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Basics of your FERS Federal Retirement 

What does income look like in retirement for a FERS Federal Employee? While retirement looks different for everybody, below is a breakdown of the three-pronged approach the Federal Government has taken to provide retirement for its employees:

  1. FERS Retirement Pension
  2. Thrift Savings Plan (TSP)
  3. Social Security

We will briefly explore how these FERS retirement benefits work individually, how they can complement each other, and the sobering role taxes and other deductions play in determining what you actually receive in your bank account in retirement.

FERS Federal Retirement Benefits – Pension, TSP, Social Security

1: FERS Retirement Pension (OPM officially calls this “FERS Basic Annuity”, but not to be confused with an actual annuity option through your TSP)

  • This is a stable source of income in retirement whose amount is based on years of service and average salary. It is a fixed income in retirement that enjoys small increases over time as the cost of living increases (inflation).
  • Deciding whether to cut loose or stick it out a few more years can result in a big difference in your lifetime pension income. Generally, the longer you work for the government, the higher your pension will be. Additionally, your pension amount may increase if you retire after reaching certain service milestones. Retire/quit federal service too early (Minimum Retirement Age not met with credible service years), and it may be reduced.

2: Thrift Savings Plan (TSP)

  • The TSP is a vital part of your retirement income, serving as an optional way to save a portion of your paycheck into a long-term investment account. The retirement income drawn from here will vary depending on how much is saved and how well the account is managed – similar to a 401(k).
  • Voluntary contributions to TSP are tax-advantaged, and the government may match a portion of your contributions (most receive an automatic 1% Gov’t contribution). These matching contributions are incredibly important to take advantage of (free money!). Both traditional and Roth options are offered.
  • To minimize penalties and maximize tax advantages, a disciplined withdrawal strategy is crucial to ensure the savings last as long as possible.

3: Social Security:

  • Social Security benefits are based on your earnings history and the age at which you claim them.
  • Having a Social Security claiming strategy is essential – this is something you want to be very intentional about. You can start as early as age 62, but waiting until your full retirement age (typically 66 to 67) can result in higher monthly payments.
  • Understanding the implications of when you claim Social Security is crucial for optimizing your overall retirement income. In analyzing, you must always consider spousal benefits if applicable.

How they work together

Your FERS Federal retirement income puzzle is incomplete without understanding how these sources can work together. Remember that while your FERS Pension and Social Security provide a fixed income, your TSP is likely a means to bridge any income gaps. Framing this retirement income puzzle is increasingly important because access to each of these sources can begin at different times, and there may be years where you only take one source before firing on “all cylinders”. Which ones to start when? While your FERS pension is often the first, this will largely be different for everyone as a strategy comes after defining your individual needs and goals.

For example, in one retirement scenario, a FERS retiree who takes their pension upon retirement may maximize their Social Security benefits by waiting until full retirement age or even delaying until age 70. In the interim, they could withdraw from their TSP to meet their additional income needs until they decide to claim Social Security, which results in higher monthly Social Security payments for life. However, this means spending down your TSP savings, potentially reducing the amount available later in life should you need it. Careful planning for when and how much you withdraw from TSP can help manage retirement taxes as well as potentially increase the longevity of the savings.

The FERS “supplement”, another income benefit, may be available to some who retire before age 62. It serves to fill an income gap until age 62 when you first become eligible to draw from Social Security. However, retirees are phased out of this benefit as their income increases.

There is certainly a careful balance in strategizing which benefits to claim, the right timing to do so, and what you may have to give up to get it. For example, while you could live off extra TSP withdrawals while delaying Social Security, you run the risk of depleting assets too quickly, or worse, doing so during a period of low or negative stock market returns. Or, you may never qualify for the extra FERS income supplement with early retirement because your other income is too high.

We find that helping our Federal employees with an individualized strategy greatly increases their odds for retirement success by taking advantage of the best benefits available and avoiding pitfalls.

The impact of taxes and other deductions – the Gov’t giveth, and they taketh

Taxes and other deductions will significantly affect the amount you receive in your bank account during retirement. FERS Pension and Social Security estimates are provided to you in gross numbers. To get a better idea of this, look at your LES (Leave and Earnings Statement) and note the deductions taken from each pay period and the net pay. You’ll get the picture…

Your FERS Pension specifically, will likely be reduced by one or more of the following:

  • Tax withholding – Federal (& State if applicable)
  • FEHB (health insurance premiums, if eligible to take into retirement)
  • Survivor benefits (pension continues to surviving spouse, typically lowers benefit by 10%)
  • FEGLI premiums (if you choose to maintain, most don’t)
  • Early retirement deduction (depends on retirement type, but can amount to a lot)

Don’t be fooled into thinking you’re getting more in your pocket than you actually are. We always walk clients through what their potential “take-home” pension and social security will be.

Taxes, for one, can take a significant bite out of your retirement income, as it dips its greedy fingers into all three pots of FERS retirement income. Federal employees need to consider these implications:

  • Pension: Your pension income is subject to federal income tax, and some states also tax it. Your paid-in contributions are nontaxable, but this typically makes up only a tiny amount of the total.
  • Social Security: Depending on your income level, up to 85% of your Social Security benefits may be subject to federal and state taxation, depending on the state.
  • TSP: Traditional/Pre-tax withdrawals from your TSP are subject to federal income tax, and some states also tax it. The timing of these withdrawals can affect your overall tax liability. Consider strategies like Roth conversions and systematic withdrawals to manage taxes. This is where you have the most flexibility to manage your retirement taxes. It’s easy to stumble into common IRS pitfalls without knowing, so be sure to get qualified help who understands your tax implications.

Did we answer your FERS Federal retirement questions?

As financial advisors in Utah, we help our clients with tax planning, financial planning, and saving for retirement.

If you’d like to talk about how to put the FERS Federal retirement benefits or any other financial planning related matters to best use, please set up a time below.

Rhett Sorensen CFP® is a financial advisor focused on Federal employees and defense contractors.


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