Understanding Your FERS Retirement

If you are a Federal Government Employee planning to retire, the Federal Employee Retirement System (FERS) will play a key financial role in your retirement. FERS, was launched on June 6, 1986, and replaced the Civil Service Retirement System (CSRS). One of the driving goals in changing retirement systems was to bring the Federal Government’s retirement benefits more in-line with private sector benefits, which meant that employees were expected to bear more of the burden – and potentially more of the investment risk – in funding their retirement.

While FERS was less generous than CSRS, the retirement benefits it offers still compares very favorably to those offered by most employers. FERS consists of both a retirement savings components and two retirement income components. The savings component, the Thrift Savings Plan (TSP), can be thought of as the Federal Government’s version of a 401k. The two primary income components are the FERS Basic Benefit, a defined benefit pension, and Social Security. We’ll cover details on each element of FERS below.

The FERS Basic Benefit

The FERS Basic Benefit is what is known as a defined benefit plan. Defined benefit plans pay a specified amount in retirement based on a pre-determined formula. Decades ago, these plans were common among employers when the prevailing belief was that if you worked for the same employer for decades, that employer would guarantee you an income in retirement. The employer took the risk that you lived (and drew a pension) for decades. The employer also assumed investment risk in guaranteeing you an income regardless of how the pension plan’s investments performed. These pensions were expensive for employers, and over time they were jettisoned for far less costly retirement plans.

Fortunately, the Federal Government did not entirely abandon the idea of a pension. And while the pension portion of FERS – the FERS basic benefit – is less lucrative than the old CSRS pension, it is still an attractive and valuable benefit in a world where pensions are seldom found. The FERS pension is funded by mandatory employee contributions along with employer contributions. The amount of the benefit you’ll receive in retirement is based on the average of your highest three earning years with the Federal Government and your years of creditable service. You can find specifics on the FERS pension calculation here. In addition to the basic benefit, if you retire early, you may also be eligible for a FERS annuity supplement through age 62. Once you reach age 62, you’ll also be eligible for Social Security, as unlike the old CSRS, you do pay into Social Security as a Federal Government employee.

The Thrift Savings Plan (TSP) The Thrift Savings Plan, or TSP, is a defined contribution plan. In defined contribution plans, employers agree to contribute a defined amount to your retirement plan. That amount is often based on how much you contribute to the plan, as contributions are usually optional). For the TSP, the government automatically contributes 1% of your salary regardless of whether you make any contributions. If you do make contributions, the government will match your contribution up to 3% of your salary, and beyond that, they will contribute 50% of what you contribute up to 5% of your salary. This means that if you contribute 5% or more of your salary to the plan, the Federal Government will also contribute 5% of your salary.

Beyond determining how much you contribute, you’ll also need to decide whether to contribute to the traditional TSP and receive a tax benefit now or whether to contribute to the Roth option within the TSP. Lastly, the TSP several broad-based low-cost investment options

along with all-in-one investment funds whose allocation is roughly based on your retirement date. Overall, fund and plan expenses are low, investment options are good (with one notable exception) and rules around how you can draw on the TSP in retirement have become more retiree-friendly.

Taken as a whole, FERS offers the tools needed for a secure retirement, particularly if you’re a long-term employee and can contribute meaningful amounts to the TSP over time. As you begin considering retirement, you should assess just what your benefits will be, either by running your own calculations, using the Ballpark Estimator or working with a financial advisor with expertise in Federal Employee retirement benefits.