Federal Retirement Pension Reductions

When planning your federal retirement – it’s important to remember that your pension will be reduced.

There are seven main pension reductions that affect federal employees in retirement. Most federal employees will be affected by at least three reductions.

Let’s take a closer look at the most common reductions to your federal pension…

Reduction #1) Survivor Annuity Cost

If you choose to leave a survivor annuity, your pension will be reduced for the cost of this annuity while you’re alive. The amount of this reduction depends on the survivor annuity you choose.

In most cases where people choose the ‘full’ survivor annuity – it will cost you 10% of your gross pension to pay for this benefit. (It could be much higher if your survivor is considered an ‘insurable interest’). Do remember that the ‘full’ survivor annuity means that your survivor will only get *half* of your pension when you pass away.

To learn more about your survivor annuity choices, as well as their costs and benefits – click on FERS Survivor Benefits or CSRS Survivor Benefits. 

Sometimes people want to decline doing a survivor annuity and do a ‘Pension Max’. The concept behind Pension Max is that you can (theoretically) replace the benefit of the survivor annuity from your federal pension at less cost on the private market. However – in my opinion – I think Pension Max is a *BAD* idea for 99% of people.

It is possible that Pension Max can work very well in certain cases. But the risks of Pension Max going wrong are so high – the cases where it works well are so rare – that you should only proceed with great caution. Most of the time – I think it’s just not a good idea for federal employees.

Reduction #2) Taxes

The lions share (90 – 98%) of your federal retirement pension will be taxable at ordinary income tax rates.

Most federal employees I meet pay an effective rate (not the marginal rate) of 15% – 20%. So I would encourage you to plan on federal income taxes of at least 20%. Of course, everyone’s tax situation is unique. I know that for most folks, 20% will be high – but I’d rather recommend you putting aside more for taxes than less.

And if your state has an income tax (Alaska does not) – be sure to factor that in as well.

Reduction #3) FEHB

Remember to account for the cost of your FEHB coverage in retirement. FEHB plans, options and costs will be different for every state. In Alaska, a good family plan is north of $410 / month.

Of all of your federal retirement benefits – I believe your biggest benefit as a federal employee is to keep FEHB in retirement. Be sure to factor the cost of your FEHB premiums into your federal retirement plans.

Reduction #4) Early Retirement Reduction Penalty

Depending on the type of federal retirement you take – you may be subject to a pension reduction for early retirements.

If you’re a FERS and take an MRA+10 Early FERS Retirement, there’s a 5% penalty for each year you’re under age 62.

So if you’re 56 when you retire on MRA+10 retirement, your FERS pension would be reduced by (62 – 56 = 6) 6 years x 5% = 30% PERMANENT Reduction.

Some FERS choose to do a Postponed FERS Retirement to avoid this hefty penalty.

CSRS who took an Early CSRS Retirement (only available if it’s offered to you) will have their federal retirement pension reduced by 2% for each year they’re under age 55.

If you’re retiring under regular immediate retirement (CSRS or FERS) – you don’t have to worry about this reduction.

But if you are going out on an early federal retirement, make sure you figure this reduction into your plans.

Reduction #5) Deposit or Redeposit Reduction

Deposits and redeposits can be tricky. For more information, check out the CSRS/FERS Handbook, Chapter 50 Section 50A3.1-3 Reductions in Annuity.

Reduction #6) FEGLI

This reduction will only affect you if you choose to keep FEGLI into your federal retirement. However – most folks do *NOT* continue FEGLI into retirement because it becomes very very expensive as you age.

In general, FEGLI can be less expensive than some private policies when you’re young and just starting out in federal service.

Somewhere around mid-career, FEGLI and private polices usually cost about the same.

But as you near retirement, FEGLI is significantly more expensive than private insurance.

See for yourself by looking at the cost tables for FEGLI Option B . You’ll see the cost of FEGLI Option B double from when you’re age 54 to 55. And more than doubles again between age 59 and 60.

However, if you are in poor health FEGLI might be cheaper than private insurance. Or you’re un-insurable on the private market (ex: cancer survivor) – FEGLI might be your only option.

If you do choose to continue FEGLI into retirement – remember to include the premium costs in your federal retirement plans.

Reduction #7) FLTICP

If you choose the Long Term Care (LTC) plan that OPM sponsors through John Hancock, you have the option to have your premiums come right out of your federal retirement pension.

You can also choose to pay your premiums directly. Either way, be sure to factor the premium costs into your planning.