What’s Left of Your CSRS or FERS Pension?
by Micah Shilanski, CFP |
In the federal retirement classes I teach, most people in class already have some idea about how much they’ll receive from their FERS or CSRS pension.
However, they often forget about some important reductions to their retirement checks.
Here are 7 reductions that could affect the amount of your FERS or CSRS pension. Most federal employees will be affected by at least 3 of them.
Let’s discuss the reductions, and then we’ll look at some examples.
#1) Survivor Annuity (Affects Most)
If you elect a ‘full’ survivor annuity 10% of your gross pension will be taken to pay for that benefit. (And remember ‘full’ survivor annuity is really ‘half’ of your benefit) If you have an insurable interest, it could be much higher than 10%. For more info, see FERS Survivor Benefits or CSRS Survivor Benefits.
Some people decide to decline the survivor annuity and do pension max to save money. In my opinion, I think pension max is a bad idea for 99% of people. It is possible that pension max can work very well in rare cases – but the risks of it going wrong are so high and the consequences so serious that I think most people should avoid pension max.
#2) TAXES (Affects ALL)
The majority (90 – 98%) of your pension will be taxable at ordinary income tax rates. Most feds I meet pay an effective rate of 15% – 20% in taxes. (Not the marginal rate). Of course, your taxes will vary based on your personal situation. I would encourage you to plan on federal income taxes of at least 20%. 20% might be a bit high for some folks, but I’d rather have you save more for taxes than not enough. If your state has an income tax (Alaska does not) – be sure to factor that in as well.
#3) FEHB (Affects Most)
I think one of your best benefits as a federal employee is the ability to continue FEHB into retirement. FEHB plans, options and costs will be different for every state. In Alaska, a good FEHB family plan is about $410 a month.
#4) Early Retirement Reduction Penalty (Affects Some)
If you’re a FERS and going out on an MRA+10 Retirement, there will be a 5% penalty for each year you’re under age 62. So if you’re 56 when you retire on MRA+10 retirement, your FERS pension would be reduced by (62 – 56 = 6) 6 years x 5% = 30% PERMANENT Reduction. This steep reduction is why some FERS choose to do a postponed retirement.
CSRS who took an Early Retirement (only available if it’s offered to you) will have their pension reduced by 2% for each year they’re under age 55.
If you’re retiring under regular immediate retirement – you don’t have to worry about this reduction. But if you are going out on an early retirement, make sure you figure this into your plans.
#5) Deposit or Redeposit Reduction (Affects Some)
Deposits and redeposits can be tricky – we don’t have time to cover them in this article. For more information, see the CSRS/FERS Handbook, Chapter 50 Section 50A3.1-3 Reductions in Annuity.
#6) FEGLI (Affects Some)
Most folks do not continue FEGLI into retirement because the costs increase so dramatically as you age.
For example, looking at the cost tables for Option B – you can see the cost of Option B doubles from when you’re age 54 to 55. And more than doubles again between age 59 and 60.
In general, FEGLI can be cheaper than some private policies when you’re young and just starting out in federal service. About mid-career, FEGLI and private polices cost about the same. But as you near retirement, FEGLI is significantly more expensive than private insurance.
However, if you are in poor health FEGLI might be cheaper than private insurance. Or you’re un-insurable on the private market (ex: cancer survivor) – FEGLI might be your only option.
If you do choose to continue FEGLI into retirement – remember to include that amount in your planning.
#7) FLTCIP (Affects Some)
if you have LTC through the OPM sponsored plan by John Hancock your premiums can come out of your annuity checks (you can also choose to pay your premiums directly).
Let’s look at an example…
Let’s say you’re retiring on a regular immediate pension – so there is no early retirement reduction. You’ll be electing a full survivor benefit and continuing your FEHB into retirement, but not FEGLI or FLTCIP.
Say your gross pension was going to be $2,000/month. Your ‘full’ survivor annuity cost will be 10% of $2,000, so $200. Taxes will vary, but I would encourage you to set aside 20% for federal income taxes. (Even though a small portion of your pension will not be taxed, since it’s so small, for this example we’ll just use 20% of the full pension.) So 20% of $2,000 is $400. Your FEHB cost will vary depending on your state, and your plan. Here in Alaska, a good family FEHB plan costs about $410 a month.
Your personal situation will vary – but you can see from this example that these reductions can have a huge impact on planning your retirement.
And if you’re going out on an early retirement – the impact is even more dramatic.
Let’s say that you were going out on a FERS MRA+10 Retirement. Your MRA was 56, but you’re retiring at age 58. To stick with a similar example, we’ll say that your unreduced pension was going to be $2,000 a month.
Because you’ll be retiring under MRA+10 rules, your pension will be reduced by 5% for each year you are younger than age 62. 62 – 58 = 4 years. 4 years x 5% = 20% reduction. If your pension was $2,000 a month, after the age penalty, it’s $1,600 a month.
And that age reduction is PERMANENT. Your pension will be reduced by 20% forever and always. It also affects the amount of your survivor annuity. If you take the ‘full’ survivor annuity – your survivor gets half of $1,600, not $2,000.
After the age reduction, next you have the cost of your survivor annuity. A ‘full’ survivor annuity that will cost you 10% of your age-reduced pension. 10% of $1,600 is $160. If you’re setting aside 20% for taxes, that will be $320 a month. And we’ll say that FEHB will still cost about $410 a month. (Again your FEHB plan will vary by state and by options).
These are just quick examples, you’ll want to look at exactly how these reductions will affect your personal situation.
The next step is to look at how these numbers might change over time. For example, while FERS and CSRS retirees have received no COLA increase in recent years, it’s not uncommon to see a 7 to 9% increase in the cost of FEHB *each year*. It would also be important to consider where you think taxes are going in your plan. (Personally, I think taxes will be increasing dramatically in the coming years.)
So where do you make up the difference? In your TSP and other personal investments. Your pension will not keep pace with your increased costs of living. That is why it’s so important to have your own personal investments to fill the gap.
Whether you’re working with a financial planner or doing it yourself – please take time to determine how these reductions will impact your retirement.
© 2013 Plan-Your-Federal-Retirement.com. Plan Your Federal Retirement is a dba of Shilanski & Associates, Inc., an Alaska Registered Investment Advisor, with securities offered through Summit Brokerage Services, Inc., Member FINRA/SIPC.
by Micah Shilanski, CFP |