When it comes to the Federal Employees Retirement Plan, the FERS annuity is the solid foundation. There are four key points that people fail to understand, even as a good number of federal employees know how to calculate their FERS annuity.
Understand How FERS is Calculated at Different Ages
The first thing to know is the difference in the calculation at age 62. The FERS retirement formula is your high 3 x number of years of service x 1%. The formula, however, changes if you work until age 62 and retire with 20 or more years of service. You will receive 1.1% per year worked instead of getting 1% per year worked. An extra 0.1% on 20 years of service will add an additional 2% to your high 3.
For the employee that is considering retirement around the age of 62, the extra 0.1% can make a big difference. Or the employee near the 20 years of employment threshold and is considering retirement after age 62.
Know How Your Survivor Annuity Works
If you are married at retirement, you will have the option of electing a 5% reduction for a spousal benefit of 25% or a 10% reduction for a spousal benefit of 50%. If the federal spouse dies first, the nonfederal spouse can continue Federal Employee Health Benefits (FEHB), which is another reason to select a SA. However, the surviving nonfederal spouse cannot continue FEHB without a SA. If you are considering using life insurance to replace the SA, this is something to be aware of.
Your COLAs Won’t Keep Up With Inflation
FERS retirees do receive an annual COLA, even as most retirees that receive a pension don’t receive any type of annual increase on their pension. The downside to that COLA is that it won’t keep up with inflation. This means that your expenses are increasing at a far more higher rate than your income.
A lot of retirees only look at their TSP balance when they determine their allocation and want to invest conservatively in their TSP when they retire. If the 4% rule of investment withdrawals is applied and the value of FERS annuity is added, then there will be a significant change. This is because the value of the above FERS annuity is $600,000, and this would all be considered fixed dollars. Investing is a lot more than just numbers and math if we look at it from a strictly logical perspective.