FERS Retirement Basics

By September 1, 2015Federal Benefits, FERS, TSP

FERS Retirement

FERS Retirement simply stands for the “Federal Employee Retirement System” and is the retirement system that the majority of Federal Employees working today are under.

The split from CSRS to FERS actually occurred in 1984 and was put into place by President Ronald Reagan to help fix a social security crisis that was occurring at the time.

What Makes Up the FERS Retirement?

The FERS retirement is made of three different parts, and each part has its own details that are unique to its system.

These parts include:

  • Basic FERS Pension
  • Social Security
  • Thrift Savings Plan (TSP)

The Basic FERS Pension, as well as Social Security, are somewhat similar in that they both have fixed dollar amounts.

TSP differs however in that the amount you have available for withdrawal depends on how much you actually contributed, and also how well the money was managed, due to a majority of the TSP Funds being invested in the Stock Market. You can read more about TSP Fund Volatility Here.

One of the biggest differentiations between FERS and CSRS (Civil Service Retirement System) employees is that FERS have the opportunity to have more control over managing their retirement than CSRS employees ever had.

This can have great advantages, but also disadvantages depending how disciplined and informed you stay about your benefits.

I’ve talked to many CSRS employees who wish they could have, or would have transferred to the FERS system, but I’ve also spoken to many FERS employees who wish they could have been under the CSRS system.

My advice in this area is to not worry about the retirement system you are not a part of because it will do nothing for your future, instead focus on maximizing your retirement under the system you are under.

Before we get into the details of the various parts of the FERS retirement, let’s look at who is eligible to retire under the FERS system.

Who Can Retire Under the FERS System?

The first qualification for retiring under the FERS system is to have reached the qualified age and also have at least the minimum amount of years of credible service applied to your career.

This sounds fine, but how do you know a question often asked is, “how do I know when I’m old enough and just how many years of service do I need?”

Like anything within the Federal Retirement Systems, it doesn’t have an easy answer.

But, even though the answer isn’t immediately answerable, we can detail some of the milestones that must be completed before moving on.

So, what does your eligibility to move beyond your Federal Service into the almighty stage of life called retirement depend on?

  • Years of Credible Service
  • Age
  • What Type of Retirement You Choose

To give you an example of what the average amount of time and age looks like for a federal employee you can look below:

John is a looking at a regular FERS Immediate Retirement from the Postal Service. He has reached his Minimum Retirement Age, also known as MRA and is different for each person depending on when they were born. John also has 35 years of credible service, which exceeds the minimum of at least 30 years. If he didn’t reach these minimums, he could have also qualified if he was at least 60 years old and had 20 or more years of service, or if he was at least 62 years old and had at least 5 years of service.

There’s many little details on the various eligibility rules that require a more in-depth discussion.

To find more about the various eligibility rules under FERS retirement click here. *****

Let’s move on the 3 parts of the FERS retirement.

Part 1: Basic FERS Pension

pension pot

The Basic FERS Pension can be quite confusing.

The main reason I feel that people get confused is because the FERS Pension is often called a FERS Annuity, and for a good reason. The problem is, that although it is an annuity, it gets confused with other annuities such as an annuity you can select from your TSP, or an annuity through insurance companies.

In fact, OPM (Office of Personel Management) even calls it an Annuity. But for the sake of simplicity and avoidance of confusion, in this discussion the FERS Annuity will be referred to as the FERS Pension.

You may have noticed on your paystub, that each pay period there’s a portion of your paycheck automatically deducted that is put towards your FERS Pension. Most agencies’ paystubs are different, but you can typically find the deduction somewhere on them.

The amount deducted each pay period?

For the majority of FERS employees, it’s 0.8% of your basic pay. You Pension, however, is not based on this amount.

This is where the FERS Pension get’s somewhat more complicated.

I’m sure many of you have heard of defined benefit vs. defined contribution plans. A defined benefit essentially means the benefit you receive is “defined” and not based on the amount you contribute. A defined contribution plan is the opposite; the amount you will receive is based on the amount you have contributed.

The FERS Pension although looks like a defined contribution plan based on the majority of federal employees contributing 0.8% of basic pay is actually a defined benefit plan.

Looks can be deceiving.

This means, the amount you will receive from your FERS Pension is indeed ‘defined.’ The amount of money you contribute has no bearing on the monthly income you will draw in retirement from your pension.

The fixed amount you will receive, however, is based on many different factors.

The great thing about your having your FERS Pension is at the point you retire, you have the opportunity to receive a basic monthly pension for the rest of your life. And, not only that, you have the opportunity to elect for your spouse to receive up to half of your FERS Pension should you pass before your spouse. But, those details will be saved for a future article.

Moving on to what many of your are actually curious about…

Just How Much Can I Expect to Receive from my FERS Pension?

The real meat and potatoes of the FERS Pension.

In order to calculate your basic FERS retirement pension, there are three things that must be known.

  1. Years of Credible Service
  2. Your Highest Three Years of Salary, also known as the High-3
  3. Your Pension Multiplier

The calculation looks like this:

Pension Multiplier

This calculation is deceptively simple. It becomes complex in how the High-3 Salary is actually calculated and what years of service actually count towards your years of Credible Service.

FERS Pension Tip: Calculate your Net Pension

When calculating anything in planning for retirement, it’s important to look at not just the gross amount, but also your net amounts. The majority of people calculate the gross amount to determine what they will have to live off of in retirement, but taxes and other deductions should be calculated to determine the actual amount that will be available.

This is a big mistake I see in planning and can really be a bad surprise in retirement if you only looked at the gross amount– not the net.

And, you’ll be surprised to know there are as many as 7 reductions that could be taken out of your FERS pension.

Part 2: Social Security for FERS

Security concept: Social Security on Blue puzzle pieces background, 3d render

This was another big addition to FERS employees retirement that CSRS don’t have the advantage of receiving. The majority of FERS employees pay into and receive Social Security benefits when they retire.

How Much Social Security Will I Receive?

I wish I could tell you calculating Social Security was simple, but alas, it is not.

Each pay period, the Federal Government as I’m sure you have noticed takes 6.2% out of your basic pay to contribute towards Social Security. In a similar fashion to the FERS Pension, Social Security Benefits are not calculated based just on your contributions, there are other factors at play as well.

The actual amount of Social Security benefit you receive is based on the amount of money you’ve earned over your working years and the amount of time you’ve been working in a job that contributes to Social Security. Just so you’re aware, most jobs do contribute to Social Security.

Trying to figure out how much you can expect to receive your Social Security benefit was at one time mailed to you. SSA would mail paper statements, but with the growth of the internet, the use of mail for statements is no longer used.

If you would like to see an estimate of how much you may receive it’s actually quite easy. The only real problem is, you can see what the SS benefit will look like, but the earnings history that goes into the calculation isn’t available. Maybe sometime in the future, they will release that information for you to see.

Go to SSA’s Retirement Estimator and follow the prompts; it will give you a good idea what you can expect to receive.

Special Supplement for FERS Who Retire Before Age 62

The Special Annuity Supplement is an added benefit for FERS employees who retire before they turn 62. You may know it by it’s another name, FERS Supplement.

Because Social Security plays such an integral part in the FERS employee retirement, the FERS Supplement is designed to take the place of Social Security until the employee is old enough to begin filing for Social Security.

It really is a good benefit, and I suppose that’s why they refer to it as the “Special” Supplement.

Part 3: Thrift Savings Plan

tsp

The Thrift Savings Plan, also referred to as the TSP is something I’m sure many of you are well aware of. In a similar fashion as a 401(k), the TSP is special account for Federal Employees that is based on their contributions. The TSP was created as part of the Federal Employees Retirement System in 1986. The majority of government employees are eligible to contribute to the TSP, and that isn’t strictly limited to FERS employees, but CSRS as well.

The TSP  is a qualified account that allows you to save pre-tax dollars in a special personal account. The money within the account can be invested in any of their 5 Funds, plus the L-Funds which is a combination of all of the available funds.

The weight of the decision on how to invest the money is on the shoulders of the federal employee, which many see as a great advantage, while others would rather not have to think about it.

One way the TSP differs from Social Security and the Basic FERS Pension is that the amount you receive from the TSP is based on the amount you contribute, and how well it’s done within the funds you invest it in.

The Basic FERS Pension and Social Security are fixed amounts, and not tied to the ups and downs of the stock market like many of the TSP Funds are.

To read more about volatility in the TSP Funds click here.

Another difference is that your TSP contributions are optional and completely separate from your FERS pension.

One of the greatest benefits of the TSP is the ability to receive matching contributions from your employer which, many federal employees have available and take full advantage of.

If you have any questions on the various parts of FERS, please put them in the comments and I will do my best to answer.

-Cooper Mitchell

Author Cooper Mitchell

Hello, I'm Cooper. I am the President of and an Investment Advisor Representative for Dane Financial, LLC. I specialize in helping Federal Employees better understand their benefits and prepare for retirement through Comprehensive Financial Planning and Investment Management. When I'm not helping federal employees, you can find me focusing on other entrepreneurial pursuits, spending time with my beautiful Wife, worshipping Christ, blogging, lifting (somewhat) heavy weights, and reading non-fiction.

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