Somewhere around the third or fourth meeting of the week, a federal employee tells me they’ve heard annuities are a ripoff. Usually they can’t say why. They read it somewhere, or a coworker said it, or someone on the radio was emphatic about it.
Fair enough, there’s a version of that criticism that’s earned. But it’s a strange place to start a retirement conversation, because the most valuable asset most federal employees own is already an annuity in everything but name. FERS is a defined-benefit pension. You contributed, and in exchange the government owes you a check every month for as long as you live. That is the exact structure people are being told to be afraid of.
So the question with annuities for federal employees isn’t whether they’re good. It’s whether one solves a problem you actually have. Which means you have to know what your problems are first.
Start with the gap
Before anyone talks to you about a product, you should be able to answer one question: what does your retirement cost?
Run the real number, not a percentage-of-income rule of thumb. Then stack up what’s already guaranteed, FERS, Social Security at whatever age you plan to claim, the FERS supplement if you’re eligible, a spouse’s pension, whatever survivor election you make. Subtract.
If you’re spending $7,000 a month and your pension and Social Security cover $7,500, you don’t have an income problem. You may have other problems, sequence risk, a tax problem sitting in your traditional TSP, long-term care exposure, but paying for guaranteed income you already have is a bad use of your money. I’ve told people exactly that and watched them look relieved.
If you’re spending $8,000 and guaranteed income covers $5,500, that $2,500 comes out of the TSP every month whether the market cooperates or not. Different conversation entirely, and it’s the one where annuities start to earn their keep.
Plenty of people land in between and want more guaranteed income than they strictly need. They don’t like the idea of their pension covering their essentials down to the dollar with nothing behind it. That’s a preference, not a math error, and I don’t argue with it.
Most bad annuity stories are bad advisor stories
I’ve seen contracts I wouldn’t have recommended. Income riders charging annually on money that was never going to be turned into income. Long surrender schedules on clients who didn’t have that kind of time horizon. The same product sold three times in three contracts, which tells you what the sale was really about.
But when someone tells me they hate annuities and we dig into why, the complaint is almost never the contract itself. It’s that nobody told them the surrender period ran seven years. Or that the “7% guaranteed” was a rollup on a benefit base they could only ever access as income, not a return on their money. Or that the cap could be lowered at renewal.
That’s not a product defect. That’s someone who either didn’t understand what they were selling or didn’t want to slow the meeting down.
The distinction matters, because “annuities are bad” is a rule that will cost some people real money. “I was sold something badly” is a reason to ask better questions.
It isn’t always about income
Half the annuity conversations I have aren’t about lifetime income at all. They’re about someone carrying more market exposure into retirement than they can actually stomach.
Accumulation and distribution are different games. A 35% drawdown at 45 is an inconvenience, you keep contributing and you buy the recovery. The same drawdown at 68, while you’re pulling $2,500 a month out of the account, permanently removes shares you were counting on. You can’t see the difference on a chart of average returns, and it’s most of the ballgame.
That doesn’t mean retirees should get out of stocks. It means the conservative sleeve of the portfolio has an actual job to do, and bonds have been worse at that job than people remember. 2022 was the reminder, the G Fund did what it was supposed to, the F Fund finished down around 12.8%, and a lot of people learned their “safe” money wasn’t.
For part of that sleeve, a fixed or fixed indexed annuity is worth pricing against the alternatives. Part of it. If someone is walking you toward putting most of your retirement savings into one contract, stop.
The tradeoffs, plainly
What you can get from a fixed indexed annuity or a fixed annuity, depending on the contract: income you can’t outlive, no direct loss from a market decline, tax deferral, interest credited from a fixed rate or from index performance within the contract’s limits.
What you give up: liquidity for a defined number of years, upside above the cap or participation rate, and, if you add riders, an annual charge whether or not that rider ever pays off. Surrender charges are real and they’re front-loaded.
Both lists are true at the same time. If the person across the table only reads you one of them, that tells you something about the person.
How much
There’s no percentage that works for everyone. There are two constraints.
How much of your savings are you willing to have exposed to the market? On a $1 million TSP, some people are fine with all of it. Others want $700,000 exposed and $300,000 somewhere that can’t print a negative number. Both are defensible. Only one of them is yours.
And how much can you leave alone for the length of the surrender period? This is the one people underestimate. Deferred annuities commonly allow around 10% a year penalty-free, but read what that 10% is calculated on, contract value or original premium, and whether taking it reduces other benefits. Many contracts waive charges for nursing home confinement or terminal illness. These provisions vary enough between carriers that you can’t assume anything.
Money you might need in two years doesn’t go into a seven-year contract. That one isn’t a judgment call.
Three things I hear that aren’t true
“It’ll beat the market.” No. That isn’t the design. A fixed indexed annuity credits interest through a formula with caps, participation rates, or spreads, and that formula exists precisely so the carrier can afford to absorb your down years. When the index runs 22%, you aren’t getting 22%. When it drops 20%, you’re getting zero, which beats losing twenty. If someone shows you a backtest where the product wins over thirty years, ask which index, when it was created, and how many of those years are hypothetical.
“They all have high fees.” Too broad. Variable annuities can stack M&E, subaccount expenses, and rider charges into something genuinely expensive. Plenty of fixed and fixed indexed contracts carry no explicit annual fee at all. That doesn’t make them free, the carrier is paid out of the spread between what they earn and what they credit you, and you feel that in the cap. The question was never whether there’s a cost. It’s what the cost buys, and whether you need the thing it buys.
“Your money is locked up.” Overstated in one direction and understated in the other. You generally have penalty-free access to some of it every year. You do not have access to all of it without a charge until the schedule runs out. Anyone telling you it’s fully liquid is wrong. Anyone telling you it’s untouchable is also wrong.
Where this leaves you
If your guaranteed income already covers your expenses with room to spare, you probably don’t need to manufacture more of it.
If there’s a gap, filling some of it with income that arrives regardless of what the market did last quarter is worth looking at.
If the gap is fine but the volatility isn’t, that’s a different product conversation with a different set of questions.
If you need the money soon, or you want every dollar of long-run growth you can get, this isn’t where that money goes.
The mistake is starting with the product. Nobody should be pitching you a contract before they can tell you what it replaces in your plan.
Want to see what your specific income gap looks like? Request a Federal Retirement Report and we’ll walk through the actual numbers before anyone shows you a product.