Three Sources of FERS Income
Paul: Hello, my name is Paul Thornton. I work for United Benefits and during this segment, we’re gonna talk about FERS. FERS is your Federal Employee Retirement System.
Federal Employee Retirement System, FERS, was actually created by Congress on January 1st, 1987. It is comprised of three parts, and you can call these three paychecks.
Number one is your FERS pension. Number two is Social Security, and the third part is your TSP, your Thrift Savings Plan. Revisions to increase employee contributions made effective in 2014 are gonna be under the FERS RAE. In today’s example, we are going to have an employee, and their high three monthly average income is $85,000 per year. They’re expected at the age of 62 to draw Social Security, and they will make $1,600 a month, and over the years that they’ve been working here (which is 30 years, they’re retiring at 60) they have put in $300,000 into their Thrift Savings Plan.
When are you gonna be eligible to actually draw this pension? And this is what this chart’s telling us. If you are 62 years of age, you can retire and draw the pension with as little as five years of service. Once you reach the age of 60, you can retire and draw the FERS monthly annuity pension with just 20 years of service. However, if you have 30 years of service, you’re eligible to retire before the age of 60– but you also have to meet your MRA, and your MRA is called your Minimum Retirement Age.
For example, if you were born between 1953 and 1964, and you are 56 and you have 30 years of service, you can retire. If you were born after 1970 and you have 30 years of service, you can retire at the age of 57. Our employee is retiring with 30 years of service at the age of 60.
What am I paying into my retirement? This is a chart that’s actually showing you what you’re paying into your retirement right now. Most people that are at retirement age are under the first chart, where you’re paying 1.45% – that’s what you’re paying into Medicare. You’re also only paying .8% into your FERS monthly annuity, your pension. Social Security, you’re paying 6.2% and if you’re putting in 5% into TSP, a total of 13.45% of your income is actually going into your retirement system; and that’s an annual out-of-pocket or right off the top of your income right now of $11,477.
If you are one of the FERS RAE, so you were hired after 2013 or even after 2014, the only difference is gonna be on the retirement, and those that were hired in 2013, theirs is 3.1%. Those hired after 2014, they’re paying 4.4% into the retirement system, and you will see that they’re paying anywhere from 15.75% of their gross salary up to 17.05% of the gross salary of those that were hired after 2014. So their annual cost is between $13,432 up to 14,537.
Now one reason this is important is when you get ready to retire and you’re trying to get as close as you possibly can to what you’re living off of right now. We wanna get to what your true replacement income will be. If you will notice, under your gross income as a FERS employee, your income was $85,000, but under the normal retirement cost right now for people that were hired before 2013, that retirement cost is $11,477.20, so that’s subtracted right off of the $85,000.
So basically, this $73,522.80 is what you are living off of, not the $85,000. Now this $73,522.80 will still be taxable income, and your benefits will also come out of this. Things like your health insurance. So when we’re doing your retirement paperwork to find out what you’re gonna be making into retirement, these are the figures that we wanna get close to, to try to get you as close to possible to what you’re living off of right now.
Now the next one: “how do I compute my FERS annuity?” We have people asking this question all the time. The formula’s simple, folks. Here it is. You’re gonna do your years of service times your high three average annual income and you multiply that by 1%. This is if you’re retiring before 62. So you have 30 years of service times $85,000, times 1%: this employee is gonna earn $25,500 a year, which is $2,125 per month.
Now if you were retiring at the age of 62, and you have at least 20 years of service, you get a 10% bonus. So the way it would work at that point, your formula would be 30 years of service times your high three, and of course our employee has $85,000 a year times 1.1%, so theirs would be $28,050 per year, which is $2,337 per month.
Okay, what is the FERS Supplement? This is what’s called the FERS Annuity Supplement, and this is a wonderful benefit that you have as a Federal Government employee. This allows you to get part of what you’re gonna earn on Social Security at the age of 62 at an earlier age, as long as you have at least 20 years of service.
This is the way it works. The formula’s simple. You’re gonna take your years of service. In our example, our employee had 30 years of service. You divide it by 40. So our employee is going to get 75% of what he’s gonna earn on Social Security at the age of 62 when he retires at the age of 60. So at the age of 62, we know that he’s gonna get $1,600 a month from Social Security. So 75% of that $1,600 is $1,200 per month that you will draw before you reach the age of 62, as long as you have 20 years of service.
We have representatives that are in your areas all the time and at any time, just reach out to United Benefits and we’ll be happy to set up an appointment to take care of your needs. Thank you very much and have a great day.
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