Effective retirement planning as a federal employee means considering various income streams and investment options, including annuities. If you’re a Federal employee, you already own an annuity. Your FERS annuity planning provides a foundational retirement component for government workers. However, many Federal soon-to-be retirees ask us if they should go out and purchase additional annuities.
The answer? Maybe.
When it comes to purchasing an annuity, there’s no one-size-fits-all solution—especially for Federal employees. Understanding how these products work—and whether they complement or complicate your existing retirement plan—is critical to making a confident, well-informed decision.
Understanding Annuities: Basic Concepts
At their core, annuities are contracts between you and an insurance company. You provide the funds through periodic payments or in a lump sum investment. The insurance company (the issuer) commits to providing payments to you (the annuitant) for the remainder of your life, or for a specified period of time. While your FERS annuity operates on similar principles, private annuities offer different features and considerations.
While historically, the primary purpose of annuities has been to provide guaranteed income, many view annuities as more of an investment vehicle focused on growth of capital.
Types of Annuities
Several types of annuities exist, each with distinct characteristics. Some of big takeaways for the different types include:
Fixed
A fixed annuity (FA) provides a guaranteed rate of return over a specified period. The predictability of a fixed rate can make these vehicles an appealing option for investors with a low tolerance risk. However, they are not responsive to market growth, and fixed rates may not always keep pace with inflation. The big takeaway: Investment risk is on the issuer (the insurance company), and the money is a part of the insurance company’s general account.
Variable
This option allows the insurer to invest in a portfolio of subaccounts. These subaccounts are not mutual funds but may invest in a similar manner and even have the same managers. In a variable annuity (VA) market, performance is based on the performance of the subaccounts. These investments offer growth potential but expose buyers to higher market risk and potential fees. The big takeaway: The investment risk is borne by the investor, and the money is not commingled with the insurance company’s general account.
Fixed Indexed
These combine elements of both fixed and variable annuities, offering some market participation with principal protection. A fixed-indexed annuity (FIA) will typically provide full principal protection, with upside returns tied to the performance of some reference index. The big takeaway: The investment risk of loss is borne by the insurance company, but there is no guaranteed rate of return, and returns are typically capped. The money is part of the issuer’s general account.
Immediate vs. Deferred Annuities
Immediate annuities begin payments shortly after purchase, while deferred annuities allow for an accumulation period before disbursements begin. The accumulation period may have some unique features based on product-specific riders, contract terms, etc. Each of these vehicles has distinct pros and cons. It’s important to discuss how they function with an experienced financial advisor before incorporating them into your retirement plan.
Annuities Role in Federal Retirement Planning
For federal employees, annuities can serve as complementary tools to existing benefits. They can offer a sense of security, particularly for those concerned about outliving their savings. However, an annuity can tie up your capital, may incur significant fees, and could even drastically limit access to your money.
Additional annuity products should be carefully evaluated to determine whether they truly enhance your retirement strategy or simply duplicate benefits you already have through effective FERS annuity planning. If you are paying fees for guaranteed income riders or other bells and whistles, make sure you know what you’re actually getting for the fees you are paying. Finally, if an advisor can’t explain to you why the annuity’s specific features fit into your specific financial plan, think very carefully before you sign on the dotted line.
Federal Employee Retirement Planning
FERS Pension
As I said earlier, if you’re a federal employee, you already have access to a FERS annuity — your pension benefit. This government pension annuity provides guaranteed income based on your years of service, a high-3 average salary, and a defined multiplier. This is, by definition, a type of retirement annuity that forms the cornerstone of your retirement security.
Because your FERS annuity planning already provides reliable, guaranteed lifetime income, any consideration of additional annuity products must recognize this foundation. Believe it or not, there is such a thing as having “too much guaranteed income.” In some cases, adding an annuity to FERS benefits could limit flexibility and adaptability in retirement by locking up money in exchange for guarantees you might not need.
TSP Annuity Options
The Thrift Savings Plan (TSP) offers an annuity option that allows you to convert some or all of your accumulated balance into a guaranteed income stream — but there’s a catch. When you annuitize your TSP, you’re essentially making an irreversible decision based on actuarial calculations.
The insurance company statistically knows how long people in your demographic are likely to live, and they price their payments accordingly. Even more important is the fact that you’re giving up control of your assets in exchange for payments. You get income, but your TSP balance becomes zero, and you don’t have direct access to the funds outside of the income. This trade-off warrants serious scrutiny for most federal employees. To be candid, I have not seen many cases where this is a good idea to do.
Supplemental Retirement Planning Needs
Even with FERS annuity planning and Social Security, you might identify income gaps in your retirement annuity planning. Private annuities can fill these gaps, but they represent just one option among many. For federal employees who already have the stable income foundation of a FERS annuity, proper planning with a qualified financial advisor can often create sustainable income streams without annuitizing and giving up control of their money.
Through more evolved strategies and comprehensive planning, many federal employees can achieve the security they seek without locking additional assets into annuity products. These alternative approaches often provide greater flexibility, control, and potential for growth.
Why Working with a Qualified Financial Advisor Matters
When it comes to federal employee annuities and their relationship to your broader retirement annuity planning, professional guidance isn’t just beneficial—it’s essential. The decisions you make about annuities will impact your financial well-being for decades, yet these products are among the most complex in the financial marketplace.
A qualified financial advisor who specializes in federal benefits can:
- Evaluate your complete financial picture, including your FERS annuity planning and other retirement assets
- Identify whether there are genuine gaps in your retirement income plan that an annuity might address
- Present alternative strategies that might accomplish your goals with greater flexibility and lower costs
- Analyze the actual costs and benefits of any annuity product in the context of your specific situation
- Create a comprehensive retirement income strategy that integrates all income sources
Most importantly, a fiduciary financial advisor is legally obligated to put your interests first—a crucial distinction in the annuity marketplace, where commissions can significantly influence recommendations.
Red Flags to Watch When Choosing an Advisor
As you explore annuity options and select professional guidance, be vigilant for these warning signs:
License Limitations
If the person recommending the annuity has only insurance licenses and not securities licenses, they cannot offer a full range of financial solutions and are limited to selling insurance products only. They may call themselves a “financial advisor,” but in reality, they are an insurance agent.
Proprietary Product Focus
Be wary of advisors who primarily recommend products from the insurance company that employs them. These advisors often have a limited product shelf to offer clients as opposed to an open market approach with greater choice.
Too-Good-To-Be-True Promises
Claims of outsized returns with no risk, guaranteed high growth rates, or “secret” strategies unavailable elsewhere are major red flags. Run, don’t walk!
High-Pressure Sales Tactics
If you feel rushed to make a decision or sign the paperwork, this suggests the advisor is more focused on closing a sale than on your long-term well-being. If you’re feeling pressured, run, don’t walk!
Excessive Allocation
Be extremely cautious if the recommendation involves placing an excessively large percentage of your assets into an annuity. This could unnecessarily restrict your financial flexibility. Run, run, run, don’t walk!
No Holistic Financial Planning Discussion
If an advisor doesn’t thoroughly discuss how their recommendations integrate with your government pension annuity and your overall financial plan, they may not understand the federal benefits landscape. Annuities are tools designed to do a specific job in your unique financial plan. If this conversation isn’t happening, and an advisor is trying to sell you an annuity — run, don’t walk.
Post-Sale Ghosting
Some insurance-only agents earn substantial upfront commissions and have little incentive to provide ongoing service. These agents may make a few high-commission sales early on, but often, their careers quickly fizzle out, and they move on to doing something else. Ensure your advisor will be available for the long term.
The Key Takeaway
Remember that annuities are complex products with both benefits and limitations. For the right situation, they’re a fantastic financial planning tool. However, they are not the solution to every problem. They are not the be-all end-all. Additionally, due to their complexity, they should never be purchased without fully understanding how they fit into your unique financial plan and why the features and benefits in the annuity are right for YOU and YOUR situation.
Schedule a Free Consultation with Good Life Financial Advisors of NOVA
Your retirement deserves a strategy built around your goals, your benefits, and your life—not around one-size-fits-all products. At Good Life Financial Advisors of NOVA, we specialize in helping federal employees navigate the complexities of retirement annuity planning with confidence, clarity, and a commitment to your best interests. And if your situation calls for an annuity, we have many options to discuss with you!
Whether you’re evaluating annuity options, coordinating your FERS benefits, or building a flexible income plan, our experienced financial advisors are here to guide you every step of the way. Contact us today to schedule a no-obligation consultation with a real fiduciary financial advisor.
We’ll have a short conversation to see if we’re a good fit for each other.
Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Variable annuities are subject to market risk and may lose value. Fixed Indexed Annuities (FIA) are not suitable for all investors. FIAs permit investors to participate in only a stated percentage of an increase in an index (participation rate) and may impose a maximum annual account value percentage increase. FIAs typically do not allow for participation in dividends accumulated on the securities represented by the index. Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.
Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification mark CERTIFIED FINANCIAL PLANNERTM in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.
