Planning for retirement is a significant undertaking, especially for federal employees.
The Federal Employee Retirement System (FERS) offers a robust benefits package that includes a pension (also known as an annuity) which is generally considered the most important benefit for retirement income planning. If you’re a federal employee under FERS, you can actually lock in a 10% increase to your retirement annuity for the rest of your life.
First, let’s look at how to calculate the Regular FERS pension.
Let’s assume this individual is 61 years old with 28 years of service and a high-3 average pay of $100,000.
High 3 x Years of Creditable Service x 1% = Annual FERS Annuity
$100,000 High-3, 28 Years of Service
$100,000 x 1.0% x 28 yrs = $28,000
Total Basic Annuity: $28,000/year or $2,333/month
There’s also an enhanced formula that goes into effect for those who retire at 62 or older with 20 or more years of creditable service. This formula increases the multiplier from 1% to 1.1%.
At a glance, this appears to be a minor increase; however, it’s a 10% increase that will have a long-term effect on your retirement income for the rest of your life. If you elect a survivor benefit, that will also be increased by 10% for your surviving spouse’s life.
Let’s look at another example, assuming the same person in the example above waited on additional year to age 62 to retire.
High 3 x Years of Creditable Service x 1.1% = Annual FERS Annuity
$100,000 High-3, 29 Years of Service
$100,000 x 1.1% x 29 yrs = $31,900
Total Basic Annuity: $31,900/year or $2,658/month
This increase may or may not be a motivating factor for you, but when it comes to financial decisions that have long-term implications, you’ll want to quantify what that decision means to you in terms of dollars.
Here’s a comparison of Example 1 versus Example 2 of the increase in the FERS annuity (not factoring in any taxes or other deductions) annually, monthly, and cumulatively over 5, 10, and 20 years:
|Annual||Monthly||Over 5 Years||Over 10 Years||Over 20 Years|
If you qualify for the 1.1% increase, run the same numbers then decide if it’s worth it to stay on the job or not. Also, keep in mind this is a simplified calculation. Other factors include: payment every year you work, 5% TSP match, workplace stress, your contribution to the TSP, COLA, possible increase in high-3, etc. Ultimately, you just want to get a general idea of what kind of money you’re walking away from should you decide to retire prior to qualifying for the 1.1% calculation.