One of the great perks of working for the government is the retirement benefits. One of these retirement benefits that is often under-appreciated (in my opinion) is your pension.
In today’s world, a pension is becoming more rare every day. Big companies have realized how expensive it is to provide a pension for their retiring employees and most companies have opted to not offer one at all.
Federal employees still enjoy this benefit but I would say that most FERS employees I talk to don’t truly understand what they have. Most know that they have a pension, but most don’t realize how valuable it truly is.
Let’s run through an example to show how powerful a pension can be.
Let’s say John, my example FERS employee, has a high-3 of $120,000 and has just wrapped up a 30 year career as a federal employee. He retired at 62.
His gross annual pension would be calculated like this:
$120,000 x 30 x 1.1%
This means that John will be eligible for a gross pension of about 40k for the rest of his life.
If I gave you the option of $500,000 cash or a pension of 40k/per year, which one would you take? Many people would take the cash, but the true power of a pension becomes a lot more obvious when we look at what it would take to replicate a guaranteed income of 40k for the rest of your life.
A simple way to estimate the value of your pension is by applying the 4% rule. The 4% rule says that if you withdraw 4% of a portfolio every year, the odds of you running out of money in retirement are very low.
To calculate what size of a portfolio you’d need to create $40,000/year with the 4% rule, you simply divide your annual pension by 4%.
$40,000 / 4%
This means that if you are a believer in the 4% rule, you’d need $1,000,000 to create a stream of income that is unlikely to run out, and another huge perk is that your FERS pension is guaranteed to last as long as you do.
Federal employees enjoy many benefits that are becoming more rare every day. One of the best financial decisions that a FERS federal employee can make is to take the time to understand their benefits well enough to get the most out of them during their career and throughout retirement.