What Is the Federal Employees Retirement System (FERS) and How Does It Work?

Unless you are a government employee, you’ve likely never heard of the Federal Employees Retirement System (FERS), but if you work in the public sector or plan to in the near future, FERS is an acronym you will soon know well.

The Federal Employees Retirement System, or FERS, is the retirement plan for all U.S. civilian employees. The plan covers all employees in the executive, judicial and legislative branches of the federal government. FERS, however, does not cover military personnel or employees of state or local governments. Employees under FERS receive retirement benefits from three sources: the basic benefit plan, Social Security and the Thrift Savings Plan, or TSP.

The basic benefit plan is a pension in which the employee receives a set amount, regardless of the amount he or she has contributed. The amount depends on length of service and “high-3” average. “High-3” refers to the highest three consecutive years of service. Often, those are the last three years you worked, but if you held a higher paying position earlier in your career, your high three could be during that time.

This calculation only takes into account your basic salary. It does not include overtime, bonuses or other extra payments. Your years of credible service are reported on the SF-50 form you receive at least once per year. Then, the agency you work for adds a 1% multiplier to your High-3. However, employees who are 62 or older with at least 20 years of service will receive a multiplier of 1.1%. The formula for the basic benefit plan is: High-3 Salary x Years of Service x Pension Multiplier = Annual Pension Benefit. If you worked for 25 years and earned $75,000 per year, your monthly payment would be around $1,560, according to the formula.

Unlike some public pension plans, employees covered under FERS pay into the Social Security fund at the same rate as private employees. In 2013, anybody paying into Social Security will pay 6.2% of earnings with the agency matching the contribution. What can you plan to receive from Social Security? If you were born in 1975, earn $50,000 per year, and plan to retire at age 65, your estimated payments would be about $4,200 per month adjusted for inflation ($1,500 in today’s dollars).

Think of the Thrift Savings Plan as a 401(k). Congress established the TSP in 1986 and it offers the same types of tax benefits and savings as a 401(k). Each pay period, the agency you work for deposits 1% of your basic pay into your TSP. On top of that, you have the option of making additional contributions, which your agency will match (up to 5% of your pay). These extra contributions are tax-deferred and administered by the Federal Retirement Thrift Investment Board. Just like a 401(k), you can choose how these funds are invested. Upon setting up the TSP, you will be given a list of fund choices.

If you earned $40,000 and had agency contributions of 5% and a 6% rate of return, after 30 years of service, you would have earned about $335,200 or about $1,400 per year for 20 years. Because the TSP does not function as a pension like the basic benefit plan and Social Security, your earnings after 30 years would be based on the funds you choose, the amount of money you contribute above the amount your employer deposits and market conditions that are outside of your control. Just like a 401(k), there is a limit to how much you can contribute to your Thrift Savings Plan. Because your agency only matches up to 5%, speak to a trusted financial advisor about how to invest additional funds. It might be better to invest non-matched funds into an IRA or other investment vehicle.

“The biggest federal employee mistake I see is not contributing up to the 5% agency match. Simply choosing to contribute 5% and leaving it in the G-Fund will guarantee an automatic 100% rate of return. No investor can consistently beat that,” says Cooper Mitchell, president of Dane Financial, LLC, in Springfield, Mo., and creator of FedRetirementPlanning.com.

Different types of retirement are paid at different rates:

Disability Retirement – If you have completed at least 18 months of service and meet the requirements for disability, you may receive benefits from all three parts of your retirement plan.

Early Retirement – Early retirement can include retiring at the federal minimum retirement age (MRA), which, for anybody born after 1969, is 57 years old. It can also include early retirement due to a reduction in force or discontinued service because of an involuntary separation.

Voluntary Retirement – Traditional retirement provides you with full benefits provided you meet all requirements.

Deferred Retirement – This type of retirement is for former federal employees covered by FERS.

The Office of Personnel Management provides helpful information that covers the steps you need to take to prepare for retirement five years prior to the projected date. Once you are within two months of your retirement date, complete the required application found on opm.gov. The responsible agencies will work with you to complete the application and ensure that you begin receiving benefits soon after your retirement date.

Employees eligible for FERS receive benefits from three separate plans. In a world where pensions are being discontinued by corporations and governments, FERS is still seen as one of the best retirement packages available. (See: 5 Big Companies That Have Cut Out Pension Plans.) Some believe, however, that as the federal government continues to rein in costs, FERS could undergo changes that would make it less attractive.