Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. The information has been obtained from sources considered to be reliable. This information is not intended to be a substitute for individualized legal or tax advice. Please consult your legal or tax advisor regarding your specific situation. First Light Financial is not endorsed by or affiliated with the Federal Employees Retirement System (FERS).

One of the questions we get asked frequently at First Light Financial LLC is, do we work with federal employees on retirement planning? The answer is a resounding YES! If you’re covered by the Federal Employees Retirement System (referred to throughout this blog as FERS), we understand your benefits and have plenty of experience working under the FERS structure. Michael Danjczek, one of our partners and financial planners, recently released a video (LINK) outlining our strategy for working with FERS employees, and why we believe that First Light Financial LLC is the perfect fit. Today, we’ll talk more about FERS and offer some guidance on retirement planning for federal workers. We hope you find this information useful!

What is the Federal Employees Retirement System (FERS)

Established in 1987, the Federal Employees Retirement System is a retirement plan for federal workers and is composed of three main benefit structures: the FERS annuity (equivalent to a pension provided by a private company), Social Security, and the Thrift Savings Plan (TSP).

Annuity Plans and FERS

The FERS annuity is a “defined benefit plan” that functions as a pension: it is the government’s commitment that its employees will receive a guaranteed income stream after retiring. The annuity is calculated by a percentage based on how long you’ve been federally employed (typically 1% or 1.1%, we can represent it as A) multiplied by the length of your federal service (B) and the “average annual rate of basic pay” of your highest-paid consecutive 36 months of employment (C) – according to the formula employed by the U.S. Office of Personnel Management here.

The calculation could be visualized this way: FERS annuity = AxBxC. If you have worked long enough for an annuity rate of 1.1% (0.011), been federally employed for 25 years, and maxed out at $150,000 salary per-year for your three highest paid consecutive years, your pension would be $41,250 per year for retirement – a monthly payment of around $3,437.50. Please note that FERS annuity payments are subject to federal income tax. Guarantees are based on the claims paying ability of the issuing company.

Social Security and FERS

Social Security needs no introduction, and we will save a deep dive for a future article. FERS employees are required to be enrolled in Social Security, which means you’ve been paying Social Security taxes on your earnings and are likely eligible for withdrawals once you retire. You can click here to read more about Social Security’s application to FERS employees – including a distinction if you worked for the federal government before January 1, 1984, when FERS replaced the Civil Service Retirement System (CSRS). Social security functions as a supplemental income for retired FERS employees.

Thrift Savings Plan and FERS

The Thrift Savings Plan (TSP) is a unique defined contribution plan that functions like a 401(k) would in the private sector. It is scalable – meaning you can contribute a certain percentage of your salary and increase your contributions over time – and matched by the government up to a specified limit.

These three separate categories of benefits synergize to provide you a comprehensive and diverse retirement plan. While benefits earned from something like Social Security are static, you can adjust your contributions to your TSP, and the length of your employment is the basis on which your annuity is paid out – leading to a highly customizable and versatile retirement package.

Employees covered under FERS are broken up into two categories: traditional – when you think of a government employee, this category probably comes to mind – and special – including law enforcement, federally employed air traffic controllers, firefighters, etc. If you fall under the special employee category you may be eligible for increased benefits such as an annuity that accrues more interest. You can read more about enhanced retirement benefits for federal law enforcement personnel in a report published by the U.S. Government Accountability Office here. When you connect with a financial adviser at First Light Financial LLC, we will talk about your role as a federal employee and any potential for enhanced benefit eligibility.

FERS FAQs

Let’s cover some important questions that we often get from FERS employees.

When can I retire as a FERS employee?

According to Serving Those Who Serve’s FERS primer, Minimum Retirement Age (MRA) for a federal employee who is seeking a full, unreduced pension is age 62 with 5 years of service, age 60 with 20 years of service, or MRA (between 55 and 57 depending on what year you were born) with 30 years of service. It is worth noting that your annuity calculation (as discussed above) will increase 0.1% when you turn 62 if you have been federally employed for 20 years, so keep that in mind when making your decision. Another factor making 62 a good minimum target is that after January 1 the year you turn 62, you are eligible to receive a cost-of-living adjustment (COLA) to your FERS annuity. This adjustment ensures that your benefits are keeping pace with inflation and generally increases to cost of living.

Deferred retirement with reduced benefits is also an option once you reach the Minimum Retirement Age and have been federally employed for 10 years. My Federal Retirement has a great piece here breaking down the pros and cons of retiring early, as well as how leaving federal service may impact your benefits.

Finally, as the Serving Those Who Serve article points out, the end of the year or any month is often considered the best time for a FERS employee to retire because your time of employment is calculated monthly. The longer you serve the more your annuity will pay out and the more compounding interest will work in your favor, so talk to a First Light Financial LLC advisor today to make a smart decision on timing!

When should I retire as a FERS employee?

We get this question a lot, and the answer is different for everyone. Talking to a First Light Financial LLC advisor can help you determine when to retire, and when to start planning and saving for retirement (hint: the answer to that last question is right now!).

What are my options with the Thrift Savings Plan?

The TSP is largely customizable based on your needs and expendable income, much like a 401(k). If you’ve been keeping up with our retirement planning articles in the past, you’ll know that at First Light Financial LLC we recommend starting early and getting aggressive with saving, but that’ll look different for everyone. A First Light Financial LLC advisor can work with you to determine how much you should be saving in your TSP, and whether it makes sense to scale that amount up over time, especially as you get close to retirement. It’s your money and you want to squeeze the most out of it so that you can enjoy retirement after a long and productive career! We can help you make decisions that get you towards that goal.

The way you structure your TSP can be unique. Kiplinger breaks down your various investment options here. You can invest your entire portfolio in “L funds” (life cycle funds) to manage risk and set reasonable expectations for a return on investment. You can also mix and match from individual TSP funds, including “G funds” (government securities funds, sourced from U.S. Treasury securities), “F funds” (a mixture of governmental and corporate bonds, often with a bit more risk), “C funds” (common stock index funds with market risk but higher capacity for return), “S funds” (smaller to medium corporate stocks, much like you might day trade in a personal capacity), and “I funds” (diverse corporate stocks from overseas).

Finally, you can sock your TSP savings in mutual funds. Mutual funds are often stable but often have eligibility requirements and fees. If these options are confusing to you, a First Light Financial LLC Financial advisor can help you cut through the noise and determine what investment options is best for you.

When can I begin TSP withdrawals?

You can start withdrawing from your TSP (with restrictions) while still employed if you are over 59.5 years old. Once you are no longer federally employed, there is no minimum for when you can begin TSP withdrawals. Your options may include lump sum or monthly payouts. Please note that if you don’t withdraw your entire balance by the time you turn 72, you must begin taking required minimum distributions from your account. This information and more is also covered by Federal Employee Retirement in an article here.

How many years of service are required to qualify for full benefits?

As covered above, here’s the breakdown to receive a full, unreduced FERS annuity (pension):

Age 62 with 5 years of federal service
Age 60 with 20 years of service
Minimum Retirement Age (typically 55 or 57) with 30 years of service

Note that Social Security benefits for federal employees will largely be structured the same as they are in the private sector, and due to the wonders of compound interest your TSP will only grow the longer you hold it. Consideration of your FERS annuity should be at the top of your mind when determining how long to serve in a federally employed capacity.

Do I need to keep my benefits after retirement?

No, you’re not required to. You can choose to keep your annuity and TSP accounts after retirement so you have access to a steady income stream, but you can choose a withdrawal pace that suits you.

If you are eligible, you can also keep your health insurance coverage via the Federal Employees Health Benefits (FEHB) program, but you can also pursue private insurance or other avenues if you so choose. The same applies to Federal Employees Group Life Insurance (FEGLI). Government Executive has more to read here. If you get connected with a First Light Financial LLC advisor, we can help you determine a withdrawal pace that works for you, and whether you should keep preexisting benefits or pursue an alternative.

What are some common mistakes to avoid when retiring as a FERS employee?

Withdrawing your TSP funds “too early” is a big one. As we discussed above, “years of service” is one of the main ingredients when calculating what your pension payout will look like. The longer you stay federally employed, the bigger the number your annuity rate will be multiplied by. We encourage you to take out a calculator and do some of the math for yourself. You’ll see that even just working a few extra months can really boost your scheduled payouts in retirement. While everyone is different, and some may have a reason to retire early, we definitely encourage you not to start withdrawing your TSP funds before it’s optimal to do so.

The next mistake is tied in: misunderstanding the Minimum Retirement Age and/or “years of service” calculation. MRA is 55 or 57 based on the year you were born, and you can find an easy calculator here to determine your own MRA. And as PlanWell points out here, years of service are calculated as a sum of all creditable federal employment including time worked as a FERS employee, military service, unused sick leave that’s converted to time worked, and more.

Not planning for healthcare continuation is another big mistake we see folks make. As mentioned above, you may be eligible to continue federal healthcare coverage into retirement. Whether you choose to do that or pursue a different form of coverage is a conversation to have with a financial planner and your doctor, but don’t let coverage lapse in your retirement! The last thing you want is for unexpected medical expenses to eat the savings that you’ve worked so hard to accrue.

Finally, failing to optimize survivor benefits is a common mistake. FERS employees can provide survivor benefits to spouses or dependents based on factors such as the length of the relationship and the employee’s service time. Speak with a financial advisor today about looking to the future and setting up survivor benefits.

I have a question you haven’t answered yet!

Great! This article isn’t intended to be comprehensive. If you have more questions, or follow-ups about anything you’ve read today, please reach out. Which leads nicely into our next section …

How First Light Financial LLC Financial Can Help

First Light Financial LLC Financial exists to give personalized guidance for retirement planning, and to help you navigate what’s often a confusing landscape with crystal clear advice and information. If you’re a FERS employee, we are intimately familiar with your benefits structure and will utilize our experience working with federal employees to craft a path that’s unique to you and your goals. We also have local expertise: many of our clients are federal employees in the Washington, D.C. and greater “DMV” area! We employ an open door policy with all our clients, inviting you to ask questions and brainstorm with us during strategy sessions. No question is too small to bring to our attention. Our goal is to make you feel comfortable with your retirement plans!

If you are a federal employee covered by FERS and anything you’ve ready today has piqued your interest, please don’t hesitate to reach out! Visit our website today, where you can learn more about our services and get connected with our excellent team. Retirement planning doesn’t have to be scary, and First Light Financial LLC is here to help you navigate your options. Thanks to our years of experience working with FERS employees, we are also uniquely positioned to assist federal workers achieve their retirement goals. See you next month!

Planning for Retirement as a FERS Employee: A Financial Advisor’s Guide