Retirement Accounts • June 29th, 2020

What is the Federal Employees Retirement System (FERS)?

Stephanie Faris

Key Takeaways
  • Federal government employees are set up for retirement benefits under the Federal Employees Retirement System (FERS).
  • FERS includes a Basic Benefit Plan, the Thrift Savings Plan, and Social Security.
  • Each account under FERS works differently, so it’s important to understand the features of each to make sure you’re maximizing your retirement savings.

If you’re a federal employee, you have great benefits. Not only do you have fairly solid job security and medical insurance, but you’ll also have money set aside for retirement.

Federal government workers are automatically added to the Federal Employees Retirement System (FERS) upon hiring. FERS includes three retirement accounts: a Basic Benefit Plan, the Thrift Savings Plan (TSP), and Social Security.

Understanding the Basic Benefit Plan

At one time, most employees had their eventual retirement funded by something called a pension. The employer covered the majority of the cost of that pension, and at retirement, the money was paid out. The longer you were in a job, the more that income would be. Over the years, pensions have gradually disappeared, though, as employers have shifted to plans like 401(k)s.

That makes a federal pension stand out to job seekers. If you’re weighing a government job against one in the private sector, that pension is worth considering, even if the salary is lower.

Within the FERS retirement system, the Basic Benefit Plan is your pension. You’ll contribute 0.8 percent of your basic pay, while the federal government pitches in at least 10.7 percent. Money is put into the account throughout your tenure no matter how much you contribute to your other retirement accounts.

If you’re participating in FERS, you may want to know just how much this 0.8 percent will pay off upon retirement. To get started with your FERS retirement calculator, it helps to understand how your pay will be determined. Here’s the calculation FERS will use when you retire:

  • Length of service
  • Average basic pay for the highest three consecutive years (a.k.a., the “high-3 average pay”)

For most employees, the federal retirement payout will be 1 percent of your high-3 average pay times your years of creditable service. For example, let’s say you had 15 years of creditable FERS service with an average basic pay of $80,000. 1% of $80,000 is $800, multiplied by 15 years of service is $12,000, representing your FERS retirement annuity.

Federal Employees and Social Security

No matter where you work, you’ll likely be covered by Social Security when you reach the minimum age. But you may wonder how your federal retirement affects your payments. You pay into Social Security just as private-sector employees do. That money will be waiting for you when you’re ready to retire.

One major difference for federal employees is that you have an option to retire early. You won’t be eligible for Social Security until you reach the age of 62. If you qualify to receive your other benefits, you may also qualify for something called a Special Retirement Supplement to cover the difference until you reach official retirement age under the Social Security program.

Tip: It's always in your best interest long-term to make sure you're contributing enough to get the full employer match. Otherwise, you're leaving money on the table for your retirement.

Social Security will be calculated the same for you as it is for non-government employees in the program. But if you’re using the FERS calculator to determine how much you can expect to receive in Social Security payments, here’s how your Social Security payout will be calculated:

  • Your average earnings during the timeframe you’re paying into the program
  • Your number of dependents at the time of retirement, as well as your marital status
  • The Consumer Price Index (CPI), which fluctuates depending on the economy

Understand the Thrift Savings Plan

As a federal employee, you’ll get a third retirement benefit in addition to the basic benefits plan and Social Security. The Thrift Savings Plan (TSP) is similar to a defined contribution plan like a 401(k) that you get with a private-sector employee. Like a government pension, the government will contribute to the plan, but the amount you can put into it is exponentially higher.

Your federal benefits allow you to contribute part of your basic pay to your TSP. You can contribute as much as you want, but your agency will only match up to 5 percent. For the first 3 percent you contribute from each pay period, your agency will match dollar for dollar. The other 2 percent will be matched at a rate of $.50 on the dollar.

It's always in your best interest long-term to make sure you're contributing enough to get the full employer match. Otherwise, you're leaving money on the table for your retirement.

When setting up your federal employee retirement, it’s important to also know the two types of TSPs that are available. You can sign up for a traditional TSP, which takes the money out of your check before taxes. You’ll pay taxes when you retire and take the money out.

If you’d prefer to pay the taxes on the money now, consider a Roth TSP. With this type of plan, you’ll enjoy tax-free withdrawals once you reach FERS retirement age. This can give you more money to live on at a time when you’ve stopped working and mitigate the risk that tax laws adversely change in the future. However, it’s important to consider that you’ll likely be in a lower tax bracket upon retirement, so you may pay more in taxes overall by taking them now.

Types of Retirement

Your FERS pension and other retirement benefits will come into play when you decide to retire. But there are different types of federal retirement, and each affects the amount you receive.

  • Disability — If you’ve completed at least 18 months of Federal service and become disabled, you may be able to apply for disability, which will pay you retirement benefits.
  • Early retirement — After 10 years of service, you can qualify for early retirement, as long as you meet the minimum age requirements.
  • Voluntary retirement — If you retire once you’ve reached the federal retirement age, you’ll be issued a payment based on your years of service.
  • Deferred retirement — You don’t have to stay with the federal government until retirement age to qualify for your retirement benefits. If you meet the minimum years of service requirements, you’ll qualify for an annuity the first day of the month after you turn 62.

Bottom Line

If you’re a federal employee, it’s important to make sure you’re taking full advantage of the benefits that come with your position. In addition to the basic benefits plan and Social Security, make sure you’ve set up your Thrift Savings Plan so that you’re getting the maximum match available. An expert Certified Financial Planner® can help you choose the right retirement setup to fit your needs.

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Author

Stephanie Faris

Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a writer for a credit card processing service and has written about finance for numerous marketing firms and entrepreneurs. Her work has appeared on Money Under 30, The Motley Fool, MoneyGeek, E-commerce Insiders, and GoBankingRates.