Unique ‘Gaps’ in Your FERS Retirement Income

Did you know that your FERS retirement income will have some unique twists and turns? Your retirement income will start, stop and change in ways that simply won’t compute in most financial planning calculators. Find out how your income will change, and what it means for your ‘Gap’.

Did you know that your FERS retirement income will have some unique twists and turns?

Your retirement income will start, stop and change in ways that simply won’t compute in most financial planning calculators.

And the way it changes also means that your ‘gap’ changes.

Dealing with the ‘Gap’

The ‘gap’ is the difference between your fixed income, and how much you need to live in retirement. So when your fixed income goes up or down – it changes how much you’ll need from your TSP and other personal investments to make up the difference.

As a federal employee, one of the key parts of your retirement plan is in figuring out how you will fill your ‘gaps’. But many federal employees have never really thought about the way their retirement income changes.

So let’s take a look now at some of the important changes to plan for…

The Three Phases of FERS Fixed Income

For many FERS, they will go through three different phases in their fixed income in retirement. Let’s take a quick look at those phases, and then we’ll look at an example.

FERS Fixed Income Phase 1) FERS Pension + FERS Supplement

When many FERS retire – they’ll receive their pension – but many will also receive an additional source of fixed income – the FERS Supplement.

The FERS Supplement is a unique benefit (with no equivalent in CSRS). And not all FERS will get the Supplement, there are special rules that lay out who gets it and who doesn’t.

The FERS Supplement is designed to approximate a portion of your Social Security income for FERS who retire before they are eligible for a Social Security benefit. And it can be a nice boost to your fixed income after you retire.

But there’s a tricky bit to the Supplement that is sometimes forgotten – which causes the next Phase of your FERS fixed income to begin.

So for Phase 1 – we have your FERS pension coming in, and your FERS Supplement as well.

FERS Fixed Income Phase 2) FERS Pension + Nothing

So what’s that tricky bit to remember about the FERS Supplement?

If you read the regs – it talks about the Supplement stopping when you become ‘entitled’ or ‘eligible’ for Social Security benefits. This is not the same as when you ‘start’ Social Security.

So for almost all FERS, this means that your Supplement will stop when you reach age 62 – whether or not you have started drawing Social Security.

Once your Supplement stops – this creates a gap in your fixed income. One that many FERS have not planned to address.

So for Phase 2, the FERS Supplement has stopped, and we now have only your FERS Pension coming in.

FERS Fixed Income Phase 3) FERS Pension + Social Security

For most FERS, the last phase starts when you begin drawing your Social Security benefit.

For Phase 3, you have your FERS Pension and your Social Security benefit coming in.

Example: The Three FERS Fixed Income Phases

Let’s take a closer look at the three phases through an example. We’re going to keep the numbers very simple to highlight the main concept – and we’re not worried about COLA or inflation just yet.

Let’s say you are going to be retiring under FERS MRA+30 rules. Your MRA is 56, and when you retire, you’re eligible to receive the FERS Supplement.

For easy numbers, we’ll say your FERS pension is $2,000/month, and your Supplement is $750/month. So together, in Phase 1, you start off retirement with $2,750/month of fixed income.

But the FERS Supplement will stop when you reach age 62. This means that once you turn 62, you now only have your FERS Pension coming in at $2,000/month during Phase 2.

Let’s say that for your situation, it makes sense to turn on Social Security at age 66. So once you turn it on, let’s say you receive $1,200/month of Social Security. Then add in your FERS pension of $2,000/month – and in Phase 3 – you now have $3,200/month of fixed income coming in.

What Does This Mean for Your ‘Gap’?

Continuing our example, let’s say that you need $5,000/month in retirement. Let’s look at how your fixed income phases look against what you need each month.
FERS Fixed Income Phase 1)
Age 56 to Age 61: $5,000 – $2,750 = GAP of $2,250/month

FERS Fixed Income Phase 2)
Age 62 up Until Age 66: $5,000 – $2,000 = GAP of $3,000/month

FERS Fixed Income Phase 3)
Age 66 and Beyond: $5,000 – $3,200 = GAP of $1,800/month

You can see that as your fixed income changes, so does your ‘gap’. And you have the biggest ‘gap’ in our example from age 62 to 65.

Social Security at 62 to Fill the ‘Gap’?

Sometimes, when I explain the income timeline concept to Federal Employees – some will suggest that we just turn on Social Security at age 62 – and *poof* – there went the gap.

Well – that’s not always the case. And in reality – for most federal employees, turning on Social Security only reduces the ‘gap’ – it doesn’t make it go away entirely.

While it might seem like a good idea in the short term – it’s important to run the numbers for your personal situation. Many Federal Employees might find that it still makes sense to delay Social Security – and find other ways to fill the Phase 2 Gap.

What About Retirement COLA?

In this article, we’ve just been discussing the basics of your fixed income phases. It’s also important to consider how your fixed income might be increased from COLA in retirement.

There’s more to know about COLA in retirement – and you should also know that most financial planning calculators can’t compute the way that your FERS retirement COLA works. If you aren’t aware of this – you might be counting on retirement projections that are inaccurate.


About the Author

Micah Shilanski is a Certified Financial Planner™ professional who specializes in helping federal employees get the most out of their retirement benefits. Micah helps his clients with tax planning, retirement planning, federal retirement planning, estate planning, and investment advice. 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.