The foundation of the federal employee’s retirement fund is the FERS annuity. While some federal employees can effortlessly calculate their FERS annuity, there are some four elements of FERS that many people can’t seem to wrap their fingers around.
The first element we’re going to tackle is to understand and know how your FERS annuity is calculated at different ages, especially once one gets to age 62. The formula for FERS retirement is: your high three multiplied by the number of years of service then multiplied by one percent (high 3 x number of years of service x 1%)
This formula, however, changes if you retire with 20 or more years in service and if you work until age 62. You will receive 1.1% instead of getting 1% per year you worked. On your 20 years of service that extra 0.1% will add an extra 2% to your high 3.
For the employee that is considering retirement after age 62 and near the 20 years of employment threshold or the employee considering retirement around the age of 62, the extra 0.1% can make a huge difference for them.
The second element to tackle is understanding how your survivor annuity works. If at retirement you are still married, you will have to pick one of two choices. You will either have to choose the option of a 10% reduction for a spousal benefit of 50% or a spousal benefit of 25% with a reduction of 5%. Something to be aware of if you are considering or rather planning on replacing the SA with life insurance is that, if the federal spouse dies first the nonfederal spouse will no longer be able to access FEHB, but with SA the nonfederal spouse can continue with FEHB.
The next is knowing that your COLAs will not keep up with inflation. Even as most retirees that receive a pension don’t get any kind of increase on their pension. FERS retirees do get an annual COLA. The con to COLA, however, is that with the inflation it won’t be able to keep up. This means that expenses are increasing at a higher rate way more than your income. That said, FERS employees should be aware of this and plan themselves adequately.
The last one is that you need to know how your FERS annuity relates to your investment strategy. The approach this is looking for a way that includes every different component to capture the way these things relate to and affect each other. Emotions play a huge role in any investment decision and most times leads people to make the wrong decisions at the worst possible times. Be smart and do the math. These are the four things that should be given some significant attention when planning for retirement.