Essential Things to Know Before You Take the TSP Annuity Option

The TSP offers an annuity you can use in retirement, but the author cautions there are some downsides to this option.

A federal employee has a lot of options when retirement comes. With just about every benefit that employees enjoy, a decision will have to be made on how to use that benefit in retirement.

One of these decisions that will make a huge impact over the course of a retirement is what to do with your TSP.

Following the TSP Modernization Act that was implemented last September, there are now more options and flexibility when taking money out of your TSP.

One of these (although not new) options is to take what they call a life annuity. With the life annuity option, you give a portion or all of your TSP balance to MetLife (an insurance company and annuity provider) who then guarantees you fixed payments over the course of your lifetime.

It may seem like an attractive option for some people but there are some things you have to know before choosing this option.

Downsides to the TSP Annuity

The major downsides to this option is that it limits what changes you can make down the road. Once you make the decision, there is very little you can do to change or get out of the contract. If something was to change in your life that would affect how much you need each month, it is very difficult or impossible to adjust. 

Another downside of life annuities is that your money doesn’t grow much over the life of your contract. The annuity provider (Metlife) guarantees a fixed growth rate but it is generally around 2.6%.

Other Alternatives

The good news is that those who want a fixed monthly payment out of their TSP will have other options to make this happen.

Retirees can take what they call an installment payment. With this option your money stays in your TSP account and the TSP will pay you a fixed amount every month, quarter, or year (whatever you pick), not to mention that you will be able to stop and start these payments whenever you’d like and even change the payment amount a couple times a year. And because your money stays in your TSP account, you will also be able to continue investing those funds in retirement.

When you compare the life annuity option to the installment payment option, the latter is simply a better option for the majority of people. It provides much more flexibility and potential growth. With many peoples’ retirements now lasting 20, 30 or even 40 years, it can be a huge plus to have the flexibility to adjust as the needs in your life change.


The one advantage with the life annuity however is the certainty that comes with it. This option guarantees that you will receive a monthly payment for the rest of your life and you won’t have to worry about your investments. These can be valuable characteristics for some people.

With any of your retirement decisions, you have to educate yourself in what options are available and see what makes sense for you. With many federal benefits, and especially your TSP, tens of thousands or even hundreds of thousands of dollars are won and lost based on these types of decisions. It is worth your time and energy to make sure you make the best decision for you. 

About the Author

Dallen Haws is a Financial Advisor who is dedicated to helping federal employees live their best life and plan an incredible retirement. He hosts a podcast and YouTube channel all about federal benefits and retirement. You can learn more about him at Haws Federal Advisors.