There are hundreds of people counting the months, days, and minutes until they can retire and leave everything behind. Some might already be “retired in place” both mentally and physically, but maybe they should be polishing that resume and relocating to expensive locales. Why? Let’s dig deeper.
Federal employees are rewarded for their decades of service with a pension of either Civil Service Retirement System (CSRS) or Federal Employees Retirement System (FERS). Per OPM.gov, joining after January 1, 1987 will enroll an employee into FERS.
FERS calculates two retirement payment methods (per OPM.gov):
- FERS #1) 1 percent of your high-3 average salary for each year of service for under Age 62 at Separation for Retirement, OR Age 62 or Older With Less Than 20 Years of Service.
- FERS #2) 1.1 percent of your high-3 average salary for each year of service for Age 62 or Older at Separation with 20 or More Years of Service.
Let’s use Jeremey, a Civil Servant. Jeremey joined one day after January 1, 1987 and is enrolled into FERS. He is 27 years old at time of employment and works in the lowest locality zone.
Let’s fast forward 30 years, its 2017 and he’s ready to retire. Jeremey has done very well and maxed out as a GS-13 Step 10 supervisor, thus earning $107,434 (using 2014 salary table for illustration). His “high-3” average is $107,434. He is 57 and benefits from 30 years of creditable service.
Jeremey’s FERS retirement annuity will be $32,230.20 and is calculated as 1% of his high-3 average salary for each year of service. ($107,434 x 1% = $1,074.34 x 30 = $32,230.20)
Let’s fast forward 25 years, its 2012 and he’s got a wild hair. Jeremey has done very well and wants to experience another part of the United States; maybe a large city on the west coast. He decides to apply for and take a lateral GS-13 Step 10 in the most expensive locality. He was maxed out as a GS-13 Step 10 supervisor previously earning $107,434 (using 2014 salary table for illustration). Now he’s maxed out earning $127,187.
He lives and works in the new location for five years and now retires (it is 2017). His “high-3” average is $127,187. He is 57 and benefits from 30 years of creditable service.
Jeremey’s FERS retirement annuity will be $38,156.10 and is calculated as 1% of his high-3 average salary for each year of service. ($127,187 x 1% = $1,271.87 x 30 = $38,156.10)
The conclusion is, Jeremey will be earning a FERS annuity of $5,925.90 ($38,156.10 – $32,230.20 = $5,925.90) more by moving to a higher locality a few years before retirement than if he stayed stagnant. This means for the rest of his retirement life he will earn $493.83 more every month; nothing to scoff at. It gets even better if he moves to a state with the lowest overall tax burden; quick research points to states like Alaska, Nevada, Wyoming, Florida, or New Hampshire.
This scenario is considering Jeremey is single, imagining his spouse (also a GS-13/10) follows the same technique with him; they could double that additional income. Think of a couple bringing in an additional $987.65 monthly, this could be a payment on a nice retirement condo, small home, or that Mercedes convertible they’ve always wanted.
This is also not considering Jeremey’s Thrift Savings Plan (TSP), the defined contribution retirement savings plan for Federal employees. By moving to a higher locality and earning an additional $19,753 ($127,187 – $107,434 = $19,753), he will take advantage of the 5% matching benefit if he’s contributing over 5% of his income. This will increase his TSP agency contributions and add $987.65 annually ($19,753 x 5% = $987.65).
By relocating for just five years, Jeremey will ultimately gain $4,938.25 ($987.65 x 5 = $4,938.25) towards his TSP and $5,925.90 annually for the rest of his life in FERS annuity, which could amount to $118,518 during a 20 year retirement or $177,777 for 30 years. Not too shabby for a five year investment.
Its understandable Jeremey will be paying higher rents and taxes in a higher locality, but then again it would all depend on his lifestyle, taxable deductions, etc. Bottom line, do your research and plan ahead. There are many ways to retire, but some could be more fruitful than others. If you are open minded and looking for change in your life before retirement, relocating could payoff exponentially.
Vitaly Gnatyuk is a federal employee who specializes in Foreign Military Sales (FMS) and works with foreign partners to optimize their national defenses. He is a proud graduate of the University of Tennessee, earning his Bachelors in Finance and Economics as well as receiving an MBA in Organizational Leadership from the University of Findlay.