FERS Retirement Planning 101: The Top Components of Your Retirement as a Federal Employee
If you’re a federal employee, you’re probably at least heard of the Federal Employees Retirement System (FERS). FERS is a comprehensive program designed to ensure financial security for federal employees.
Understanding the FERS system makes retirement planning easier as you become more familiar with how your retirement benefits work.
With numerous moving parts and important decisions to make, navigating FERS retirement planning can seem overwhelming. This blog will walk you through everything you need to know about the basics of FERS retirement benefits.
Want more insights into additional FERS benefits not described here? Click on the ebook image to get a free copy of the Ultimate Guide to FERS Retirement Benefits for Federal Employees.
If you’re looking for a federal employee financial planner to help you understand your benefits, you can reach out to our team of financial advisors in Tampa here.
What is FERS?
The Federal Employees Retirement System (FERS) is the cornerstone of retirement planning for federal employees hired after 1987. This retirement system combines three essential components to provide comprehensive retirement security for federal employees:
- Basic FERS Pension Benefit: A guaranteed monthly income that reflects your years of service and salary.
- Thrift Savings Plan (TSP): A retirement savings and investment plan bolstered by government contributions.
- Social Security benefits: A supplemental income stream designed to enhance the pension and TSP benefits.
FERS covers most federal civilian employees, including those working in executive agencies, Congress, and various federal organizations and agencies.
Who Is Covered under FERS?
- Federal civilian employees hired after January 1, 1987
- Former CSRS employees who converted to FERS
- Members of Congress and congressional employees
- Federal judges
- U.S. Postal Service employees
Now let’s look at each of the three components of the FERS benefit system, starting with the pension benefits.
FERS Pension Benefits: The Foundation of Your Retirement
As a federal employee, the FERS pension benefit serves as the foundation of your retirement, providing you with a dependable income stream throughout your retirement years. When paired with the TSP and your Social Security benefits, it helps you build a secure retirement plan, ensuring financial stability and peace of mind as you transition into your next chapter.
You become eligible for FERS benefits after completing at least 5 years of service. Specific eligibility criteria, such as your age and total years of service, determine the retirement options available to you, including early or immediate retirement pathways.
Calculating Your FERS Pension
Your pension amount is calculated using three key factors:
- Your “high-3” average salary (highest average basic pay earned during any 3 consecutive years)
- Years of creditable service
- A pension multiplier (1% for most employees, or 1.1% if retiring at age 62 with 20+ years of service)
Employees with extended service periods and higher salaries naturally receive larger payouts, providing a clear incentive for career growth and longevity.
Case Study: FERS Pension Calculation
Let’s look at an example:
- Sarah’s high-3 average salary: $85,000
- Years of service: 25
- Retiring at age 62
- Calculation: $85,000 × 25 × 1.1% = $23,375 annual pension
How to Maximize Your FERS Pension
To optimize your FERS pension benefits, consider these strategies:
- Plan your career progression to achieve the highest possible salary during your last three years.
- Consider the impact of overtime and premium pay on your high-3 calculation.
- Consider working until age 62 if you’re close to 20 years of service since FERS retirement before 62 provides a smaller pension multiplier.
Additionally, exploring options like deferred retirement and survivor benefits can significantly enhance your payout.
Next, let’s look at the role of the TSP in your retirement planning.
Thrift Savings Plan: Supplement Your Retirement and Grow Your Wealth
The Thrift Savings Plan (TSP) can be thought of as the “investment account” part of your FERS retirement plan. Similar to a 401(k) in the private sector, the TSP provides additional opportunities to grow your savings and build your wealth through investing in your choice of several different stock market and bond market investment vehicles.
While the TSP offers simplified investment choices and low expenses, there are also some downsides to solely relying on a TSP as your primary investment method.
Understanding TSP Contributions and Matching
You can contribute a portion of your salary to the TSP, and the government matches up to 5%. You receive a dollar-for-dollar match on the first 3% of your contributions and 50 cents on the dollar for the next 2%.
To maximize your savings, contribute at least 5% to capture the full match—free money for your retirement.
If you’re a FERS or BRS participant, your agency or service automatically adds 1% of your basic pay to your TSP account each pay period, even if you don’t contribute. These contributions are not deducted from your pay or taxed upfront. However, they are subject to vesting, requiring you to work a certain amount of time before you can claim these benefits.
TSP Contribution Limits 2025
- Regular contributions: $23,500
- Catch-up contribution limit (age 50-59 and ages 64+): $7,500
- Catch-up contribution limit for participants ages 60-63: $11,250
Click here to visit the TSP website for the latest TSP contribution limits.
TSP Tax Advantages
When making contributions to your TSP, you can choose whether you want to make traditional or Roth TSP contributions.
- Traditional TSP: Your contributions are made before taxes are taken out of your paycheck. This reduces your taxable income now, which can be helpful if you’re looking to lower your current tax bill. However, when you retire and start making withdrawals, those distributions are taxed as ordinary income.
- Roth TSP: Your contributions are made after taxes have been deducted from your paycheck. While this means you don’t get an immediate tax break, your qualified withdrawals in retirement—including both your contributions and the earnings on them—will be tax-free, as long as you meet the requirements.
You can divide your contributions between Traditional and Roth TSP accounts if you’d like. Keep in mind that any automatic or matching contributions from your agency or service are always deposited into your Traditional TSP balance and cannot be converted to Roth within your TSP account.
TSP Investment Options
The TSP offers low-cost funds to suit your goals:
- G Fund: Stable, low-risk government securities.
- C Fund: Stocks mirroring the S&P 500.
- F Fund: Fixed income (bond) index.
- S Fund: Small- to mid-cap U.S. stocks.
- I Fund: International stocks.
- L (Lifecycle) Funds: Diversified portfolios adjusted to your planned retirement date.
TSP Withdrawal Options
When you retire, you have the following options for your TSP account:
- Take a lump sum
- Do a TSP to IRA rollover
- Take partial withdrawals as needed
- Set up recurring payments
- Purchase an annuity
Each option has tax implications. Plan carefully to avoid penalties and optimize income. Traditional TSP withdrawals are taxed, while Roth TSP withdrawals may be tax-free.
Lump Sum vs. IRA Rollover
Unless you choose the last three options above, you’ll have to decide whether you want to take a lump sum of your TSP assets or do an IRA rollover. Here’s the difference between each:
- Lump-Sum Withdrawal: This option provides you with immediate access to your entire TSP balance. However, it comes with significant tax implications, as the entire amount is subject to income tax in the year of withdrawal. A large withdrawal could push you into a higher tax bracket, so this option requires careful consideration.
- IRA Rollover: By rolling your TSP funds into an Individual Retirement Account (IRA), you can maintain the tax-deferred status of your Traditional TSP or the tax-free status of your Roth TSP. This option also gives you access to a wider range of investment options than the TSP. Be mindful of any fees or rules associated with the IRA provider, and ensure the rollover is done correctly to avoid taxes or penalties. It’s best to consult with a federal employee financial planner prior to executing an IRA rollover to ensure you understand the implications before taking this step.
Last, but not least, let’s look at the role of social security in your FERS retirement planning process.
Social Security: How It Fits into Your FERS Retirement
As a federal employee under FERS, you’re eligible for Social Security benefits based on your earnings history. These benefits work together with your FERS pension and TSP, providing an extra income stream to ensure you have enough for retirement.
Social Security Benefits Calculation
Social Security benefits are calculated based on your average lifetime earnings. The Social Security Administration (SSA) looks at your 35 highest-earning years, adjusts them for inflation, and then averages them to determine your primary insurance amount (PIA). This amount is what you’ll receive if you claim at your full retirement age. The earlier you claim, the lower your benefits will be, and the later you claim, the higher they’ll be—up to age 70.
- Early retirement (age 62): Reduced benefits
- Full retirement age (66-67): Full benefits based on your PIA
- Delayed retirement (up to age 70): Increased benefits
Example of Social Security Timing Impact
Here’s a quick example of how waiting to take your Social Security benefits can pay off:
- At age 62, you’d get $1,400 per month (a 30% reduction).
- At age 67 (full retirement age), you’d get $2,000 per month.
- At age 70, your benefit jumps to $2,480 per month (a 24% increase).
To make the most of your retirement income, it’s important to have a clear financial plan in place and coordinate your Social Security with your FERS pension and TSP withdrawals. This way, you’re balancing your immediate needs with long-term financial goals.
Taking the Next Steps Toward a Secure Retirement as a Federal Employee
Financial planning for federal employees is a bit different than for most traditional employees, given the multifaceted aspect of the FERS retirement system.
To ensure a smooth transition into retirement:
- Calculate your pension accurately by reviewing your high-3 salary and years of service.
- Implement tax-saving strategies that are suitable for your income and situation.
- Evaluate healthcare options for comprehensive coverage.
With diligent planning and informed decision-making, you can maximize your FERS benefits, achieve financial independence, and enjoy a fulfilling retirement journey.
Use this guide as a starting point, but remember that personal circumstances vary, and professional advice may be necessary for your specific situation. If you’d like to consult with financial planners that have vast experience in serving the financial and retirement planning needs of federal employees, click here to schedule a call with the Troncoso Group.