Understanding the Federal Retirement System
The Federal Employees Retirement System (FERS), is the retirement plan for all U.S. civilian employees. While employees in the executive, judicial, and legislative branches of the federal government are covered, military personnel or employees of state or local governments are not. Employees under FERS receive retirement benefits from three sources: the Basic Benefit Plan, Social Security, and the Thrift Savings Plan (TSP).
If you choose to leave the federal government before retirement, you can take two of the three FERS segments with you to your next job – Social Security and the TSP. For both the Basic Benefit and Social Security segments of FERS, you and your agency pay a share each pay period. Your agency withholds the cost of both from your pay as payroll deductions. Once you retire, you’ll receive annuity payments each month for the rest of your life.
Basic Benefit Plan
Regardless of the amount an employee has contributed, this pension pays a set amount depending on the length of your service and the “high-3” average. The “high-3” refers to the highest three consecutive years of service – usually the last three years worked. This calculation only accounts for your basic salary, not overtime, bonuses, etc. Years of service are reported on the SF-50 form at least once per year. The agency then adds a 1 percent multiplier to your high-3; employees aged 62 and older with at least 20 years of service receive a multiplier of 1.1 percent.
Social Security
Employees under FERS pay into the Social Security fund at the same rate as private employees, unlike some public pension plans. Employees will pay 6.2% of earnings with the agency matching the contribution. For example, if you earn $50,000 per year, were born in 1975, and plan to retire at age 65, your estimated payments would be about $3,000 per month adjusted for inflation ($1,500 in today’s dollars).
Thrift Savings Plan
The TSP segment of FERS is an account your agency automatically sets up for you. Each pay period, your agency deposits into your account an amount equal to 1 percent of the basic pay you earn for the pay period. Additionally, you can make your own tax-deferred contributions to your TSP account and your agency will make a matching contribution. The TSP is administered by the Federal Retirement Thrift Investment Board. Congress established the TSP in 1986 and it offers the same types of tax benefits and savings as a 401(k).
Types of Retirement
You may qualify for Disability Retirement if you have completed at least 18 months of service and meet the requirements for disability, meaning you can receive benefits from all three segments of your retirement plan. Early Retirement can include retiring at the federal minimum retirement age of 57 for anybody born after 1969. Additionally, Early Retirement can be included due to a reduction in force or discontinued service because of involuntary separation. Voluntary Retirement provides you with full benefits provided you meet all requirements, whereas Deferred Retirement is for former federal employees covered by FERS.
While this is a brief overview of FERS, the most effective strategy for you is intricate and nuanced. At Federal Educators, we can help you better understand your federal retirement benefits and make a plan that best supports you. Give us a call and request your free analysis at 866-226-8160.
