Should You Turn Your TSP Into an Annuity?

Should federal employees convert their TSP to an annuity at retirement? These are some considerations.

Deciding what to do with your TSP in retirement is a big decision! Your TSP is often the difference between a great retirement and a stressful one, and turning your TSP into an annuity is a big decision that should be made very carefully. 

Here are the biggest things to consider first.

What am I Buying?

So what is an annuity exactly? Two main types of annuities are relevant for federal employees.

The first is your Federal Employees Retirement System (FERS) annuity or pension. That is the monthly check you receive once you retire from the federal government. Most people call this annuity a pension. 

This article is going to focus on the second type of annuity which you can purchase with your Thrift Savings Plan (TSP).

Long story short, you hand over a piece or all of your TSP (or other investments) to an insurance company and in return, they guarantee a monthly payment for a set amount of time or the rest of your life. Once that set amount of time passes or you pass away (depending on the type of annuity it is) then the payments stop. 

For example, you give $300k to MetLife (insurance company) and they guarantee a $2,000/month payment for the rest of your life. 

Note: The numbers in the above example are made up. The amount you’d get from an annuity would depend on a bunch of things like your age, payout period, interest rates, etc.

Buying Security

In a nutshell, buying an annuity is passing off the investment risk to an insurance company.

We all like less risk, right? Yes, less risk is good but what is the cost?

The main cost is that you give up flexibility.

Annuities are normally a one-way street. Once you get in one it is often very difficult to get out of one. 

And it is very hard to predict what our lives are going to be like in the future. Think about it, 20 years ago would you have predicted what your life would be like right now? Probably not. 

And buying an annuity is often locking in a decision for the next 20-30 years. I’d be wary about making any decision that limited my options for that long.

The G Fund promises security as well, but if you change your mind you can always move your money out of the G Fund. 

Flexibility and options are king in retirement!

You Already Have 2 Annuities!

An annuity is simply a guaranteed source of income in retirement.

Good news! As a federal employee, you already have at least 2 annuities. Your FERS pension and Social Security. 

If you are a military retiree, you could have 2 more with your military pension and/or VA disability. 

In my experience, most federal employees don’t need another annuity. Most feds need more investments that are flexible to meet the needs of an unknown future. 

Are Annuities All Bad?

I have to admit, I am not a fan of annuities, especially for federal employees, but they are not all bad. They are simply another financial tool that has its pros and cons. 

If you are interested in them I would move very slowly and make sure you truly understand what you are getting into before pulling the plug.

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.