What Makes the Federal Employees Retirement System So Good?
The Federal Employees Retirement System (FERS) is one of many different retirement plans out there. But this one is decidedly different from the rest of the pack. And there are two major reasons…
For starters, not everybody can sign up for the Federal Employees Retirement System. It – as the name implies – is for federal employees. More specifically, it’s for civil servants. They are the non-military civilian workforce that forms government departments and agencies.
There are millions of such workers across the country. They system includes Federal Reserve employees and covers the congressional pension program. Those working for the National Security Agency, staff members of the White House, CIA agents and nearly 500,000 postal service workers qualify for the Federal Employees Retirement System.
The other thing that makes this a unique retirement plan is how it’s set up. It operates as a sort of hybrid of different retirement plans. Once upon a time, defined benefit plans like pensions were the retirement plan of choice. But those have largely given way to defined contribution plans like the ubiquitous 401(k).
The big difference between these two plans is that defined benefit plans include a guaranteed benefit to be paid out upon retirement. What that payout will be is usually based on years of employment, age and salary. This allows an employee to know exactly how much they will receive every month during their post-retirement lives. A defined contribution plan offers no such guarantee.
A defined contribution plan normally consists of the employee or the employer (or both) contributing funds to a retirement account. Those funds are then invested with the hope that they will grow large enough to support the employee through retirement.
The Federal Employees Retirement System in Three Parts
Employees working in the executive, judicial or legislative branch of the federal government have the opportunity to receive retirement benefits from three sources: Social Security, the Thrift Savings Plan and the basic benefit plan. These are all the parts that make up the FERS.
The first element to unpack is the Social Security component. Those enrolled in some public pension plans don’t pay into the Social Security fund at the same rate as private employees. But employees covered under the Federal Employees Retirement System do. This wasn’t always the case, though. Before 1984, civil service employees and members of Congress didn’t pay Social Security taxes. Therefore, they were ineligible to collect Social Security benefits upon retirement.
Under the updated guidelines, though, both the employee and employer contribute 6.2% of earnings to Social Security. This means that someone born in 1990 who makes $60,000 a year can anticipate roughly $5,995 a month in Social Security benefits upon retirement (factoring in inflation). But that’s just a sliver of what the Federal Employees Retirement System brings to the table.
Part Two: Thrift Savings Plan
In addition to Social Security, workers enrolled in FERS are also privy to a thrift savings plan. This is quite similar to a 401(k), with the tax benefits to boot. Every pay period, the employer deposits the equivalent of 1% of its employees’ basic pay into the Thrift Savings Plan. And employees can choose to make personal contributions as well. And most employers will match up to 5% of basic pay. So, if at all possible, max it out to take full advantage of that free retirement money if you have this plan.
From there, contributions to the Thrift Savings Plan are invested in funds of the employees choosing. And there are quite a few more funds to choose from than there were just a couple of decades before.
One other thing to consider here is the vesting period. Most of those participating in the Federal Employees Retirement System are vested after completing three years of service. But there are exceptions in certain cases. So be certain to check with your employer before leaving your job. This will ensure your ability to keep all of the money in the account.
Part Three: Basic Benefit Plan
This is the component that really sets FERS apart from other traditional retirement plans. This is essentially a pension where the employee will receive a set amount every month after retirement for life.
Like other defined contribution plans, this retirement benefit is calculated based on set criteria. In this case, it boils down to length of service and the employee’s “high-3.” Naturally, the more years employed, the higher the payout. And the “high-3” is the average basic pay earned in three consecutive years. Most likely, this would be the final three years before retirement, but that’s not always the case. And keep in mind, all these calculations include only basic pay. Seasonal bonuses and overtime are not accounted for.
The formula to calculate payments is fairly straightforward. Those with less than 20 years of service will receive 1% of their high-3 for each year employed. Those 62 or older with 20 or more years of service receive 1.1% of their high-3 for each year employed.
But naturally, there are exceptions. Special provisions have been made for air traffic controllers and capitol police (among others). These folks can qualify for 1.7% of their high-3 times years served in addition to 1% of their high-3 multiplied by the number of years employed exceeding 20. This is further proof that job loyalty and perseverance can really pay off for federal employees.
Collecting Federal Employees Retirement System Payments
For anyone nearing retirement age, it’s important to start the planning process as soon as possible. The U.S. Office of Personnel Management has an informative five-year plan available on its website. It offers guidance on important topics like how to maintain health and life insurance through retirement in conjunction with FERS.
Then, of course, there are some crucial forms to fill out shortly before retiring. To qualify for payments from FERS, you’ll need to submit a retirement application. It’s true, Washington bureaucracy knows no bounds. You even need to apply to retire. But once approved, the rest is smooth sailing into a well-funded retirement.
FERS: The Bottom Line
Not that long ago, pension plans covered roughly half of private sector employees. Today, an estimated 21% of workers participate in a pension plan. They have simply become too expensive to fund. Keeping a pension fund solvent comes with risk and uncertainty. And economic downturns have no impact on the retiree’s payouts.
This is one of the many reasons the Federal Employees Retirement System is seen as one of the best retirement packages out there. And on top of the sweet pension plan comes the additional benefits of being able to collect Social Security and payments from the thrift savings plan.
For those not eligible for a Federal Employees Retirement System plan, fret not. There’s more than one way to retire with a healthy nest egg. If you’re looking for a blueprint, we suggest signing up for our Wealthy Retirement e-letter. You’ll receive all the guidance you need to achieve financial freedom and learn secrets to achieving a well-funded retirement.
About Matthew Makowski
Matthew Makowski is a senior research analyst and writer at Investment U. He has been studying and writing about the markets for 20 years. Equally comfortable identifying value stocks as he is discounts in the crypto markets, Matthew began mining Bitcoin in 2011 and has since honed his focus on the cryptocurrency markets as a whole. He is a graduate of Rutgers University and lives in Colorado with his dog, Dorito.