Can I Opt Out of FERS?

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By on March 16, 2016 in Pay & Benefits, Q&A, Retirement with 112 Comments

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Q: Can I opt out or not contribute to the FERS-FRAE annuity system? I am a new employee and they are taking 4.4% of my paycheck for the annuity. I feel I can get a better return outside of the annuity and want to know if I can do that?

Another question I have is if I opt out and do not contribute to the FERS-FRAE (if possible) annuity can I still receive the TSP match?

A: You cannot opt out of the FERS retirement system. Even if you could, you wouldn’t want to, as the value of your FERS pension will be far greater than what you could receive if you invested your retirement contributions yourself (unless you know the next Bill Gates).

As a FERS-FRAE employee you are contributing 4.4% of your salary towards your FERS pension. Regular FERS employees contribute 0.8% of their salary and FERS-RAE employees contribute 3.1% of their salary. Special Category employees pay 0.5% more.

Let’s compare how things would end up if you were able to opt out of FERS and chose to invest the money yourself against what you would get from FERS. I utilized a time value of money calculator to come up with the following figures. Here are the assumptions I used:

  • Initial salary of $50,000.
  • FERS-FRAE employee contributing 4.4% of salary.
  • Annual salary increase of 1%.
  • Thirty year federal career.
  • FERS 1% computation rate for pension (employee retires under the age of 62).
  • 5% per year average increase in investment value.
  • 4% per year withdrawal rate in retirement (recommended by many financial planners).
  • Neither example factored in the fact that an employee is likely to be promoted several times over their career. Promotions (and the resultant higher salaries) would result in larger amounts of both investment income and pension.

The FERS pension would begin at $20,217.60 per year and would receive a modified cost of living adjustment. The FERS pension is lifetime income.

Investing the money would yield $6,870.16 per year. The invested 4.4% FERS-FRAE contributions with a 5% annual growth rate would have become $171,754. The 4% withdrawal rate used in this example is designed to allow for annual inflation increases. The odds are better than 90% (according to “Monte Carlo” calculators) that the money would last at least 30 years.

Why is the FERS pension a better deal than investing the money yourself? Because you are not the only one contributing towards your pension. Uncle Sam also contributes, and he contributes more than you do. Even contributing 4.4% of your salary, the FERS pension is a good deal.

Agencies can request to have John Grobe, or another of Federal Career Experts' qualified instructors, deliver a retirement or transition seminar to their employees. FCE instructors are not financial advisers and will not sell or recommend financial products to class participants. Agency Benefits Officers can contact John Grobe at [email protected] to discuss schedules and costs.

© 2018 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.


About the Author

John Grobe is President of Federal Career Experts, a consulting firm that specializes in federal retirement and career transition issues. He is also affiliated with TSP Safety Net. John retired from federal service after 25 years of progressively more responsible human resources positions. He is the author of Understanding the Federal Retirement Systems and Career Transition: A Guide for Federal Employees, both published by the Federal Management Institute. Federal Career Experts provides pre-retirement seminars for a wide variety of federal agencies.