Would you walk into a casino and place a bet for a million dollars at a blackjack table if you didn’t know the rules of the game?
I hope not!
Did you know that your full federal retirement benefits can be worth well over a million dollars? Despite that, I talk with coworkers every day who clearly don’t understand how federal retirement works. These people are gambling with their future without knowing the rules.
Can you explain to me how that’s any different than placing a bet at a casino without knowing the rules?
Do you know how federal retirement really works? Are you ready to bet your future on it? If not, I put together this quick guide to help you get on the right path.
Table of contents
- What is FERS (Federal Employees Retirement System)?
- What does my FERS benefits package include?
- Is my job covered by FERS?
- How much do I pay for all of these benefits?
- How does my FERS federal retirement annuity work?
- Am I eligible for social security?
- How does the TSP part of federal retirement work?
- Summary: Make your federal retirement work for you!
Note- Views below are my own and do not represent the views of the US Federal Government. Please do not confuse my personal blog with legal or financial advice.
What is FERS (Federal Employees Retirement System)?
Congress instituted the Federal Employees Retirement System (FERS) in 1986. It replaced the Civil Service Retirement System (CSRS), which Congress passed in 1920 to take care of federal employees in their old age. Chances are if you’re reading this blog and have questions about your retirement you are a FERS employee.
The FERS system allows retirees to draw from three different income sources in retirement:
- The FERS pension annuity
- Social Security
- Thrift Savings Plan (TSP), similar to a 401(k) for government employees
FERS represents a major change in how federal retirement works. Under the CSRS system, employees were guaranteed a larger pension, but did not earn social security or a government match on TSP contribution.
Many people think that FERS is just a pension. However, FERS is so much more than a pension. I calculated that the non-pension FERS retirement benefits are worth at least $750,000.
What does my FERS benefits package include?
The FERS pension annuity is just one of many benefits that FERS employees earn. Here are some of the other great benefits that are included in your FERS benefits.
- Federal employee health benefits (FEHB): Not only does federal employment come with great health benefits, but you can take your FEHB with you into retirement. I calculate that this benefit is worth at least $500,000.
- FERS supplement: If you retire from the federal government before you can withdraw social security, the government will pay you an “extra pension” approximately equivalent to what your social security benefit will be.
- Disability benefits: If you become disabled and no longer are able to work, you can receive a FERS disability pension.
- Death benefits: If you die while employed by the federal government and you have at least 10 years of service, your spouse can collect the survivor benefit (50%) of the pension you have earned. Your spouse may also be eligible for a lump sum payment.
The FERS Supplement is like an “extra pension” you get until you can withdraw social security.
Is my job covered by FERS?
If you’re trying to figure out how does federal retirement work, you’ll want to make sure that your job is covered by FERS.
The best way to understand if your job is covered by FERS is to look at your SF-50. Box 30 lists your “Retirement Plan”. How your federal retirement works depends on the code in the box.
- FERS: Federal Employee Retirement System (I wrote this article for you).
- FERS-Spec: Similar to FERS but for special positions such as law enforcement. Employees in this system have a lower minimum retirement age and a different contribution rate.
- FICA: Social security only. (Some temporary employees are not eligible for any benefits beyond social security)
- CS: Civil Service Retirement System.
If you can’t get your hands on your most recent SF-50, you should also be able to find some clues in other places. Your paystub will show some deductions for retirement and may include details about which retirement system you are in. Additionally, if the National Finance Center processes your paycheck, you should receive a “benefits statement” once a year which states which retirement system you are in.
If you want to know how federal retirement works, reading your benefits statement is a great place to start!
How much do I pay for all of these benefits?
Unfortunately, this is one of the more complicated parts of understanding how federal retirement works.
How much you pay for your FERS benefits depends on when you were hired. For many years, FERS employees contributed 0.8% of their salary towards their FERS benefits. However, Congress passed legislation requiring federal employees to contribute more towards their retirement in 2013 and 2014. Notably, this legislation only applied to new hires. Therefore, there are now 3 different categories of “normal” FERS employees with three different contribution rates:
For many years, FERS employees contributed 0.8% of their salary towards their FERS benefits.
- FERS employees hired before 1/1/2013. These employees have code “K” on their SF-50. (i.e. “K-FERS”) and contribute 0.08%.
- FERS employees hired between 1/1/2013 and 1/1/2014 are called, “FERS-Revised Annuity Employees” or “FERS-RAE” employees. They contribute 3.1% of their pay and have code “KR” on their SF-50.
- FERS employees hired after 1/1/2014 are called “FERS-Further Revised Annuity Employees” or “FERS-FRAE”. They contribute 4.4% of their pay and have code “KF” on their SF-50.
If you’re a special FERS employee such as a law enforcement officer or air traffic controller, you typically contribute an additional 0.5% of your pay.
How does my FERS federal retirement annuity work?
For FERS employees the annuity is calculated as:
1% x (years of service) x (average of your 3 highest years of salary)
However, there are some caveats. (Check out the OPM page for all of the gory details of how federal retirement works). Furthermore, your annuity depends on when you retire.
When can I retire with FERS?
- You can claim the annuity above at your minimum retirement age (typically 57) with 30 years of service.
- If you retire after age 62 (with at least 20 years of service), your multiplier increases from 1% to 1.1%. However, in doing so, you lose out on the FERS supplement. While I have not run the numbers to compare these two retirement scenarios, I think people forget that this extra 0.1% comes at the expense of not getting a supplemental pension.
- If you retire at your MRA with at least 10 years of service, you can receive an immediate annuity (as calculated above). However, the government reduces your benefit by 5 percent a year for each year you are under 62. So assuming you retire at age 57, your annuity would be: 75% x 1% x (years of service) x (average of your 3 highest years of salary).
- If you have between 20 and 30 years of service, you can receive your full annuity at age 60.
- If you have between 5 and 20 years of service, you can receive your full annuity at age 62. (Without the extra 0.1% multiplier).
- If you are a law enforcement officer, air traffic controller, or some other special FERS category employee, these formulas do not apply to you.
If reading this section made you a little confused, I wrote a whole post about when federal employees can retire that explains this in more detail.
Finally- if you leave government before your MRA, you can still access your pension through a “deferred retirement”. If you think you might want to retire early, check out my in depth post on FERS deferred retirements.
Am I eligible for social security?
Are you unsure of how federal retirement works with social security? Don’t worry, you’re not alone. I wrote a 2,000 word post explaining on whether federal employees get social security.
The short answer is that if you are a FERS employee, you pay into social security and should expect to receive social security.
If you belong to the CSRS retirement system, your federal service does not count towards social security. However, you may be eligible for social security from another job and you might have to deal with the windfall elimination provision. Check out my previous post for more details.
How does the TSP part of federal retirement work?
As I stated earlier, the government designed FERS employees to have three pools of money in retirement: FERS annuity, social security, and the TSP.
What is the TSP? The TSP is a defined contribution plan similar to a 401(k). You can contribute up to $19,500 per year (in 2021) to your TSP. The government matches the first 5% of your TSP contributions and this match does not count towards your $19,500 limit.
You can contribute to a traditional, tax-deferred TSP, or a Roth TSP. Both “flavors” of the TSP help you avoid paying taxes. If you need to decide between traditional and Roth TSP you will want to think about your current tax bracket and your tax bracket in retirement.
Summary: Make your federal retirement work for you!
I hope you enjoyed my quick summary of how federal retirement works. However, if you need more detailed information, I strongly encourage you to check out the OPM website. While the OPM website contains the official government descriptions of federal retirement, I know many people find it difficult to understand. Therefore, I tried to create this post as an easy to understand guide to the major signposts. (Please don’t confuse my personal blog with financial advice or an official position of the U.S. Government.)
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