1. WHAT IS THE FEDERAL EMPLOYEE RETIREMENT SYSTEM?
The Federal Employee Retirement System (also known as “FERS”) was created by Congress on January 1st, 1987. It is comprised of three parts (think of them as three separate paychecks):
- Your FERS Pension
- Social Security Strategies
- Your Thrift Savings Plan, or “TSP”
There were revisions made to the Federal Employee Retirement System in 2014, which increased employee contributions.
WHEN AM I ELIGIBLE TO WITHDRAW FROM MY FERS PENSION?
Let’s look at a concrete example to better understand FERS and how portions of it are calculated.
Let’s say your high-3 monthly average income is $85,000 per year. (“High-3” refers to the highest average basic pay you earned during any 3 consecutive years of service. Most workers usually earn their High-3 during their last years of employment.)
In this example, you're expected at the age of 62 to draw $1,600 a month from Social Security. Lastly, over the course of your thirty working years before retiring at age 60, you put in $300,000 into your Thrift Savings Plan.
In this sort of situation, when would you actually be eligible to start drawing from this pension?
If you are 62 years of age, you can retire and draw the pension with as little as five years of service. If you worked for over 20 years, then you can retire and draw the FERS monthly pension once you reach the age of 60. However, if you have 30 years of service or more, then you're eligible to retire before the age of 60. You just have to meet your MRA, or Minimum Retirement Age.
Minimum Retirement Age varies by birth year. If you were born between 1953 and 1964, for example, you can retire at age 56 with 30 years of service. If you were born after 1970 and you have 30 years of service, you can retire at the age of 57.
2. WHAT AM I PAYING INTO MY RETIREMENT THROUGH THE FEDERAL EMPLOYEE RETIREMENT SYSTEM?
Most people that are at retirement age are paying 1.45% into Medicare. They're also only paying .8% into their FERS monthly annuity, (their pension). They're paying 6.2% into Social Security, and if they're putting in 5% into TSP, a total of 13.45% of their income is actually going into their retirement system. That's an annual out-of-pocket, right off the top of your present income, of $11,477.
If you were hired after 2013 or 2014, then you are one of the first RAE (Revised Annuity Employees), those amounts will differ. Federal workers hired in 2013 are paying 3.1% into the retirement system, and those hired after 2014, are paying 4.4%.
FERS Revised Annuity Employees are paying anywhere from 15.75% of their gross salary up to 17.05% of their gross salary. So their annual cost is between $13,432 and $14,537.
This is important because, when you get ready to retire, you’ll want to try and get an income as close as you possibly can to what you're actually living off of right now. Your true replacement income doesn’t have to match your full salary, because you won’t be paying those percentages into Medicare and Social Security and so forth once you’ve retired.
Referring to our earlier example, let’s say your gross income as an employee under the Federal Employee Retirement System was $85,000, and you were hired before 2013. Your retirement cost while you were working was $11,477.20, regularly subtracted from your salary. So you were actually living off of $73,522.80, and not a full $85,000.
That $73,522.80 is the living cost you want to try and match with your retirement income.
Just remember: this $73,522.80 will still be taxable income, and your benefits will also come out of it (things like health insurance). So when filling out your retirement paperwork, try to find out how much money you’ll be making. You’ll want to try to get you as close to possible to what you're living off of right now.
3. HOW DO I COMPUTE MY FEDERAL EMPLOYEE RETIREMENT SYSTEM ANNUITY?
If you’re trying to compute your FERS annuity, it’s actually a fairly simple formula. If you’re retiring before age 62, multiply your years of service by your high-3 average annual income; then multiply that by 1%.
A federal employee with 30 years of service, times $85,000, times 1% is going to earn $25,500 a year, which is $2,125 per month.
If you’re retiring at the age of 62 and you have at least 20 years of service, you get a 10% bonus. At that point, your formula would be 30 years of service times your high-3 salary. If you earn $85,000 a year and multiply that by 1.1%, you would receive $28,050 per year, which is $2,337 per month.
4. WHAT IS THE FEDERAL EMPLOYEE RETIREMENT SYSTEM ANNUITY SUPPLEMENT?
The FERS Annuity Supplement is a wonderful benefit that you have as a Federal Government employee. It allows you, at an earlier age, to get part of what you're going to earn on Social Security at the age of 62. However, you must have at least 20 years of service under your belt for the FERS Annuity Supplement to apply to you.
The formula's simple. Take your years of service (let’s say it’s 30), and divide that number by 40. If you were to retire at the age of 60, you would get 75% of what you’re going to earn on Social Security at the age of 62 based on your Federal service.
So if at the age of 62 you’ll receive $1,600 a month from Social Security, 75% of that $1,600 is $1,200 per month. So as long as you have 20 years of service, then when you retire at age 60 you can draw on $1,200 per month.
THE FEDERAL EMPLOYEE RETIREMENT SYSTEM IS TRICKY…BUT YOU’RE NOT ALONE.
Do you know how much your FERS Pension will be when you retire? Are you maximizing all its benefits?
United Benefits has assisted thousands of federal employees on several impactful topics. We can help you, too. Ask us anything!
Click here to request a consultation and talk one-on-one with a representative about the options available to you.
