How to Confirm Your Retirement Take-Home Income

It is important for federal employees to know how to calculate their take home income in retirement.

One of the most often overlooked necessities to ensuring a successful retirement is knowing what your take-home income in retirement will be. A lot of federal retirees can calculate their pensions and know their eligibility requirements, however, a much smaller amount of retirement hopefuls have broken down exactly what they will be receiving from their pensions, Social Security, TSP, etc.

Let’s review how your pension is computed and then we will get into the deductions to consider.

Pension Computation

For those retiring at MRA (Minimum Retirement Age) with at least 30 years of service or age 60 with at least 20 years of service, you will receive 1% for every year of service towards your High 3 (Highest consecutive 36 months of base salary plus locality at any point in a government employees’ career).

For example, Gail is retiring with 32 years of service with a High 3 of \$120,000.00.

Formula

(High 3 X Years of Service X 1% divided by 12= FERS Monthly Pension)
\$120,000.00 X 32 X 1% divided by 12=\$3,200.00/Month

Those who work until age 62 and have at least 20 years of service receive a higher pension computation. Instead of getting 1% per year of service, they qualify to get 1.1% per year of service towards their High 3.

For example, John is retiring with 25 years of service at age 62 with a High 3 of \$95,000.00.

Formula

(High 3 X Years of Service X 1.1% divided by 12= FERS Monthly Pension)
\$95,000.00 X 25 X 1.1% divided by 12= \$2,177.00/Month

FERS Supplement

If a Federal Employees Retirement System (FERS) employee retires on an immediate/unreduced pension and is under the age of 62, then he would qualify for the FERS Supplement.

The FERS supplement was designed to bridge the gap of retirement (for those retiring at MRA with at least 30 years of service or employees retiring at age 60 with at least 20 years of service) to Social Security eligibility at age 62. The formula that OPM uses to calculate your supplement is based on your estimated Social Security benefit at 62 and your years of service.

For example, Lou is retiring with 30 years of service at age 57 and has an estimated Social Security benefit at 62 of \$1,400.00/month.

Formula

Years of Service divided by 40 X Social Security Benefit At 62
30 (years of service) divided by 40=0.75 X \$1,400.00= \$1,050.00/month

Supplement

Once the retiree reaches age 62, the supplement will automatically stop, and they could then start Social Security if they wanted.

Social Security

Another main source of income for retirees is Social Security. Social Security payments are based on a 35-year average of a worker’s “indexed earnings.” Indexed earnings take into consideration a person’s lifelong wages and factor in inflation.

It is important to have an idea of what your Social Security benefit would be based on the age of starting it. By planning early, you can build a strategy around when you would want to start taking it. Whether you feel it would be best to start it right at 62 or allow the benefit to grow by delaying it, there is no one right answer for everyone because everyone’s situation is different.

It is also important to note that not all your Social Security benefit is taxable at the federal level. For Individual filers, if you make between \$25,000 and \$34,000 per year, you may have to pay income tax on up to 50% of your benefits. If you make over \$34,000, then up to 85% of your benefits are taxable.

For joint filers, if you make between \$32,000 and \$44,000 you could have up to 50% of your benefits taxed. Income of more than \$44,000 for joint filers could have up to 85% of your benefit taxed.

This is important information to consider when factoring your net income in retirement.

Along the same line of federal taxes, state tax on Social Security is something else to consider. Some states do not tax Social Security at all, while others do. The following are states that do not currently tax Social Security at the state level:

Alabama, Alaska, Arizona, Arkansas, California, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, Wisconsin, and Wyoming

You can get more information on Social Security and find out what your benefit estimates are based on your work history and age of initiating your payments at SSA.GOV.

Deductions

Now that we covered what income will potentially be coming in, we need to look at what is going to be withheld from your pension so you will have a better idea of what you will physically be living off each month.

For the FERS pension, the main deductions are as follows:

• Federal Taxes
• State Taxes (If Applicable)
• FEHB Premiums (Federal Health Benefits)
• FEGLI (Federal Employee Group Life Insurance)
• Dental & Vision
• Survivor Benefit (If Applicable)

Federal Taxes

Federal Income Tax is based on yearly income and filing status (Individual, Married Filing Jointly, etc.). The following are the IRS 2023 tax bracket tables to see what percentage you may potentially need to deduct from your pension and other income sources in retirement:

• 35% for incomes over \$231,250 (\$462,500 for married couples filing jointly)
• 32% for incomes over \$182,100 (\$364,200 for married couples filing jointly)
• 24% for incomes over \$95,375 (\$190,750 for married couples filing jointly)
• 22% for incomes over \$44,725 (\$89,450 for married couples filing jointly)
• 12% for incomes over \$11,000 (\$22,000 for married couples filing jointly)

The lowest rate is 10% for incomes of single individuals with incomes of \$11,000 or less (\$22,000 for married couples filing jointly).

State Taxes

State taxes vary based on the state of your primary residence. Much like Social Security, some states tax your income while others do not. The following states currently do not have income tax on federal pensions:

Alabama, Alaska, Florida, Hawaii, Illinois, Iowa, Louisiana, Mississippi, Nevada, New Hampshire, New York, Pennsylvania, South Dakota, Tennessee, Texas, Washington, Wyoming

TSP Withdrawals

Traditional TSP withdrawals are taxed as ordinary income based on the federal tax bracket and filing status you would fall under (see above). This is because no taxes have been paid on the contributions to the TSP by the employee or agency match.

If you have been contributing to the Roth TSP, there would be no taxes owed on distributions made as long as you have had your Roth TSP for at least 5 years and are over the age of 59 ½.

Much like income tax at the state level, some states treat retirement income from the TSP, IRAs, etc. more favorably than others. Here is a list of states at time of this writing do not tax TSP distributions

Alaska, Florida, Illinois, Iowa, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, Wyoming

As long as you have had your health coverage for the immediate 5 years before retirement, you can carry your Federal Employees Health Benefits (FEHB) benefits into retirement.

The cost of your health benefits is the same as while you are working, and you still have an annual open season in retirement to make adjustments. The exception to your cost for health benefits not rising in retirement is if your specific agency paid a higher percentage towards your premium, you will not receive that higher contribution as a retiree.

Also, retiring is not a qualifying event for you to make changes right away and you would need to wait for the next open season to make any adjustments you deem necessary. If your pension is not enough to cover your health care premiums, you can either seek out a less expensive plan, or you would need to come out of pocket to make up the difference.

Federal Employee Group Life Insurance (FEGLI)

There are four different components of your federal life insurance: Basic coverage, Option A, Option B, and Option C.

Like your health benefits, you can carry your life insurance coverage into retirement if you have had it for the immediate five years before retirement, however, there is some important information to know about the cost during retirement.

FEGLI Basic Coverage

Your basic coverage is your salary rounded up to the nearest thousand plus \$2,000.

For example, Stacy’s salary per year is \$91,500. Her death benefit through basic coverage would be \$94,000 (\$91,500 rounded up to the nearest thousand=\$92,000 plus \$2,000=\$94,000).

You have three options for taking basic coverage in retirement and each one will have a different effect on how much is deducted from your pension.

75% Reduction Option

The first option is to choose the 75% Reduction Option, where your death benefit will be reduced upon retiring or turning age 65 (whichever is later) by 2% every month until 25% of your death benefit is left. The cost in retirement does not go up from the \$0.3467 per \$1,000 you are paying while you are working, and upon turning age 65 in retirement, you will no longer have to pay anything for basic coverage.

For example, Todd retired at age 62 and chose the 75% reduction option. His basic coverage gave him a \$120,000 death benefit while he was working. At 65 his death benefit will start reducing by 2% every month until his death benefit reaches \$30,000 (\$120,000 X 25%=\$30,000).

50% Reduction Option

The next option is to choose the 50% Reduction Option. Like the 75% reduction option, upon turning age 65 or retiring (whichever is later), the death benefit also starts to reduce.

The death benefit reduces by 1% every month until 50% of your death benefit is remaining. Unlike the 75% reduction option, you will still have to pay a premium in the amount of the original \$0.3467 per thousand plus an additional \$0.75 per thousand. Once you reach age 65 or retire (whichever is later), the \$0.3467 cost goes away, however, you still must pay the \$0.75 per thousand premium.

For example, Janice, who is 62 and recently retired, decided to choose the 50% reduction option for her basic coverage with an original death benefit of \$150,000. Once she reaches age 65 in retirement, the death benefit will start to reduce by 1% every month until \$75,000 remains (\$150,000 X 50%=\$75,000 death benefit). She would initially be paying \$164.51/month (\$150,000 divided by 1,000 X \$1.0967 (\$0.75 + \$0.3467)=\$164.51/Month). Once she reaches age 65 her premium would drop to \$112.50/month (\$150,000 divided by 1,000 X \$0.75).

No Reduction

The final option as it pertains to basic coverage is to have No Reduction. This means that your basic coverage never reduces. Much like the 50% reduction option there is an additional cost to go this route. You would be paying the original \$0.3467 per thousand plus an additional \$2.25 per thousand.

For example, Greg has basic coverage for \$75,000. He decides he does not want it reduced in retirement and chooses the no-reduction option. His cost would initially be \$2.5967 per thousand (\$0.3467 + \$2.25) or \$194.75/Month (\$75,000 divided by 1,000 X \$2.5967=\$194.75). Once he reaches age 65 in retirement, he would no longer have to pay the original \$0.3467/ thousand, however, he still would have to pay the \$2.25/thousand for the rest of his life which would mean his monthly premium would be reduced to \$168.75/Month (\$75,000 divided by 1,000 X \$2.25=\$168.75)

The following is a table from OPM’s website showing the different options as they pertain to basic coverage for federal annuitants and the costs associated:

Cost for each \$1,000 of the Basic Insurance Amount in Effect at the Time of your Retirement**

Option A

If you choose to keep Option A into retirement it will remain the same cost as you are paying now. Once you reach age 65 and are retired the death benefit will go from a flat \$10,000 and reduce by 2% every month until a \$2,500 death benefit remains. Once the reduction starts there is no cost for Option A.

Option B

One of the most crucial considerations to make is what to do with Option B. Option B is a type of renewable term where every five years (based on age brackets) the cost of your premiums goes up. You can choose from a multiple of 1-5 to get a higher death benefit based on your salary.

For example, if your yearly salary is \$100,000 and you had X5 Option B, then your death benefit would be \$500,000 (\$100,000 X 5=\$500,000).

The cost starts affordable, however, every five years the premiums go up and are more noticeable once you get into your 50s, with the cost more than doubling at age 60.

You can adjust the multiples down to save money if you do want additional coverage, and may not be able to qualify for outside coverage.

Option C

Option C is family coverage and its cost also goes up every five years (based on age brackets), however, not nearly as significantly as Option B. You get to choose the multiple (1-5) on an eligible spouse or children. Each multiple counts towards \$5,000 for a spouse and \$2,500 for a child.

For example: 5X multiple coverage on a spouse=\$25,000 (\$5,000 X 5 (multiple selected) =\$25,000)

To view what your cost for the various coverages may look like in retirement, you can visit OPM’s FEGLI Calculator.

Dental & Vision

You can carry dental and vision coverage into retirement at no additional cost.

Survivor Benefit (If Applicable)

The last main deduction that could potentially come out of your pension is a survivor benefit. There are three options to consider: Full Survivor, Reduced Survivor, and No Survivor.

Full Survivor Benefit

If you elect the Full Survivor Benefit, your surviving spouse would be eligible for half of your pension and be able to continue your health benefits if you pass away. The cost is 10% of your pension every month.

For example, Stan elected the Full Survivor Benefit for his wife Mary. His monthly FERS pension before any deductions is \$1,500/Month. The survivor benefit would cost him \$150/Month (\$1,500 X 10%=\$150). If he passes away before Mary, Mary will receive \$750/Month (\$1500 X 50%=\$750) as a survivor benefit and be able to continue FEHB coverage.

Reduced Survivor Benefit

If Reduced Survivor Benefit is elected, an eligible survivor would qualify to receive 25% of a deceased retiree’s FERS pension and once again be able to keep health benefit coverage. The cost is 5% of your FERS pension per month.

For example, Joe elected Reduced Survivor Benefit for his spouse Nancy. Joe’s FERS pension before any deductions is \$1,200/Month. The cost for Reduced Survivor Benefit would be \$60/Month (\$1,200 X 5%=\$60). If Joe dies before Nancy, Nancy will receive \$300/Month (\$1,200 X 25%=\$300/Month) and be able to stay on Joe’s federal health benefits.

No Survivor Benefit

If no survivor benefit is elected, then there will be no deduction from your monthly FERS pension, however, an eligible survivor would not get any portion of the deceased federal retiree’s pension and not be able to continue federal health benefits.