Employees of the Federal Employee Retirement System (FERS) accrue money for retirement in three ways: the FERS annuity, TSP and Social Security. Each of these are accrued independently of one another, but are used conjunctly in funding retirement. Each component of the retirement package has its own unique benefits, but they all come together to produce complimentary, fortified retirement income.

(1) FERS Annuity: If you’re able to work in the government long enough (at least 5 years), the FERS pension is a very valuable asset to have in your financial arsenal. For each year that you work in civil service, 1% of your basic annual pay (not including locality) is accrued towards your FERS Annuity. At the end of your career, you will be entitled to an annuity that is payable for the rest of your life. This risk-free, government backed guarantee of income for potentially 20+ years is one the best financial benefits of government employment. Virtually every investment that can be made in the open market carries some risk with it–Markets can decline, property can be destroyed and businesses can fail. Unless the entire government collapses, you’ll be collecting this income for life.  

The formula used to compute the exact amount of a FERS annuity is: (Average of 3 highest annual salaries) X (Years worked) X (1% if taken at age 60; 1.1% if taken at age 62 with 20 years of service) = Annual payment. For example, an individual that worked 20 years, earning $100,000 in basic pay during their 3 highest paid years, decides to begin receiving the annuity at the soonest possible date will receive an annual payment of: ($100,000) X (20) X (1%) = $20,000. Under the normal retirement scenario (not early, deferred or disability retirement), the soonest you become eligible for collecting the annuity is based on different combinations of age and years worked: Age 60 with 20 years, age 62 with 5 years or minimum retirement age (MRA) with 30 years. The MRA is age 55-57 depending on your date of birth.  

You may decide to start annuity payments before reaching these eligibility dates. However, in that case 5% of the annuity will be deducted for each year that you are under the required age.

(2) Thrift Savings Plan: The Thrift Savings Plan (TSP) is the government’s version of a 401K. It’s like every other 401K in most respects– offering stock, bond and target date funds, creditor protection, loans and annual limits. However, the TSP distinguishes itself from most 401Ks with 2 specific attributes: The efficient offering of investments and extremely low fees. Fees can have a major impact on the balance of an investment account over time. This chart demonstrates how fees discreetly eat into your money. Mind you, the TSP fees of .03% are 1/8th of even the lowest fee of .25% on the chart.

Source: investor.gov

The TSP could add tens of thousands of dollars to your account balance, which would otherwise line the pockets of fund managers, by the time you are ready to withdraw the money for retirement. Additionally, it only offers 5 core funds aside from its target date funds, which are just various combinations of those 5 funds determined by your retirement time horizon. This is viewed as a negative by some, but it is really a great benefit to the vast majority of TSP participants. These 5 funds offer broad, diversified exposure to the most valuable markets in the World. If you could pick stocks like Warren Buffett, this could be a disadvantage. Although if that were the case, it’s probably safe to say that you wouldn’t be a TSP participant. Less is more when it comes to investment options in the TSP. The TSP also comes with a nice 5% match by the government, so contributing at least 5% of pay to the plan is a must.  

(3) Social Security:  Each paycheck that you receive has 6.2% taken out and contributed to the social security fund.  This deduction is mandatory, so whether we like it or not, that percentage of our earned income is being sliced off the top in a “promise” for future repayment. Social security receives quite a bad rap these days. Most young to middle aged people are of the opinion that social security payments simply won’t exist by the time they become eligible for payments. While it’s true that the full benefit likely won’t be available in the coming decades, according to most current projections we should still be able to receive about 70% of what we’re entitled to. The average social security benefit has been trending up towards $1,400/month in recent years, so the average retiree is collecting a decent chunk of income from social security. For that reason, we should still account and plan for receiving something here. If you can easily fund retirement without banking on social security, even better. As long as the social security fund doesn’t end up going completely bankrupt at some point, social security payments are still a valuable source of stable, guaranteed income that can be relied upon in our later years.   

The FERS annuity, TSP and Social Security are the primary sources of funding for the golden years of federal employees. Their unique characteristics combine to form a complementary force of stable and reliable income: guaranteed income with the annuity, investment growth with the TSP, and forced savings with social security. With proper planning, we are usually even able to add personal investments to the equation, such as equity in a home or other savings and investment accounts. Doing so would surely sweeten the pot, but if utilized effectively, the FERS retirement package should be able to put toes in the sand or gas in the RV for many of its retirees.