Annuities Might Seem Old-Fashioned—But Some Federal Retirees Still Find Them Surprisingly Useful

Key Takeaways

• While annuities may sound outdated, they still provide critical income stability for some federal retirees—especially when coordinated with other benefits like FERS and Social Security.

• Understanding how different types of annuities work and their role in your broader retirement income strategy can help you reduce market risk and ensure predictable monthly cash flow.

Why Annuities Still Hold Relevance in 2025

If you’re a federal retiree or planning to retire soon, chances are you’ve already heard about annuities—often in the context of guaranteed income or insurance-based

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That’s because annuities offer one thing many retirement strategies lack: predictability. And for public sector employees whose income often includes a blend of FERS pension, Thrift Savings Plan (TSP) withdrawals, and Social Security, predictability can be the deciding factor between a secure retirement and one vulnerable to market volatility.

What Is an Annuity—And How Does It Fit Into Your Federal Retirement Plan?

An annuity is a financial product typically issued by an insurance company. You pay a lump sum (or series of payments), and in return, you receive income either immediately or at some point in the future. The income stream can last for a fixed term or the rest of your life.

For federal retirees, annuities serve as a potential supplement to your three-legged retirement stool:

• FERS Basic Annuity (your pension)

• Social Security

• TSP withdrawals or rollovers

If you’re concerned about longevity risk—the chance you might outlive your savings—annuities provide a way to convert a portion of your TSP or other savings into a lifelong income.

Types of Annuities Federal Retirees Consider

There are several types of annuities you might come across, but only a few are typically relevant to public sector retirees. Each comes with trade-offs in flexibility, guarantees, and complexity.

Immediate Annuities

These begin payments within a year of purchase. They’re often funded with a lump sum from your TSP or IRA and are useful if you need a reliable income stream right away after retirement.

Deferred Income Annuities (DIAs)

With a deferred annuity, you pay now and receive income later—often 5, 10, or even 20 years down the road. These are helpful if you’re worried about your income needs in your 70s or 80s.

Fixed Annuities

Fixed annuities pay a guaranteed rate of interest and provide steady payouts. For retirees wanting predictability without market exposure, this option is appealing.

Variable and Indexed Annuities

These tie your returns to market performance (directly or indirectly). While they offer higher upside potential, they come with more risk and fees, which many federal retirees prefer to avoid.

How Annuities Compare to Your FERS Pension

Your FERS Basic Benefit already acts like a lifetime annuity. So why would you need another?

Here are the distinctions:

• FERS benefits are inflation-adjusted, while many private annuities are not unless you pay extra for a cost-of-living adjustment (COLA) rider.

• FERS is based on service years and salary, not market performance. Annuities you purchase with personal savings are based on your investment amount and the payout structure you choose.

• FERS survivor benefits are optional, but if you choose to provide for your spouse, it reduces your own monthly benefit. Annuities can be structured to provide survivor benefits as well—sometimes more flexibly.

Pros and Cons of Annuities in Your Retirement Mix

Before you commit to using a portion of your savings for an annuity, consider the following advantages and disadvantages:

Advantages

• Predictable Monthly Income: Annuities offer stable cash flow, regardless of market downturns.

• Longevity Protection: Lifetime annuities ensure you won’t outlive your money.

• Low Maintenance: No ongoing management or rebalancing required once income starts.

Disadvantages

• Lack of Liquidity: Funds used to buy annuities are often locked up and inaccessible.

• Fees and Complexity: Some annuities involve hidden fees and complex riders.

• Inflation Risk: Unless you pay for COLA features, fixed income loses value over time.

Using TSP to Fund an Annuity in 2025

The Thrift Savings Plan allows you to purchase a life annuity through its partnership with an outside provider. However, in 2025, many retirees choose to roll their TSP into an IRA and shop for annuities on the open market instead.

The TSP’s built-in annuity option offers:

• Single life or joint life annuities

• Fixed monthly payments based on age and interest rates

• Optional COLA adjustments for a reduced starting amount

You cannot reverse this decision once you choose the TSP annuity. This is why many federal retirees now prefer the IRA-to-annuity route, which can offer more flexible income features and optional riders (though also potentially higher fees).

What Timing Works Best for Purchasing an Annuity?

In 2025, interest rates and life expectancy tables are two key factors affecting annuity payouts. Timing your annuity purchase can make a big difference.

• If interest rates are high, annuity payouts are generally better.

• If you delay purchase until later in retirement, your monthly income will be higher because of shorter expected payout duration.

Some retirees delay buying an annuity until age 70–75, using other income sources first. Others annuitize a portion of their assets right at retirement to lock in income stability from the start. What’s best depends on your personal health, income needs, and longevity expectations.

Survivor Benefits and Inflation: Structuring Annuities Wisely

If you’re married, survivor benefits should factor heavily into your decision. Most annuities let you select:

• Single life income (higher monthly payout, ends at your death)

• Joint life with survivor payout (lower monthly income, but continues for your spouse)

Also consider:

• Period certain annuities, which guarantee payments for a minimum number of years even if you die early.

• Cost-of-living adjustments, which increase your income annually to keep up with inflation.

Be aware: adding features like COLAs or survivorship lowers your initial monthly income, so it’s a balancing act.

Tax Considerations You Can’t Ignore

Annuity income is taxable as ordinary income in the year you receive it. Here’s what you should know:

• If purchased with pre-tax funds (e.g., from your TSP or traditional IRA), all distributions are fully taxable.

• If purchased with after-tax funds, only the interest earned is taxable—the principal is returned tax-free.

• Required Minimum Distributions (RMDs) still apply to deferred annuities in qualified accounts after age 73.

You should carefully assess how annuity income stacks with your pension and Social Security. Too much taxable income in one year could increase your marginal tax rate or push you into IRMAA surcharges for Medicare.

When Annuities Might Make the Most Sense

You’re most likely to benefit from an annuity if:

• You want to secure a minimum baseline of income for life.

• You lack confidence in managing market-based investments during retirement.

• You don’t have other sources of guaranteed income besides FERS and Social Security.

• You want to delay claiming Social Security until age 70 for a higher benefit and need income in the meantime.

• You want to protect your spouse with a second income stream after your death.

For others, particularly those with robust pensions and strong investment acumen, annuities might feel restrictive.

Rethinking Your Retirement Income Blend in 2025

With the evolving landscape of federal retirement—particularly as more FERS retirees rely on personal savings for a larger share of retirement income—the case for annuities remains nuanced but valid.

What’s changed in recent years is not the nature of annuities, but the variety of options available and the broader range of retirement risks they can help manage. From market uncertainty to longevity risk and rising healthcare costs, annuities provide a potential tool—when used deliberately.

That doesn’t mean everyone should buy one. But if your retirement income plan lacks a reliable income floor beyond your FERS pension and Social Security, it may be time to revisit the annuity question with fresh eyes.

Talk to a licensed agent listed on this website for personalized help reviewing how an annuity might fit into your strategy.