Should I Take the TSP Annuity Option?

The TSP annuity sounds great at first, but upon closer examination, it may not be such a good deal.

The TSP Annuity sounds great on paper. A guaranteed monthly income for the rest of your life regardless of what the market does. Wow! Sign me up!

I wish it was that simple. 

Long story short: 99% of federal employees should not get a TSP annuity. Here’s why.

Clear the Water

Before we get too far, let’s clear up a common misconception.

Some people confuse a TSP annuity with their FERS annuity (aka pension). While the names are similar, these are completely different things.

Your FERS annuity (also called a pension) is a monthly payment that you get from the government if you are eligible at retirement. 

A TSP annuity is when you take a portion (or all) of your TSP and hand it over to an insurance company (MetLife currently has the contract) who then guarantees to pay you a monthly payment.

The size of the monthly payment will depend on a number of factors including how much you give to the insurance company as well as if you want it to last just your lifetime or your spouse’s lifetime as well. 

So What’s The Catch?

There are 3 main reasons why a TSP Annuity doesn’t often make sense.

One Way Street

Getting a TSP annuity is not something that you can undo. 

For example, if you give $500,000 to MetLife for a TSP annuity that $500,000 is now the property of MetLife and the only thing you have right to is the monthly payment, so if your needs/plans change later in retirement then you have very little flexibility in making adjustments along the way. 

And because retirement is such a long time it is almost guaranteed that your needs/plans will change significantly over that time.

The key is keeping as much flexibility in your plan as possible. 

Once It’s Gone, It’s Gone

With a TSP annuity, MetLife guarantees payments up until you and/or your spouse passes away. 

If you live to be 112, payments will continue until 112. But if you die 1 year into retirement then MetLife keeps the difference. That is how they make money. 

So if you have a goal of leaving money to your kids/charity then a TSP annuity would probably not be a good fit for you. 

Guaranteed Is Only So Good

Having fixed/guaranteed income in retirement can be exceptionally helpful for a retirement plan, and the good news is that as a FERS federal employee you already have at least 2 sources of fixed income: Your Pension and Social Security.

These two income sources will lay the foundation for your retirement income. 

But while fixed can be really helpful, we wouldn’t want all our retirement income to be fixed because that would come with very little flexibility.

It is important to have investments that you control so that you can adapt as things change in retirement. 

But Then Again…

But at the end of the day if you still really want to buy an annuity I would shop around with many insurance companies to make sure you are getting the best rate/payment possible. 

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.