The FERS and You:

What You Should Know About Your Federal Employee Retirement (FERS) Benefits

As an employee of the federal government, you have great benefits through the Federal Employee Retirement System (FERS). But those great benefits are also convoluted, often making it difficult to understand how they can and should be applied to achieve a comfortable life in retirement.

This article will cover your FERS basic benefit plan. You will learn everything from how to determine your retirement eligibility to how your FERS income will be taxed.

We have been helping federal employees make a smooth and confident transition into retirement for many years at Minerva Planning Group, and we hope that this information can help you make a similar transition into the retirement you have worked so hard to attain.

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HOW DO I KNOW THE AGE AT WHICH I CAN RETIRE?

When you retire from federal service, you will receive three forms of income.

THREE INCOME SOURCES FOR FEDERAL GOVERNMENT EMPLOYEES

FERS basic benefit plan payments

Thrift Savings Plan distributions

Social Security benefits

The government calls your Federal Employee Retirement System benefit plan an annuity, but since its structure is similar to private-sector defined benefit pensions, we will refer to it as a pension in this article.

When determining the age at which you can retire and collect your FRS pension, you can use the formula that the government provides. At first glance, the formula seems simple; however, as with many of your federal benefits, once you delve deeper, the apparent simplicity becomes complex. The formula is:

Retirement Eligibility = Your Age + Number of Years of Creditable Service*

*Your creditable service is the length of your federal employment that is eligible for the FERS retirement. For a fuller explanation of creditable service, visit the OPM’s webpage on the topic.

DETERMINING MRA

In some cases, you must have reached a minimum retirement age (or MRA) to receive benefits. Your MRA depends on your birth year. You can use the following chart to determine your MRA.

In addition to determining your MRA, you should know the four categories of FERS benefits: immediate retirement, early retirement, deferred retirement, and disability retirement.

It pays to be diligent in determining your eligibility date. You may be eligible for two or more options, which can really give you the opportunity to maximize your retirement income!

Immediate Retirement

An immediate retirement can be likened to a regular private-sector retirement. Under the Federal Employee Retirement System, immediate retirement starts 30 days from the date you stop working. You are eligible for an immediate retirement if you meet one of the following age and service requirements:

*If you retire at MRA with at least 10 years of creditable service but less than 30, your benefit will be reduced by 5% a year for each year you are under 62. This does not apply if you have at least 20 years of service and you do not start receiving benefits until age 60 or older.

Early Retirement

In times of downsizing, you may be offered early retirement; or you may involuntarily retire—either way, you must meet the following requirements to be eligible:

Deferred Retirement

If you leave federal service before you retire, you may be able to delay your benefit payments. You must have completed at least five years of creditable civilian service, plus meet the following eligibility rules:

*If you retire at MRA with at least 10 years of creditable service but less than 30, your benefit will be reduced by 5% a year for each year you are under 62. This does not apply if you have at least 20 years of service and you do not start receiving benefits until age 60 or older.

Disability Retirement

If you become disabled due to disease or injury, you may be eligible to retire if you meet the following criteria:

Also, your disability must be expected to last at least one year. Your agency must certify that it cannot accommodate your condition and that it has considered you for any vacant position at the same grade and pay level, within the same commuting area, for which you qualify for reassignment.

Free Ebook: The Ultimate Retirement Guide for Federal Employees

Retiring from the federal government can be complicated. Although our article covers the FERS portion of your retirement, you may have questions about a broad range of issues.

We wrote The Ultimate Retirement Guide to address those issues, including strategies for withdrawing from the Thrift Savings Plan, how to address inflation, and tips for an early retirement.

You can make informed decisions about your retirement. Download your free ebook today.

How Do I Calculate How Much I Will Receive?

When deciding on your retirement date, you should also determine how much income to expect in retirement. To calculate your income, you will need to know:

Length of Service

Add up all your creditable service, calculating the total into years and months.

“High-3” average pay

This is the highest average basic pay you received during any three consecutive years of your service. Keep in mind that this number does not include bonuses or overtime pay. It comprises only your basic salary during that three-year time period, including any pay increases for which retirement deductions were withheld.

Pension multiplier

Your FRS pension multiplier will depend on your length of service and occupation:

  • Under age 62 at separation for retirement, or age 62-plus with less than 20 years of service: 1% of your high-3 average salary for each year of service
  • Age 62-plus at separation with 20-plus years of service: 1.1% of your high-3 average salary for each year of service

When you have these three numbers, you can determine your annual gross pension amount.

FERS PENSION FORMULA

Annual Gross Pension = High-3 Salary x Years of Creditable Service x Pension Multiplier

It is important to note that your pension will be computed differently if you were, say, a member of Congress. We do not have the space in this article to delve into all the varying formulas; however, air traffic controllers, firefighters, law enforcement officers, Capitol police, Supreme Court police, and nuclear materials couriers will use the following calculation:

  • 1.7% of high-3 average salary multiplied by years of service that do not exceed 20; plus,
  • 1% of high-3 average salary multiplied by service exceeding 20 years.

We understand how confusing these computations can get, but with a little diligence, you can get an idea of how much income you can expect in retirement—the cornerstone to sound and stress-free financial planning.

WHEN SHOULD I START WITHDRAWING MY MONEY?

Figuring out when you should start withdrawing your money from your FERS pension may seem like a balancing act rather than a hard-and-fast rule. Among the multitude of factors that you must balance is your need for income versus having your pension permanently reduced because you drew it early.

If your income is sufficient, or you have enough savings to bridge any gap between income and expenses, then you may want to consider waiting to make withdrawals. You can delay withdrawals until 70, if you like, and increase your FERS income when you do start taking payments.

However, there does seem to be a point of diminishing returns in delaying your withdrawals. For example, the total income that you will receive if you begin drawing at 65 will probably not be that much different from age 66.

That is why we recommend the Federal Ballpark E$timate. It can help you estimate how much income to expect in retirement based on your salary, savings, and other information. You can find the Federal Ballpark E$timate here: https://www.opm.gov/retirement-services/calculators/federal-ball-park-estimator/.

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HOW DOES FERS AFFECT SOCIAL SECURITY?

If you were an employee of the Civil Service Retirement System (the predecessor to FERS) who never had Social Security taxes deducted from your payroll, you will not be eligible for benefits. However, if you have always been on the FERS plan, the government will have automatically deducted your share of taxes, making you eligible for benefits.

Many federal employees may want to take advantage of early retirement and should be aware that age 62 is the earliest that they can apply for Social Security. If you opt for immediate (regular) retirement and have 30 years of creditable service, you may be eligible for the Special Retirement Supplement, which is meant to fill in for Social Security between ages 60 and 62.

You should keep in mind, however, that the earlier you apply for Social Security, the more your benefits will be reduced over the rest of your life! Apply at age 62 and you can anticipate a permanent reduction in benefits by 30%. If your retirement income is high enough, then this may not matter. However, waiting until full retirement age (FRA) will earn you 100% of your monthly benefit, and delaying until age 70 will earn you 132% of the monthly benefit amount. (After that point, your benefit amount will stop increasing, so it does not make sense to delay past 70.)

One final note: If you plan to work and draw Social Security benefits, then your benefits will be reduced in the short term:

  • If you have not reached FRA, $1 out of every $2 will be deducted from the amount you earn above $16,920.
  • If you reach FRA in the year you are working and drawing benefits, $1 out of every $3 will be deducted above $44,880 until the month you reach FRA.

Once you reach FRA, your benefits will increase to account for the amount that the government withheld earlier.

And if you are working after you have reached FRA, then you may keep all of your benefits, no matter how much you earn.

HOW WILL MY RETIREMENT INCOME BE TAXED?

While we are on the topic of Social Security, it is important to note that most federal retirees end up paying federal income taxes on Social Security. The amount you are taxed will be based on your so-called provisional income: gross income plus tax-exempt interest plus one-half of your Social Security.

For single filers

  • If the total is less than $25,000, your benefits will not be taxed.
  • If the total is $25,000–$34,000, up to 50% will be taxable.
  • If the total is over $34,000, up to 85% will be taxable.

For joint filers

  • If the total is less than $32,000, your benefits will not be taxed.
  • If the total is $32,000–$44,000, up to 50% will be taxable.
  • If the total is over $44,000, up to 85% will be taxable.

Also, the Social Security Administration will not automatically withhold your taxes. To avoid owing money come tax time, you will need to fill out Form W4-V to specify how much should be withheld for taxes when you apply for benefits. In addition, check with your state to see if it will also tax your Social Security benefits.

When it comes to your FERS pension, your contributions were already taxed, so they won’t be taxed again when you withdraw them. But the IRS assumes that your FERS income is a mixture of what you put in and the government’s contributions, and the latter are taxable at ordinary tax rates.

The result for you? Much of your pension will be taxable. And as with your Social Security benefits, you will need to fill out a form (W4-P) to have your taxes withheld. You should also check with your state to see if it taxes your FERS withdrawals.

MAKE YOUR BENEFITS WORK FOR YOU: SCHEDULE A COMPLIMENTARY CONSULTATION

At Minerva Planning Group, we have a longtime expertise in helping federal government employees successfully retire. We are a Georgia-based advisory firm serving clients throughout Atlanta and nationwide. As a fee-only, fiduciary firm, we take our legal and ethical obligation to act in your best interest seriously.

If you are interested in seeing how a federal employee financial advisor can help you make a smooth transition into retirement, please contact us. We offer a complimentary consultation and would be happy to talk with you.

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