. Money paid to you directly from a TSP lump sum is typically subject to mandatory 20% federal withholding. Monthly payments are handled differently. Confirm the details at tsp.gov.

Choosing how to take the money

The TSP offers a few paths, and you can combine them:

  • Monthly payments, either a fixed dollar amount or an amount calculated from your life expectancy
  • Single or occasional payments for specific needs
  • A life annuity purchased through the TSP, which turns part of your balance into guaranteed income
  • A partial or full rollover to an IRA, which opens investment choices but ends the TSP's low costs

Many retirees settle on a monthly payment that covers the base gap, plus the option to draw a one-time payment for larger expenses. The rules for changing or stopping payments have been loosened over the years, so look at the current withdrawal booklet on tsp.gov rather than relying on older advice.

The annuity option deserves a mention. If you worry about outliving your savings, or you simply dislike market swings, putting a portion of your balance into a TSP annuity can work like a second pension. It is irreversible, so many people annuitize only the amount needed to close a recurring income gap.

Plan for the required distributions

Eventually the government wants its tax revenue. Required minimum distributions from the traditional TSP begin at an age set by the SECURE 2.0 Act: 73 for most people now, rising to 75 for younger retirees. Check irs.gov for which applies to you. If your balance is still large at that point, forced withdrawals plus your annuity and Social Security can push you into a higher bracket. That is why drawing steadily, and converting some pre-tax money to Roth in the lean years, is often smarter than leaving everything alone.

A short checklist before you start

  • Add up your annuity, supplement, and Social Security estimates for each stage of retirement
  • Find the true gap between that income and your spending
  • Decide whether to delay Social Security and let the TSP carry you
  • Project your taxable income for at least the first five years
  • Pick a withdrawal method that fits, and review it every year

Dana ended up taking monthly payments of about $2,500, held a Roth portion in reserve for big expenses, and kept the mortgage. Her tax bill that first year was a fraction of what the lump sum would have cost. Your numbers will differ, but the approach holds up: let the annuity do its job, use the TSP to fill the gap deliberately, and revisit the plan whenever a milestone changes the math.