Federal Employees Retirement System FERS Pension

Chances are as time goes on, less and less people will have a pension or defined retirement plan. Some estimates are that less than 15% of people will have any kind of pension in the future. These were popular at one time, mainly during the post WWII boom period in the US. This is the old, put your 30 years in day in and day out. Then one day you get a gold watch, a little party and a pension for life.

Bygone Era

For the most part this represents a bygone era. But there are some exceptions, for example many firefighters, police, healthcare and federal employees still have a pension. But, the trick is in calculating that pension based on various scenarios.

There are over 2 million civilian federal employees in the nation. These are the people that do food inspection, medical research, run the department of justice, fight crime, manage public lands, help craft laws, analyze intelligence data, protect and manage the homeland, etc. etc.

In other words these people help keep order and keep the US economy humming. They also for the most part carry out all the things Congress and the President want done in the country.

They are also lucky enough to have a modest pension after reaching certain career milestones. In this article we look at some of the basics of what is known as the Federal Employee Retirement System FERS pension.

For most Americans over the years, these pensions have been dismantled at every turn, in favor of the 401k plans that many are depending on to fund 30-40 years of retirement. The problem is that most people do not or cannot save enough in these plans. They lack the discipline, foresight or life happens!

Like anything in life, working a federal career has many pluses and minuses, depending on the way you look at things. You may not make as much on an annual basis compared to your private sector friends or earn high valued stock options, but there are advantages. For example, it is hard to beat the federal government’s “401k” known as the Thrift Savings Plan (TSP). This plan boasts low expenses, exposure to various asset classes, a federal match up to 5-6% and some convenient in progress borrowing options.

In addition, federal jobs still offer a pension at the end of a long career. Here is how you can calculate your pension upon retirement. We analyzed dozens of documents and over-complicated FERS retirement calculators to bring you a simplified approach to approximating your pension payout.

THE FERS RETIREMENT PENSION

FERS stands for Federal Employees Retirement System. It covers most civilian Federal government employees, and provides a pension annuity after you retire from your job. This pension is called the FERS Basic Benefit.

For most federal employees, this pension will not be close at all to supporting a person completely. It is part of what is sometimes referred to as the “3 legged stool” of retirement support. One leg is the pension, followed by Social Security and the Thrift Savings Plan (kind of like a 401(k) for government employees).

While the latter 2 components contribute to your overall retirement, the goal of this article is to help you understand and calculate the FERS Basic Benefit (your pension).

One of the main benefits of working for the government is that they still offer a pension AND contribute to a defined-contribution plan like the Thrift Savings Plan. If one could start their career all over again, they should seriously consider looking for a federal government job. While the pay may not quite match up with the private sector, the benefits are unparalleled.

FERS BASIC BENEFIT CALCULATION

The FERS basic annuity formula is actually pretty simple, and is based on your salary and years of service.

FERS Basic Annuity = High-3 Salary x Years of Service x 1%

And if you retire at age 62 or older with 20+ years of service, you get a slight bonus (1.1% multiplier vs. 1%):

FERS Basic Annuity = High-3 Salary x Years of Service x 1.1%

How to Calculate Your High-3 Salary

The High-3 Salary is the government’s term for the average of your highest 3 years of base pay. It is usually your last 3 years of employment, but could be any consecutive 3 year time period when you had the highest pay.

Illustrative Examples

I like concrete examples, so let’s say Amanda is planning to retire at the age of 60 after 20 years of service. During her last 3 years of employment she made $98,000, $100,000, and $102,000 for an average of $100,000. Since she retired before age 62, we will use the first formula. Here is how we would calculate her FERS basic annuity:

$100,000 Average High Salary x 20 Years of Service x 1% = $20,000/year

So she would be eligible for a $20,000 annual annuity at retirement. Again, not really enough to depend on alone, but if she combines this with $24k from social security and another $20k pulled annually from investment accounts, she has $64k in annual income. Not bad!

Complications

The basic formula seems pretty easy, but there are a lot of exceptions or modification depending on retirement age, years of service, and when you leave your job. This is the government we are talking about, so it needs to be complicated and full of rules. If you want the full excruciating detail, you will need to visit the website of the Office of Personelle Management.

So let’s talk about the modifications to the basic benefit calculator. First up is eligibility – are you even able to take a pension?

ELIGIBILITY FOR FERS

A lot of people mistakenly assume that you have to work as a federal government employee for 20 or 30 years before you are eligible for retirement benefits, but this is not true. It helps the longer you work for the United States, but you can still draw a small pension with lesser time.

When you are eligible, and the amount of benefit you are eligible for is a little bit of a tricky calculation, but here are the major components.

Minimum Retirement Age (MRA)

The minimum retirement age (MRA) is the age at which you can retire with benefits. Without going into too much detail, your MRA is probably 57 (57 if you were born after 1969). But wait, there’s more!

Depending on your years of service, you may be eligible for immediate retirement or deferred retirement. And years of service also determines whether you receive the full benefit, a reduced benefit, or even no benefit.

If you have less than 5 years of service, too bad so sad, you don’t get any benefit. That’s the easy case. So, if you do snag a federal job, try and do at least 5 years, it could pay off in the future.

Immediate Retirement

If you meet one of the following conditions, you can apply for an immediate retirement benefit (that starts within 30 days from the date you stop working).

Age 62 and at least 5 years of service

Age 60 and at least 20 years of service

MRA (age 55-57 from above) and at least 30 years of service

MRA and at least 10 years of service

FERS Reduced Benefit Calculation:

If you retire under the last provision at your minimum retirement age, and have more than 10 but less than 30 years of service, then your retirement benefit is reducedby 5% for each year you are under the age of 62.

In a mathematical formula, your pension benefit would be calculated as:

Reduced FERS Basic Benefit = FERS Basic Benefit – FERS Basic Benefit * (62 – Current Age) * 5%

So, for example, if you were 57 and met the MRA requirement, but only had 15 years of service, your benefit would be reduced by (62 – 57) * 5% = 25%.

These reductions can get pretty crazy, therefore best if possible to shoot for the 4 immediate retirement scenarios above! If you are part of the FIRE movement, you may want to make your FIRE age 57. Which on many levels is still considered an early retirement from regular work. Many folks work well into their late 60’s if possible.

Deferred Retirement

If you leave federal government employment before retirement age, but have at least 5 years of service, you are eligible for deferred retirement. Your payout would not begin until you reached your eligible retirement age (either MRA or age 60+).

The same rules apply here as for the immediate retirement option, you just get to pick when that starts at some point in the future. So if you only had 5 years of service but chose to start taking retirement benefits at your MRA of 57, you would received a reduced benefit as described above. If you had 20 years of service and started taking retirement at age 60, you would get the full benefit.

OTHER FERS RETIREMENT CALCULATION CONSIDERATIONS

Cost of Living Adjustment

In addition to your initial pension payment, every year it will be adjusted for cost of living. The cost of living adjustment (COLA) is based on the Consumer Price Index, and should generally fall in the 1-3% range. The purpose is to adjust your pension to keep up with the rising costs of housing, groceries, transportation, etc. so that you can continue to live comfortably in retirement.

Social Security Benefit

In most cases, if you participate in the FERS system during your employment you are also eligible to collect social security. The old government pension system that people used to rave about did not allow a participant to collect SS. But, they instead received 70-85% of their high salary for life, wow!

But today, in addition to your pension you will also receive a social security annuity benefit starting as early as age 62. To calculate your social security benefit, I recommend using the calculator on the Social Security Administration website.

FERS RETIREMENT CALCULATOR IN SIMPLE STEPS

Ok, if that was all a little bit of information overload, here are the simple steps to calculate your FERS retirement pension. Here is the information you will need:

1. Your High-3 Salary (average of highest 3 consecutive years of base compensation)
2. Years of Service
3. Age when you will retire (immediate retirement) or age when you will start taking retirement benefits (deferred retirement)

And that’s it! Here are the steps to make sure you are eligible and calculate your benefit:

Do you have at least 5 years of service?

Great! Move on to the next step. If not, you are not eligible for any benefits

2. Are you retiring at age 62 or older with 20+ years of service?

If yes, you get the easiest calculation. Your benefit is:

High-3 Salary x Years of Service x 1.1%

If no, then continue to the next step.

 

3. Are you retiring at age 62 or older with 5 – 19 years of service?

If yes, your benefit would be:

High-3 Salary x Years of Service x 1.0%

If no, then continue to the next step.

 

4. Are you retiring at age 60 or older with 20+ years of service?

If yes, your benefit would be the same as above:

High-3 Salary x Years of Service x 1.0%

If no, then continue to the next step.

 

5. Are you retiring at the Minimum Retirement Age or older with 30+ years of service?

Remember, the minimum retirement age is between 55 and 57 depending when you were born.

If yes, your benefit would be:

High-3 Salary x Years of Service x 1.0%

If no, then continue to the next step.

 

6. Are you retiring at the Minimum Retirement Age or older with 10 – 29 years of service?

If yes, then you would be eligible for a reduced benefit. The reduction calculation is:

Reduction Factor = (62 – Retirement Age) x 5%

And your benefit would then be calculated as:

(High-3 Salary x Years of Service x 1.0%) x (1Reduction Factor)

If no, then you would not qualify for an immediate retirement. You could take a deferred retirement by waiting until a later age to begin taking retirement benefits. Pick an age when you would like to start taking retirement benefits and go through the questions again.

FERS RETIREMENT CALCULATOR EXAMPLES

Let’s run through a few examples of using the steps above to calculate your retirement benefits.

Example 1 – Tom wants to retire, life long fed example

Let’s say Tom has been a federal employee his entire career. He’s ready to call it quits and sip espresso on the Amalfi Coast. He was hired at age 25 and he wants to retire at his minimum retirement age. He was born in 1960, so according to the FERS eligibility requirements, his MRA is 56. He made an average of $75,000 over the last 3 years of employment. So his variables are:

1. High-3 Salary average: $75,000

2. Years of Service: 56 – 25 = 31

3. Retirement Age: 56

Stepping through the questions, he would answer Yes to #1 (at least 5 years of service), then make it down to #5. Retiring at the MRA with at least 30 years of service means his pension benefit calculation would be:

High-3 Salary x Years of Service x 1.0% = $75,000 x 31x 1.0% = $23,250 per year or $1,937.50 per month

Example 2 – Ted wants to retire early after a short government career

Ted was a high-flying executive in his early career and decided to use his management skills in a less-demanding job with the government after his kids were out of school. He started working for the federal government at age 54 and knows he needs to work at least 5 years to earn a pension so that’s what he does, planning to retire slightly above his MRA at age 59. He made an average of $150,000 his last 3 years (management has its perks). His variables are:

1. High-3 Salary average: $150,000
2. Years of Service: 59 – 54 = 5
3. Retirement Age: 59

Looking at the FERS Retirement Calculator steps, he would answer Yes to #1 (barely), and No to everything until #6. So he is eligible for a reduced pension.

First we would calculate the reduction factor:

Reduction Factor = (62 – Retirement Age) x 5% = (62 59) x 5% = 15%

Next we would calculate her pension payout:

(High-3 Salary x Years of Service x 1.0%) x (1 Reduction Factor) = $150,000 x 5 x 1.0% x (1 0.15) =$6,375 per year or $531.25 per month

Not too bad for only working 5 years!

THE SIMPLE MATH OF FERS RETIREMENT

I hope this has been helpful in showing that the basic math behind the FERS retirement calculation is not that hard. But there are a lot of factors to take into account. You must do your own research. As we say here a lot, only you will be your best advocate for retirement planning and wealth building.

If you read through this whole article and are NOT a federal employee, then you are probably seeing some of the major benefits of government employment – the pension system. This and the opportunity to serve our great country are reasons to consider federal employment. For anyone looking to secure their retirement, I think working for the government for some portion of your career could be a good fit if you have the right skills.

 

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