Federal Employees Retirement System 101 - What It Is? And How Does It Work?

The Federal Employees Retirement System (FERS) was established by Congress in 1986 and came into effect on 1st January 1987. Since then, all new Federal civilian employees eligible for retirement benefits are covered under FERS.

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What is the Federal Retirement System

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The Federal Employees Retirement System (FERS) is a pension scheme specifically created for U.S. civilian employees working in the executive, judicial, or legislative branches of the federal government. If you are employed in one of these sectors, FERS is likely the retirement plan you will be enrolled in.

FERS provides retirement benefits from three primary sources:

• Basic Benefit Plan: This is the main component of FERS, offering a base pension calculated from your salary and years of service.
• Social Security: As a federal employee, you contribute to Social Security and receive benefits from the scheme when you retire.
• Thrift Savings Plan (TSP): The TSP is a tax-deferred savings and investment plan, similar to a 401(k). It allows you to contribute a portion of your salary and invest in various options.

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Basic Benefit Plan

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The Basic Benefit Plan (BBP) is one of the three elements of the Federal Employees Retirement System (FERS). It provides a base pension for eligible federal employees when they retire.

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How it works:

• Annuity: The BBP calculates your annuity based on your average final salary (AFS) and years of service.
• High-3: The AFS is calculated by averaging your highest three years of salary.
• Pension Multiplier: The pension multiplier is a percentage used to determine your annuity amount, which varies based on your years of service.
• Cost-of-Living Adjustment (COLA): The BBP includes a COLA to help your pension keep up with inflation.

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Eligibility:

• You must have at least five years of creditable service under FERS.
• You must reach the minimum retirement age (MRA), which varies depending on your date of birth.
• You must meet the minimum service requirement, generally either 60 years of age with 20 years of service or 62 years of age with 25 years of service.

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Social Security

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Social Security is a government programme that provides retirement, disability, and survivor benefits to eligible individuals. While federal employees contribute to Social Security, their benefits are generally calculated differently from those of non-federal employees.

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Key points to remember about Social Security for federal employees:

• Federal Employees Contribute: Like other workers, federal employees pay Social Security taxes.
• Different Calculation Method: The formula for calculating Social Security benefits for federal employees is slightly different from that used for non-federal employees.
• Minimum Retirement Age: Federal employees typically need to reach a higher minimum retirement age to receive full Social Security benefits compared to non-federal employees.
• Supplement to FERS: Social Security benefits often act as a supplement to the basic pension provided by the Federal Employees Retirement System (FERS).

Early Retirement Options: Federal employees may have the option to take early retirement from Social Security, although this may lead to reduced benefits.

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Thrift Savings Plan

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The Thrift Savings Plan (TSP) is a retirement savings and investment scheme similar to a 401(k) plan and forms one of the three key components of the Federal Employees Retirement System (FERS).

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Key features of the TSP:

• Tax-Deferred Growth: Contributions to the TSP are made with pre-tax earnings, allowing your investments to grow tax-deferred until you withdraw the funds.
• Investment Options: The TSP offers a range of investment choices, including:
• Common Stock Index Funds: Track the performance of various stock market indices.
• Bond Index Funds: Invest in both government and corporate bonds.
• Lifecycle Funds: Automatically adjust your investment mix according to your age.
• International Stock Index Funds: Invest in shares from foreign markets.
• Matching Contributions: Many federal agencies provide matching contributions to the TSP, which can significantly enhance your retirement savings.
• Loan Options: Under certain conditions, you may be able to borrow against your TSP account.
• Roth TSP: The TSP also offers a Roth option, allowing you to contribute post-tax earnings and withdraw your gains tax-free in retirement.

Note: You can also use TSP calculator to check your paycheck and Start your journey to financial security.

Types of Retirement

Retirement is a significant life transition, and there are several different types to consider. Here are some common approaches:

Traditional Retirement

• Full Retirement: This involves retiring from full-time work at a specific age, often around 65 or 67.
• Phased Retirement: Gradually reducing your workload over time, allowing for a smoother transition from full-time work to retirement.

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Early Retirement

• Early Retirement with Savings: Retire earlier than the traditional age using savings and investments.
• Early Retirement with a Pension: Retiring early due to a pension plan that allows for early retirement.

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Delayed Retirement

• Continuing to Work: Working beyond the traditional retirement age, often due to financial reasons or a desire to stay active.
• Part-Time Work: Continuing to work part-time after retiring from full-time employment.

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Alternative Retirement

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• Entrepreneurship: Starting a new business or venture after retirement.
• Volunteer Work: Dedicating time to volunteering for causes you care about.
• Travel and Exploration: Embarking on extensive travel adventures.
• Continuing Education: Pursuing hobbies, interests, or academic studies.

Which type of retirement is best for you depends on your circumstances, financial situation, and personal goals. It's important to plan and consider factors such as:

• Financial Security: Ensure you have sufficient savings and investments to support your desired lifestyle in retirement.
• Health: Assess your physical and mental health to determine if you're ready to retire.
• Personal Goals: Consider what you want to achieve in retirement and how different types of retirement can help you accomplish those goals.

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The Bottom Line

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Employees eligible for FERS receive benefits from three distinct plans. In a time when many companies and governments are phasing out pensions, FERS is still considered one of the most favourable retirement packages available. However, some speculate that as the federal government continues to cut costs, FERS may be altered, making it less appealing in the future.

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