Compare Your FERS Pension With an IRA Annuity
Federal employees must decide between taking the FERS pension’s irrevocable distribution or rolling the funds into an IRA fixed index annuity with a Guaranteed Lifetime Withdrawal Benefit (GLWB). Each option offers unique advantages and drawbacks, making it essential to compare potential retirement income.
Note: This tool illustrates two types of annuity payouts: Advanced and Level payouts. An advanced income annuity provides much higher income early on, then decreases after 10+ years. A level income annuity, by contrast, pays the same amount every year for life.
How the FERS Pension Works
The FERS pension provides a government-backed, guaranteed monthly payment for life. However, the decision is irrevocable, meaning you cannot adjust or access your lump sum once you start receiving payments. Survivor benefits require a reduction in monthly income.
Pros:
- Guaranteed income for life.
- No market risk or investment decisions.
- Simple and predictable monthly payments.
Cons:
- No access to principal once the pension starts.
- Limited inflation protection, unless elected with a lower payout.
- Survivor benefits cost extra, reducing income.
- No lump-sum payout to heirs upon death.
How an IRA Fixed Index Annuity With a GLWB Works
Rolling your FERS pension into an IRA fixed index annuity with a Guaranteed Lifetime Withdrawal Benefit (GLWB) offers income for life, potential growth, and access to your funds. The annuity’s payout may increase over time depending on index performance.
Pros:
- Guaranteed lifetime income with potential growth.
- Control over funds—access principal if needed.
- Higher income potential than a pension over time.
- Full balance can pass to beneficiaries instead of disappearing at death.
Cons:
- Income depends on contract terms, not government-backed.
- Withdrawal rates are set and may be lower initially.
- Market-linked growth (though principal is protected).
Pros and Cons of Each Option
| Factor | FERS Monthly Pension | IRA Fixed Index Annuity with GLWB |
|---|---|---|
| Guaranteed Income | Yes, but fixed for life | Yes, with potential income growth |
| Inflation Protection | Limited (unless elected at a cost) | Can grow with index performance |
| Control Over Funds | No, irrevocable decision | Yes, access to account balance |
| Survivor Benefit | Requires reduction in payout | Full balance can pass to heirs |
| Market Risk | None | None (principal is protected) |
| Tax Treatment | Taxable as ordinary income | Tax-deferred until withdrawals |
Who Needs a Fixed-Index Annuity?
- Federal employees who want control over their money instead of an irrevocable pension.
- Those who want a higher long-term income through potential growth.
- Retirees who want to leave a financial legacy to their heirs.
Who Should Keep the FERS Pension?
- Employees who want a simple, fixed monthly income for life.
- Retirees who don’t need access to the principal in retirement.
- Those who prefer government-backed security over annuity provider guarantees.
Additional Coverage to Consider
- Long-Term Care Insurance – Protects against future healthcare costs.
- Life Insurance – Can replace survivor benefits at a lower cost.
- Medicare Supplement – Covers gaps in healthcare expenses.
Contact The Annuity Expert’s financial advisors and insurance agents for a free, no-obligation quote today.
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Questions From Our Readers
If I’m RIF’ed (Reduction in Force), how soon will my FERS annuity and TSP payments start? Should I expect a lapse in income?
Yes, there will likely be a gap in income. When you’re RIF’ed or take an accelerated retirement, your FERS annuity does not begin immediately. It can take 2 to 3 months or more for OPM to process your retirement application. During that time, you may receive interim payments, which are smaller estimated amounts until your full benefit is calculated.
Your TSP account does not pay out automatically. You have to initiate a withdrawal or rollover, and processing typically takes a few weeks, depending on your selected distribution method. Installments, annuities, or rollovers all come with different timelines and tax implications.
To cover the income gap, consider building a 3–6 month emergency fund. You might also be eligible for unemployment benefits, depending on the circumstances of the separation. If you’re near or at retirement age, you could explore rolling the TSP into a fixed indexed annuity with a guaranteed income rider for faster access and reliable income.
Starting the retirement and TSP paperwork early—even before separation—can shorten delays. Being proactive ensures you’re financially prepared for the transition.
Should I still retire from federal service at 60 if the FERS Supplement is eliminated, or wait until age 62?
If the FERS Supplement is eliminated, it will significantly reduce your income if you retire before age 62. The supplement was designed to bridge the gap until Social Security begins, so losing it means you’ll need to rely only on your base FERS annuity and TSP withdrawals. For someone with 36 years of service at age 60, this is a major loss in expected retirement income.
Without the supplement, retiring now may strain your finances unless you have other income or assets to rely on. By waiting until 62, you can start Social Security and continue building your annuity and TSP. This could result in a higher monthly benefit and more financial security in the long run.
If you want to retire earlier but need income, consider using a fixed indexed annuity (FIA) with a guaranteed lifetime withdrawal benefit (GLWB). It can provide stable income while you delay retirement or wait for Social Security to kick in.
Until Congress makes a final decision, it’s wise to delay retirement if the supplement is crucial to your plan. If it’s eliminated, reassess your income sources and consider guaranteed income alternatives to avoid financial stress.
Am I eligible for a deferred retirement annuity under FERS if I’m RIF’ed at age 60 with 10 years of service?
Yes, under the Federal Employees Retirement System (FERS), if you’re involuntarily separated due to a Reduction in Force (RIF) and you have at least 5 years of creditable civilian service, you’re eligible for a deferred retirement annuity starting at age 62. With 10 years of service and age 60, you do qualify for this option. However, if you accept severance pay, you may waive your eligibility for a deferred annuity. Choosing the deferred annuity means forgoing immediate severance in exchange for a guaranteed pension starting at 62. This can be a good option if you have other income or savings to cover the two-year gap.