Answering listener questions about Medicare Advantage and retirement. Listen to the Full Episode: Enjoy the show? Use the Links Below to Subscribe:Read More
As a Federal Employee, your retirement consists of three components: your Basic Benefit (also called your annuity or your pension), social security, and the Thrift Savings Plan.
The FERS Basic Benefit plan is a defined benefit plan for Federal Employees that allows you and your agency to contribute part of your pay today into a plan that will pay you a monthly pension when you retire, providing of course you meet the requirements under the plan’s rules for participation.
If you are a Federal Employee who started service on or after, January 1st, 1987. Just like the Social Security retirement benefits that most of us receive or will receive, the Basic Benefit Plan is a guaranteed income stream for the federal employee retiree. The amount a federal employee will receive from their Basic Benefit Plan is determined based on length of creditable service, salary, and age
Part of the Basic Benefit Plan is funded employee, and the other part is funded agency.The start date of the federal employee determines how much of their salary that the employee contributes, or deducts, to the Basic Benefit Plan. If you were hired between 01/01/1987 and 12/31/2012, you would be deducting a total of 7% of your base pay – 0.8% going to the FERS Basic Benefit Plan and 6.2% going to Social Security. If you were hired between 01/01/2013 and 12/31/2013, you would be deducting a total of 9.3% of your base pay – 3.1% going to the Basic Benefit Plan and 6.2% going to Social Security. If you were hired on or after 01/01/2014, you would be deducting a total of 10.6% of your base pay – 4.4% going to the Basic Benefit Plan and 6.2% going to Social Security. As modern medicine continues to improve and people live longer, the rate was adjusted by Congress.
(01/01/1987 - 12/31/2012)
|7% of Base Pay is deducted:
(01/01/2013 - 12/31/2013)
|9.3% of Base Pay is deducted:
(01/01/2014 - Current)
|10.6% of Base Pay is deducted:
The start date only determines how much the employee is paying for their benefit, NOT how much they will receive when they retire.
What are synonyms for the Basic Benefit Plan?We like calling it a pension because a pension is something that you only get from an employer. You work for a specified period of time, and the employer promises to pay you a certain amount of money for the rest of your life. That’s exactly what the FERS Basic Benefit Plan guarantees, which is why we refer to it as a pension. An annuity on the other hand, doesn’t automatically imply that it comes from an employer. There are plenty of insurance companies out there that would gladly sell you their annuities, yet you don’t have to work for the insurance company to get them. We’re not saying that annuities from private insurance companies are bad either, but we just want to use language that most people are familiar with whenever we are helping federal employees understand more about their FERS benefits.
The FERS Basic Benefit Plan, AKA the FERS pension, is calculated by taking the length of creditable service, and multiplying it by a percentage (usually 1%), and again multiplying it by the “high-3” average pay. The length of creditable service is the sum of the years, months, and days of civilian service, military service, and unused sick leave, and rounded down to the nearest month. The example below shows a scenario where an individual worked as a civilian and in the military, and also had unused sick leave. After adding up the years, months, and days of creditable service, this individual had 32 years, 9 months, and 27 days of service. As a result, the individual will have to round down to 32 years and 9 months of creditable service for computing their pension.
The percentage used in the calculation is typically 1% of creditable service. The main exception to this rule is if a federal employee retires after reaching age 62 with at least 20 years of creditable service, and in this case the percentage increases to 1.1%. This results in a 10% increase in a federal employee’s FERS pension if they satisfy this rule; not a bad deal!
Other exceptions exist for Air Traffic Controllers, Firefighters, Law Enforcement Officers, Capitol Police, Supreme Court Police, Nuclear Materials Couriers, Members of Congress or Congressional Employee (or any combination of the two), and if you’ve transferred into the FERS. All of these exceptions can be found on OPM’s website:
The last part of the pension calculation is the “high-3” average pay. This refers to the average of the federal employee’s highest consecutive 36 months of basic pay they receive before they retire. This could be their last 3 years of working, but it doesn’t have to be. Basic pay does NOT include bonuses, overtime pay, military pay, cash awards, holiday pay, or travel pay.
Let’s run through a couple of quick examples. Remember, the benefit formula for calculating the FERS pension is:
Length of Creditable Service × Percentage (1% or 1.1%) × High-3 average pay
Suppose that Bob retires at age 59 with 32 years and 9 months of creditable service. His high-3 average pay is $47,654.94. Since he isn’t yet age 62, his percentage of multiplier is 1%. Below shows his pension income would be $1300 every month before any taxes or deductions for survivor benefits or health insurance.
Suppose that Sue retires with the same amount of service credit years as Bob and has the exact same High-3 salary of $47,654.94. Instead, Sue retires when she is 63. The math works out that her pension increases 10% because she satisfied the rule of retiring at age 62 or older with 20 years of creditable service, so her percentage multiplier increases from 1% to 1.1%. Her pension income increases to $1430 every month before taxes and other deductions.
In order to be vested in the FERS Basic Benefit plan, you need to have at least 5 years of creditable service.
If you retire with at least 5 years of service but are younger than the Minimum Retirement Age (MRA), you will need to either defer your pension or postpone it – which are not the same thing. We cover the difference between the two in another article.
When our clients who have at least 5 years of creditable service decide they no longer want to work for the federal government, we recommend that they keep their FERS Basic Benefit contribution inside of the FERS. That way, should they ever decide to return to work as a federal employee, they are grandfathered in to the current vesting schedule.
More recently, we have seen a specific agency not allow our clients to keep their contribution inside of FERS, and instead wrote them a check for their portion of their contribution plus a nominal interest rate.
What is a Disability Retirement under FERS? Unlike the Immediate, Deferred, or Postponed Retirements, the Disability Retirement is a unique type of retirement only offered to federal employees who become
As a Federal Employee, your High-3 average salary refers to the average of the highest three consecutive years of base pay earned. This is calculated based on your “deemed” rate,
I am aware that after I put in ten years’ federal civilian creditable service and then retire, my FERS annuity will be reduced monthly by 10% for the surviving spouse
What is an Immediate Retirement under FERS? The Immediate Retirement under FERS is the main way of qualifying for the pension. Sometimes it’s referred to as the full, normal, or
Get the most out of your federal retirement benefits by taking advantage of the FERS resources created by Micah Shilanski, CFP®, and the team of independent financial advisors at Shilanski & Associates, Inc. Join the thousands of federal employees who trust us to guide them in their retirement planning journey because of our unique perspective of how your FERS benefits contribute to your comprehensive financial plan.
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