The Three-Legged Stool of Government Retirement
By Joe Kosek
The term “three-legged stool” has been used with retirement planning for decades. Traditionally, this has been based on a pension, Social Security benefits and personal savings. In the private sector, the pension portion of the stool is becoming a thing of the past for many workers who now must rely more on themselves and their 401(k) contributions. But the situation is different for current and future federal retirees who still have all three legs of their stool, including:
Leg One: Your basic Federal Employee Retirement System (FERS) Leg Two: Social Security benefits
Leg Three: Thrift Savings Plan (TSP)
- Leg One: FERS Pension
This is a defined benefit program which means the amount you receive is defined or fixed. To calculate your FERS pension you must know: 1) Your High-3 Salary Years; 2) Your years of Credible Service, and 3) Your Pension Multiplier. The FERS Pension Calculation is:
High-3 Salary Years x Years of Creditable Service x % Pension Multiplier = Annual FERS Pension
While the calculation may look simple, calculating your High-3 Salary Years and what counts as Years of Creditable Service can be quite complicated.
- Leg Two: Social Security Benefits
Employees covered under the Federal Employee Retirement System (FERS) are typically eligible to receive Social Security benefits when the retire.
- Leg Three: Thrift Savings Plan
The Thrift Savings Plan (TSP) is a special account for Federal Employees; it allows you to save pre-tax dollars in your personal account. With your FERS retirement pension and Social Security benefits, you will receive fixed amounts. But with your TSP, the amount you receive depends on how much you invest and how well the money has been managed.
The TSP offers the following six different funds in which federal employees can invest:
- G Fund – Government Securities Investment Fund
- F Fund – Fixed Income Index Investment Fund
- C Fund – Common Stock Index Investment Fund
- S Fund – Small Cap Stock Index Investment Fund
- I Fund – International Stock Index Fund
- L Funds – Lifecycle Funds
If you are covered by the Federal Employee Retirement System (FERS), the TSP is one part of a three-legged retirement stool, which also includes your FERS basic annuity and Social Security benefits.