katleho seisa / istock

How to Avoid Buyer’s Remorse

Federal retirees should understand the ins and outs of each retirement system, especially if they have been misclassified.

We’ve all experienced buyer’s remorse at one time or another. You buy something new only to discover there’s a better version of what you just purchased, or maybe you just have second thoughts about your choices. In some cases, you bought the wrong thing and find there’s no simple fix for a costly mistake. The same thing can happen in retirement planning.  

Maybe, you’ve felt buyer’s remorse after moving your TSP into a different fund right before a big increase in the account where you were previously invested. A less frequent but more significant issue occurs when a federal employee is placed incorrectly in the wrong retirement system. Fortunately, when this happens, employees generally have a period of time when they have the option to move into the correct system or they can decide to stay with the system to which they were incorrectly assigned. This option is available under the Federal Erroneous Retirement Coverage Corrections Act. If you are facing a decision under FERCCA, be sure to understand all the variables.  

Today’s column aims to show how the Civil Service Retirement System, the CSRS Offset, and the Federal Employees Retirement System were all designed to provide complete retirement and disability benefits for federal workers, but in very different ways. 

First, it’s important to understand the differences between the three systems: 

  • The CSRS was established 15 years before Congress created the Social Security system. Federal employees under CSRS were excluded from participating in Social Security until 1987, when the FERS was created and the Thrift Savings Plan was established. CSRS was designed as a single benefit system that didn’t require employee involvement other than to work for the government for a full career.
  • The CSRS Offset is similar to CSRS, however this system accommodates federal employees covered by the Social Security amendments of 1983. Most employees covered under CSRS Offset receive their retirement through a combination of a reduced (offset) CSRS benefit, plus Social Security.  
  • FERS is a three-part retirement system that provides benefits to the vast majority of federal employees today. It includes a government pension (smaller than the pension under CSRS), Social Security and money an employee has saved through the Thrift Savings Plan, government’s 401(k)-style retirement plan. FERS requires employees to decide how much and where to invest in the TSP, and employees are responsible for continuing to manage these funds after they retire.  

In addition to the government pension, federal retirees may also qualify for Social Security retirement no matter which federal retirement system they were covered by during their federal career. All federal employees may participate in the TSP. Despite all three components being present in the retirement of most CSRS, FERS, or CSRS Offset retirees, the value of these three components can vary tremendously in retirement.   

Before I offer a general example comparing CSRS to FERS to CSRS Offset, remember that every individual’s situation will be different. The factors that will affect your retirement income include, but are not limited to: 

  • Age at federal retirement 
  • Age at claiming Social Security
  • Basic pay rates in effect throughout your career (this impacts all three of the benefits) 
  • Marital status and spousal benefits
  • How much you’ve saved in the TSP
  • Your investment choices in the TSP  
  • The choice of distribution options from the TSP 
  • There are also different formulas for those federal employees covered under special provisions of CSRS and FERS such as for law enforcement officers, firefighters and air traffic controllers.  

In light of these variables and others, let’s consider an employee who had 30 years of federal service at retirement and a high-three average salary of $80,000. For the CSRS Offset scenario, the 30 years included 15 years under CSRS before leaving federal employment and later returning to work another 15 years under CSRS Offset.  It is also important to remember that a CSRS employee had to be hired before 1984 in order to be covered under CSRS, so for simplicity, we are going to ignore the fact that a CSRS employee today would have at least 38 years of federal service if they never had a break in their career. We’ll also assume a typical career progression starting out at an entry level salary and progressing to higher pay later in the career. Despite these assumptions, this comparison shows that CSRS, FERS and CSRS Offset provide similar retirement income when all components are considered, but in different ways.

Government Pension

FERS Scenario: Under FERS, the government pension is computed as 1% x high-three average salary x length of service. If the employee retires at age 62 with 20 or more years of service, then the computation factor is 1.1% instead of 1%. In this example, that would provide a government pension of: 

1% (or 1.1%) X $80,000 X 30 = $24,000 (or $26,400)

CSRS Scenario: The CSRS pension benefit can be computed by using this shortcut to the general formula: length of service minus two and then that answer times two and add .25 and a percent sign:

(30 - 2) x 2 + .25 = 56.25% x $80,000 = $45,000

CSRS Offset Scenario: The CSRS Offset formula is identical to CSRS, but when the retiree is eligible for Social Security the CSRS benefit is subject to an offset (reduction).  The $45,000 retirement benefit would be reduced by approximately 15/40 of the Social Security benefit. The number 15 represents the years covered under CSRS Offset and 40 is a constant that represents a career from age 22 to age 62. If the employee is not entitled to Social Security at age 62 because, perhaps they retire younger than age 62, there is no offset until or unless he or she later becomes entitled to Social Security.  Depending on how many years of substantial Social Security covered work this employee had during their lifetime, their Social Security benefit may be reduced by the Windfall Elimination Provision of Social Security.  The end result might look something like this:

(30 - 2) x 2 + .25 = 56.25% x $80,000 = $45,000

Then, offset by 15/40 x $11,400 (Social Security benefit)

$45,000 - $4,275 = $40,725

Social Security

FERS Scenario: The Social Security retirement for this employee will be based on those 30 years of federal employment wages plus any other employment that was subject to FICA tax withholding over their lifetime. For this example, at the time of retirement, let’s assume that the annual Social Security benefit is $18,000.  

CSRS Scenario: The 30 years of federal service was exempt from FICA tax withholding. This may result in the CSRS retiree not qualifying for Social Security since you must earn 40 credits in order to qualify for a Social Security retirement benefit. Credits are based on your total annual wages; it takes 10 years of work (or more if fewer than 4 credits were earned in a year) to earn 40 credits. The average of your earnings over your working years, not the total number of credits you earn, determines how much your monthly payment will be when you receive benefits. CSRS retirees also have to consider that their earned Social Security benefit may be reduced due to the modified formula used under the Windfall Elimination Provision and the impact that the Government Pension Offset will have on the spousal or widow’s benefit entitlement.  

For this example, let’s assume that the individual had earned 40 credits of coverage from work they did outside of their government career, however due to the Windfall Elimination Provision and the short amount of time paying into Social Security, the annual benefit they are entitled to is $3,600.

CSRS Offset Scenario: Like FERS, the CSRS Offset retiree will have a more substantial Social Security benefit entitlement. Many CSRS Offset retirees become fully or partially exempt from both the Windfall Elimination Provision and the Government Pension Offset from their continued coverage of the FICA tax on their federal wages. The Social Security benefit for this retiree is based on the earnings during the 15 years of CSRS Offset service and additional years of other Social Security covered employment for an annual benefit of $11,400.

Thrift Savings Plan

FERS Scenario: FERS employees typically are more focused on managing the TSP as an integral part of future retirement. FERS employees receive 1% of basic pay each pay period automatically from the agency whether they contribute to the TSP or not. In addition, agencies match contributions dollar for dollar up to 3% and then 50 cents on the dollar up to 4% of basic pay. For this example, we’ll assume the employee had 30 years of contributing a minimum of 5% of basic pay to the TSP, as well as diversifying the investment more aggressively in the early years and more balanced in the later years, for a balance of $550,000.

CSRS Scenario: CSRS employees have been permitted to contribute to the TSP since its inception. CSRS employees receive no agency automatic or matching contributions.  For this example, let’s assume that the employee was hired in 1983 (4 years before the TSP started) and retired in 2013. Let’s also assume that they saved in the TSP when available at a rate of 5% of basic pay and their TSP balance is $300,000 at retirement.

CSRS Offset Scenario: Let’s assume that the employee had a TSP balance around the same $300,000 as the “pure” CSRS employee at retirement.  

How the Systems Compare

So, how would this employee with 30 years of federal service and a high-three salary of $80,000 come out under each scenario? Here are the results:

CSRS:  

  • $45,000 CSRS retirement; 
  • $3,600 / year Social Security
    • Total annual lifetime stream of income: $48,600 plus:
  • $300,000 in TSP at retirement

CSRS Offset:  

  • $40,725 CSRS Offset retirement
  • $11,400 Social Security retirement
    • Total annual lifetime stream of income: $52,125 plus:
  • $300,000 TSP account balance 

FERS:  

  • $24,000 (or $26,400 if age 62 or older) FERS retirement
  • $18,000 Social Security benefit 
    • Total annual lifetime stream of income: $42,000 plus:
  • $550,000 TSP balance 

The FERS employee’s higher balance in the TSP should make up most of the difference compared with lifetime pension and Social Security benefits of the CSRS and CSRS Offset scenarios. As you can see, the three systems are comparable, but it’s important to understand the many variables that will affect an individual’s total federal retirement benefit.

X
This website uses cookies to enhance user experience and to analyze performance and traffic on our website. We also share information about your use of our site with our social media, advertising and analytics partners. Learn More / Do Not Sell My Personal Information
Accept Cookies
X
Cookie Preferences Cookie List

Do Not Sell My Personal Information

When you visit our website, we store cookies on your browser to collect information. The information collected might relate to you, your preferences or your device, and is mostly used to make the site work as you expect it to and to provide a more personalized web experience. However, you can choose not to allow certain types of cookies, which may impact your experience of the site and the services we are able to offer. Click on the different category headings to find out more and change our default settings according to your preference. You cannot opt-out of our First Party Strictly Necessary Cookies as they are deployed in order to ensure the proper functioning of our website (such as prompting the cookie banner and remembering your settings, to log into your account, to redirect you when you log out, etc.). For more information about the First and Third Party Cookies used please follow this link.

Allow All Cookies

Manage Consent Preferences

Strictly Necessary Cookies - Always Active

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data, Targeting & Social Media Cookies

Under the California Consumer Privacy Act, you have the right to opt-out of the sale of your personal information to third parties. These cookies collect information for analytics and to personalize your experience with targeted ads. You may exercise your right to opt out of the sale of personal information by using this toggle switch. If you opt out we will not be able to offer you personalised ads and will not hand over your personal information to any third parties. Additionally, you may contact our legal department for further clarification about your rights as a California consumer by using this Exercise My Rights link

If you have enabled privacy controls on your browser (such as a plugin), we have to take that as a valid request to opt-out. Therefore we would not be able to track your activity through the web. This may affect our ability to personalize ads according to your preferences.

Targeting cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.

Social media cookies are set by a range of social media services that we have added to the site to enable you to share our content with your friends and networks. They are capable of tracking your browser across other sites and building up a profile of your interests. This may impact the content and messages you see on other websites you visit. If you do not allow these cookies you may not be able to use or see these sharing tools.

If you want to opt out of all of our lead reports and lists, please submit a privacy request at our Do Not Sell page.

Save Settings
Cookie Preferences Cookie List

Cookie List

A cookie is a small piece of data (text file) that a website – when visited by a user – asks your browser to store on your device in order to remember information about you, such as your language preference or login information. Those cookies are set by us and called first-party cookies. We also use third-party cookies – which are cookies from a domain different than the domain of the website you are visiting – for our advertising and marketing efforts. More specifically, we use cookies and other tracking technologies for the following purposes:

Strictly Necessary Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Functional Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Performance Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Social Media Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Targeting Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.