IN THIS ARTICLE
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.
THREE INCOME SOURCES FOR FEDERAL GOVERNMENT EMPLOYEES
FERS basic benefit plan payments
Social Security benefits
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.
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!
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.
Length of Service
“High-3” average pay
- 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
FERS PENSION FORMULA
- 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.
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/.
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.
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.
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.
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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