Understanding your fers annuity

Updated January 2023.

If you’re a long-time Federal Government employee, the Federal Employees Retirement System (FERS) will be a primary source of income for you in retirement. While it isn’t as rich as the CSRS pension that preceded it, it’s still a very valuable retirement benefit when pensions are becoming increasingly rare. It provides benefits from three different sources: Social Security, the Thrift Savings Plan, and a Basic Benefit plan, which we will discuss in this article.  

Understanding how the FERS annuity works both now and in retirement is a key part of determining when you can retire and here are a few things you should know.

IN THIS ARTICLE: 

• The FERS Basic Benefit Plan is a pension plan funded by Federal Government and the employee.
• The amount of the annuity is determined by three factors: average high-3 salary, years of service, and the multiplying factor based on your age at the time of retirement. 
• The minimum retirement age for FERS depends on your birth year, and retiring at that age may reduce your pension, but there is a way to retire early and receive your full pension.

What is the FERS Basic Benefit Plan?

The FERS Basic Benefit Plan is a defined benefit plan, commonly known as a pension. The agency commits to providing a guaranteed pension payment based on a formula that factors in both the salary and length of service of an employee. FERS plans are funded by the agency and employees. Employee deductions are made directly from their salary and the percentage depends on the employee’s start date. The required amount of the employee contribution has climbed over time, from 0.8% of base pay in 1987 to 4.4% of base pay in recent years. 

Even with the higher required employee contribution, the plan is still far more attractive than retirement benefits one typically finds in the private sector. One reason for this is that the plan provides some protection against inflation during retirement through a cost of living adjustment, although the adjustment may not fully cover increased expenses in times of high inflation. Fortunately, assuming you’ve set aside savings in the Thrift Savings Plan, those savings can help cover the additional expense.

Related Article: Thrift Savings Plan (TSP)

FERS Retirement

FERS retirement and federal retirement are often synonymous. Although the basic benefit is typically referred to as an annuity, it is what has traditionally been called a pension, and pensions are rare enough these days, let alone pensions that offer a cost of living adjustment provided as part of a FERS retirement. As you put together your long term retirement plan, you’ll find inflation adjustments are key in allowing you to keep up with inevitable increases in expenses over the course of retirement. 

The basic annuity is the cornerstone of a successful FERS retirement, but as we’ve outlined above, there are several other benefits that come into play as well. The TSP is often at the top of the list when it comes to planning a Federal Retirement, followed by the federal employee healthcare benefits and the FERS supplement for those planning an early retirement (particularly special provisions employees). Make sure you understand all the relevant elements as you build your FERS retirement plan, and review your SF 50 to ensure the information used to calculate your benefit is correct. If you need assistance from a financial advisor well-versed in Federal retirement benefits, don’t hesitate to contact us to schedule an introductory call.

How to Calculate the FERS Annuity

The FERS benefit calculation is based on your salary, your creditable service and the age at which you retired. More specifically, the formula for FERS is:

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

While the formula is fairly simple, determining the individual inputs to the formula can be tricky. Here are some guidelines that might help.

Calculating your high-3

Your “high-3” average salary is the average of your three highest and consecutive earning years, which is typically your last three years of service. This only includes base pay and other salaries from which you contributed to FERS, not bonuses or overtime pay. To learn more about your “high 3” average salary, reference this deep-dive blog post about your FERS pension.

How to calculate creditable service?*

A good general rule of thumb is that if you worked in a position in which you contributed to FERS, that counts as creditable service. If you’re a long-time employee and worked prior to 1989, no deduction was taken for FERS, but you can elect to pay a deposit – typically 1.3% of your salary – to have that time counted as well towards your pension. Unused sick leave can also be used to increase creditable service. 

If you leave Federal service and withdraw your FERS deposits, you also have the option to redeposit those funds (plus interest) if you return to service and want those prior service years to be creditable for FERS. This page at OPM offers more detail on creditable service and the rules for less common situations. 

What is included in Average Pay?

Average pay includes your basic pay, plus any other salary from which you contribute to FERS. Salary in this case includes locality pay and shift rates, but it does not include overtime or bonuses (you can find a more comprehensive list of what counts toward your High-3 here. Most Federal employees contribute 0.8% of their salary towards FERS, although relatively recent changes increased the rate to 3.1% of salary for those hired in 2013, and the contributes increased again to 4.4% for those hired in 2014 or afterwards.

Note that the calculation is based on the highest average pay for any 3 consecutive years. For most, these years will occur at the end of their career, but this isn’t always the case. 

What Factor Do I Use?

Most Federal employees will use either 1% or 1.1% as their factor. The vast majority of Federal employees use 1% as their factor. If you are a Federal employee with over 20 years of service and are over 62 years old, you will use 1.1% as your factor. Another component to consider is that if you’re a Special Provisions Employee (such as an air traffic controller, firefighter, law enforcement officer, etc.), you will use a higher factor as your multiplier.

MRA Eligibility

If you were born…	Your MRA is…
Before 1948	55
In 1948	55 and 2 months
In 1949	55 and 4 months
In 1950	55 and 6 months
In 1951	55 and 8 months
In 1952	55 and 10 months
In 1953-64	56
In 1965	56 and 2 months
In 1966	56 and 4 months
In 1967	56 and 6 months
In 1968	56 and 8 months
In 1969	56 and 10 months
In 1970 or after	57

Source: OPM.gov

Even if you don’t have 30 years of service, you might be eligible to begin drawing your pension under the MRA + 10 provision. 

MRA + 10 allows you to retire if you have reached the minimum retirement age and have at least 10 years of service. However, your benefits will be reduced under this provision if you elect to draw your pension prior to age 62.

What is the Minimum Retirement Age for FERS? 

For most government employees, the two options with regards to drawing the FERS benefit are to take it immediately upon retirement or to retire and defer drawing the pension (we’ll cover early retirement and disability retirement in a future post). You’re eligible for the first option – immediate retirement – with no reduction in benefits if you meet the combination of age and years of service described above.

If you decide to retire under using the MRA (minimum retirement age) provision and you have between 10 and 30 years of service, you’ll see a reduction in your pension of 5% per year for each year you are under the age of 62. So, for example if you have 15 years of service and begin drawing your pension at age 59, your benefit will be reduced by 15%. Your minimum retirement age depends upon the year you were born, and varies between age 56 and 57. 

You can also elect to defer retirement benefits when you retire. You might decide to do that because you don’t meet the age and service requirements when you separate or because you don’t want to receive a reduced pension as outlined above. In other words, if we return to the example of the 59 year old above, by waiting until age 62 to begin the benefit, the retiree would receive her full pension. 

One additional factor that comes into play if you’re considering early retirement is the FERS annuity supplement. The supplement can come into play if 

– You choose to begin drawing your benefit immediately
– The benefit is not reduced – i.e. you meet the age and service requirements to avoid a reduction in benefit
– You are not yet eligible for Social Security

The benefit is meant to act as a bridge until you are eligible for Social Security, which in most instances is age 62. The benefit pays an amount equivalent to what you would earn from Social Security at age 62, at which point you could begin drawing those benefits to supplement your pension and any other income. 

When to begin drawing FERS is a question you should answer as part of your retirement planning process – and we find it’s helpful to think of that process as designing a retirement paycheck. One thing to note, though – if you do elect to defer your FERS benefit, you will receive no cost of living adjustments during the deferral period (but waiting will lead to a higher pension if you’re subject to the MRA scenario outlined above). 

Once you’re ready to begin drawing FERS, if you’re planning on an immediate retirement, you would fill out form SF-3107, while the form for deferred retirement is RI 92-19. Once you begin drawing our annuity, you will receive a FERS annuity COLA (cost of living adjustment) that is based on the Consumer Price Index (CPI), with a few exceptions. If CPI is between 2 and 3%, your COLA will be 2%, and if CPI is in excess of 3%, the adjustment to your annuity will be 1% below CPI. There are taxes on the FERS annuity at the Federal level, while state taxes vary from state-to-state.

Deferring your FERS annuity

You can also elect to defer retirement benefits when you retire. You might decide to do that because you don’t meet the age and service requirements when you separate or because you don’t want to receive a reduced pension as outlined above. In other words, you can retire at 59, but defer receiving your pension until age 62 and you would receive your full pension.

One important note to deferred payments, you will not receive the cost of living adjustments during the deferral period. 

Related article: What You Should Know About Postponed and Deferred Retirement Under FERS

One additional factor that comes into play if you’re considering early retirement is the FERS annuity supplement. The supplement can come into play if: 

• you choose to begin drawing your benefit immediately;
• the benefit is not reduced, i.e. you meet the age and service requirements to avoid a reduction in benefit;
• you are not yet eligible for Social Security.

The supplement is meant to act as a bridge until you are eligible for Social Security, which in most instances is age 62. The benefit pays an amount equivalent to what you would earn from Social Security at age 62, at which point you could begin drawing those benefits to supplement your pension and any other income.