FERS has three sources of retirement income: a basic benefit, a retirement savings plan (the Thrift Savings Plan) and Social Security (or the FERS supplement if you're below Social Security retirement age).
Because FERS is a three-level system, unlike the single-benefit style of CSRS, weighing retirement issues is somewhat more complicated. So in the hypothetical example below, we'll need to make some assumptions about events and decisions.
Suppose John will have 30 years of service this year, including six years of military service (for which he has paid a deposit) and 24 years under FERS. He's 59, so he's past the FERS minimum retirement age. If he retires with 30 years of service, his FERS basic retirement will provide 30 percent of his high-three average salary. He's been at the GS 13-10 level for the past three years. His current salary is $113,007. His retirement will be computed as:
30% x $108,027 (high-three average) = $32,408
John will choose to provide maximum survivor benefits for his wife, which will reduce his retirement benefit by $3,240 per year. He also will pay income taxes on his reduced retirement, with a small credit for his previously taxed retirement contributions.
After survivor election and income taxes, John's net annual retirement will be about $20,800. He also will be entitled to a FERS retirement supplement of about $12,000 a year, but it will be tested against outside earnings. If John goes to work after his federal retirement, any income over $14,160 will reduce his supplement by $1 for ever $2 earned. John also will not receive any cost-of-living adjustments on his FERS benefit or his supplement until he's 62.
Now let's take a look at John's current situation, before retirement. Here's a list of salary deductions that will not be taken out of his retirement check:
- Retirement: $904
- FICA tax: $6,621
- Medicare tax: $1,638.60
- TSP contributions: $22,000
- Income tax (After TSP and health insurance premiums are deducted from his taxable salary): $21,851
- Total salary deductions: $53,014
- Net income: $113,007 - $53,014 = $59,993
John would need about $1 million saved in the TSP to purchase an annuity providing this much income. (The current interest rate index is only 3.125 percent for computing a TSP annuity.) Let's assume John was invested in the TSP's L2020 Life -Cycle Fund last year. If that's the case, he would have lost 22 percent of his account balance. For John, retiring now may not be the best choice.
Other Options So what can he do to make his retirement more affordable? Here are some options:
- Work longer to increase the percentage of his high-three average salary. Every year of additional service will increase the percentage by 1 percent, and the high-three average also will increase.
- Wait to retire at 62. Then his FERS benefit will be computed at 1.1 percent for every year of service, instead of 1 percent, a 10 percent increase. That would be enough to cover the cost of survivor benefits for his wife.
- Stay in the military reserves. Then he could qualify for reserve retirement at 60 in addition to getting his FERS basic benefit. This would not interfere with him using his six years of active duty toward FERS retirement as long as he paid the military service credit deposit.
- Reduce living expenses by paying off his mortgage, or using retirement savings to make mortgage payments. Since John has been saving the maximum in his TSP account, this account could be used to pay his monthly housing costs.
- Consider relocating to a less expensive area.
- Retire from government and continue working in a second career.
Regardless of your current salary, if you're thinking about retiring, you need to compare how much it takes to meet your current living expenses with your retirement benefit. To do so, you may have to request a retirement estimate from your human resources office.
And remember, a year can make a big difference. Suppose the stock market actually is starting to recover. During the next year (or maybe a couple of years) John's retirement options could look much better than they do right now.
Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.
For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.