For those who entered covered service with the United States Government on or after January 1st, 1984, retirement benefits are referred to as FERS (Federal Employees Retirement System).
FERS is a complex system and much depends on an individual’s status with the government when planning for what to expect upon retirement. This is a guide intended to assist readers in understanding, calculating, and maximizing their FERS.
The Main Components of FERS
FERS has three main parts:
- Basic FERS Annuity
- Social Security
- Thrift Savings Plan (TSP)
The FERS Pension and Social Security are both fixed amounts. The amount of both depend on how much you have worked and how long. The TSP depends on the amount of money you put into it, and how well you managed it.
When Can I Retire?
The FERS system is built up on a series of rules, and tends to reward the ones who have worked the longest. In order to be eligible for FERS (barring disability or an unusual position), you must reach your MRA, or Minimum Retirement Age, which is typically between 55 and 57.
There are different kinds of retirement available, and each have their own MRAs and other requirements. This is a good place to learn more about the different kinds of FERS retirement.
The FERS Annuity
While this is referred to by the government as an “annuity,” it is more accurately a pension. Essentially, each pay period you work for the government, a small percentage (normally 0.8% of your pay) is withheld for your annuity – however, this amount does not define the amount that you will get. Upon retirement, you will receive a fixed amount each month, just like a pension.
As this is a “defined benefit,” there is nothing you can do to change the amount that you will receive other than manipulating the variables that are involved with the annuity calculation. This calculation is as follows:
High-3 Salary X Years of Creditable Service X % Pension Multiplier = ANNUAL FERS pension
Here is a breakdown of each variable:
- High-3 Salary. This is the highest annual basic pay received during three consecutive years of service. Not everything you earn counts toward your High-3. For instance, bonuses, COLA, and overtime do not. You can calculate your High-3 here.
- Years of creditable service. This is often the hardest number to nail down. This number is calculated by the OPM and can be found by looking at your SF-50s. Calculating years of creditable service can be complex: this is a good resource.
- Pension multiplier. For most federal employees, this is 1%. The exceptions are if you are age 62 or above at time of retirement with 20 or more years of service. Then it is 1.1%.
For example, if an individual’s High-3 is 75,000, they worked for 25 years, and they had a 1% pension multiplier:
$75,000 x 25 x 1% = $18,750/year, or $1,562.50/month
However, keep in mind that this is your gross, or total, pension. There are many possible deductions from your FERS annuity, and most employees have at least three (survivor benefit, taxes, FEHB). You can learn more about deductions here.
How Can I Maximize my FERS Annuity?
The first, obvious steps are to work at least 20 years with the federal government and to retire at or after age 62 – this increases the pension multiplier and the more years worked ups your overall calculations. The second is to have as high of a high-3 salary as possible.
In terms of the deductions, taxes cannot be opted out of, and it is generally advised to not opt out of FEHB since the reduction of taxes outweighs that of income in most cases. The survivor benefit cannot be waived if you have a spouse.
In terms of the other deductions, most of them involve extenuating circumstances (like life-threatening illness) or deductions relating to extended periods of leave or having been a federal employee under CSRS.
Essentially, the best advice to maximize the FERS annuity is to work over 20 years and retire as late as possible.
This is the same as the Social Security that other citizens and permanent residents of the US enjoy. Each pay period, the government will take 6.2% of your basic pay and roll it into Social Security.
The amount that you will get from Social Security depends on the amount of money contributed over your career and length of that job. You can use an estimation calculator website for your Social Security here.
How Can I Maximize my Social Security?
Just like with the FERS annuity, the best advice is to make as much money as possible (so your contribution is higher), and to work at least to the age of 62.
Thrift Savings Plan
The Thrift Savings Plan (TSP) allows federal employees to take pre-tax dollars of their salaries and invest them into various TSP funds. While Social Security and the FERS annuity will give you fixed amounts, the TSP payout depends on how much you invested and how well it was managed.
Another unique component to TSP is that it is entirely voluntary, so you could choose not to participate in this leg of federal retirement at all. It is estimated that about half of the US Army participates in TSP.
Should I Participate in TSP?
As with most investment plans, that’s a personal decision. However, the power of compound interest with TSP investments is a great benefit. Basically, every dollar put into TSP now becomes more powerful in the future.
When it comes to taxes, you have a choice with TSP: Roth (after-tax) or traditional (pre-tax) contributions. Being able to choose how to pay taxes on your investment can be a retirement powerhouse if used correctly.
How Can I Maximize my TSP?
Overall, many financial strategists recommend TSP for the above reasons. If you are looking to maximize, here are some quick tips:
- If early in your career, choose Roth. If you are in a lower income bracket now and believe that your career will blossom, it’s better to pay lower taxes today as compared to higher taxes upon retirement. If you’re already well into your peak earning years, traditional contributions are smarter.
- Consider your own beliefs about taxes. If you believe that taxes will overall be higher in the future, it’s better to invest with Roth.
- Calculate your required rate of return. Figure out how much risk you’re willing to incorporate into your TSP. It’s a good idea to start from the goal point (how much money you want to get from TSP after retirement) and extrapolate based off of how much you are putting in. This will show what percentage you need on investments to get the goal number. A 7% return is considered reasonable, but only if you’re willing to take on a higher burden of risk.
- Learn about the funds. The G Fund is entirely protected from risk, but offers low rates of return. The S Fund has a much higher amount of risk but has a far higher potential rate of return. Learn more about the different funds here.