Understanding Retirement Plans and Options for Federal Employees

Employees of the federal government can plan for retirement using the Federal Employees Retirement System (FERS), which draws funds from three sources: a Basic Benefits Plan, Social Security and a Thrift Savings Plan (TSP). While all federal employees are eligible and automatically enrolled, there are certain requirements for receiving retirement benefits early and factors to consider, such as health insurance, when you retire. Some plan components can also be transferred if an employee leaves the federal government for another job.

The FERS program offers federal employees a convenient and efficient way to save for retirement. In 1983, FERS replaced CSRS and has been the retirement program in place for federal workers ever since. Under FERS, retirement funds are drawn from three sources: an employee-and-employer-funded annuity, Social Security and a tax-deferred option, the thrift savings plan (TSP). Federal employees are automatically enrolled in FERS upon being hired, though there are several requirements an employee must meet to be eligible to start collecting retirement payments early.

Federal employees are automatically enrolled in FERS at a 0.8% contribution level toward their basic benefits. An employee’s basic benefit calculation is based on the length of employment and the highest pay earned during any three consecutive years of employment. Employees are able to contribute up to 11% of their salary toward TSP. Payments are fully vested after five years of service. Along with retirement income, FERS also provides disability payments and survivor benefits.

Federal employees with military service are eligible for certain benefits. Service members must have received an honorable discharge and service must have occurred before they retire from their federal position. Military credits work through a buy-back system that begins once an employee makes an annuity deposit into FERS.

In order to be eligible to receive FERS benefits, service members must waive their military retirement and benefits pay. Exceptions do apply, such as if an employee developed a disability during a war or if they served in a certain branch of the military.

Public employees have three ways to pay into and receive retirement benefits: the Basic Benefit plan, Social Security income and the TSP. The Basic Benefit Plan is jointly funded by the employee and branch of the federal government for which they work, while Social Security works through a paycheck deduction — the same as it does for private-sector employees. TSP is a tax-deferred plan that works in much the same way as a 401(k) plan. Employees contribute a percentage of their income tax-free and the employer matches it up to a certain percentage. Each source provides retirement income and benefits to federal workers.

The Basic Benefit Plan is an annuity that both the employee and federal employer contribute to. Federal employees are automatically enrolled to contribute 0.8% of their salary. The amount of the annuity is calculated using length of service and an employee’s “high-3” average salary. This refers to the highest pay earned during any three consecutive years of service. This number excludes any overtime or bonuses and refers only to basic pay. Pay will be slightly higher if you retire at age 62 and have worked for at least 20 years versus if you retire younger than 62 or at 62 but with fewer years of service.

If an employee leaves their federal job, they have a few options depending on how long they were employed. Employees who worked for at least five years can leave the funds in their account and apply for a deferred annuity when they have reached an eligible age or apply for a refund of their contributions. Employees with less than five years of employment can leave funds in the account if they believe they will return to a federal position or apply to receive a refund of their contributions.

As part of FERS, employees pay into Social Security via tax deductions from each paycheck. These payments equate to credits that can be used to claim benefits upon reaching retirement age — as early as age 62 but in most cases when a worker turns 65. Taking benefits at age 62 can result in lower payments.

Full-time federal employees are automatically enrolled as they are in the private sector. If a worker leaves a government job to work at another job, previous payments made usually do apply toward their ultimate Social Security benefit.

The TSP is the third component of FERS. Federal employees are automatically enrolled when they are hired, though the contribution rate varies depending on the hire date. For example, employees hired in October 2020 or later are enrolled at 5% while employees hired back to August 2010 are enrolled at 3%. Contributions are vested after three years of service, meaning if you leave your job, you are entitled to keep your TSP contributions. You can also leave funds in your TSP account as long as your balance is at least $200. If you do withdraw funds, however, they are considered taxable income.

The Civil Service Retirement System (CSRS) was the retirement program in place for federal employees until 1987 when FERS replaced it. It began in 1920 when the Civil Service Retirement Act was passed. Employees contribute up to 10% of their basic pay, which is matched by the employer. They can also pay into a TSP account without an employer contribution. CSRS employees don’t pay Social Security tax but do pay the separate Medicare tax.

Federal employees who pay into CSRS can take advantage of full employer matching for their contributions. The benefit of CSRS over FERS is that CSRS was designed around one plan while FERS consists of three. Typically, CSRS employees receive a larger pension than those receiving Social Security. This one-plan system compensates for not receiving Social Security or other supplemental income. The Office of Personnel Management (OPM)’s handbook outlines CSRS and FERS coverage and benefits.

It’s extremely important to plan for retirement during your working years, when many employees have access to contribute to programs such as FERS and Social Security. Making contributions toward retirement accounts now can provide you with income when you retire. It can be helpful to take steps based on milestones, such as when you’re five years, one year or months away from retiring.

The best health insurance options are those that provide affordable coverage for yourself and your family. The Federal Employees Health Benefits (FEHB) program offers health insurance to employees and their families, as well as to retired employees and their survivors and certain temporary workers. Former spouses can also enroll. Several plans are offered with varying levels of coverage and deductibles. The OPM compiled a health care fact sheet providing a basic breakdown of plans offered and created a comparison tool for current coverage options.

Life insurance is a key benefit that ensures the employee’s assets, debts and beneficiaries are covered after the death of an insured member. The Federal Employees’ Group Life Insurance (FEGLI) offers basic life insurance coverage. The OPM offers a FEGLI calculator to determine premiums and plan value.

You’ll need to know your length of service and highest average salary over three consecutive years in order to calculate how much you’ll earn in retirement under FERS. Keep in mind there are special circumstances that will affect your calculation, which are noted in the OPM computation guide.

There are four types of retirement for federal employees that differ depending on an employee’s circumstances around retiring. Early and voluntary retirement both carry minimum age requirements, for example. Documentation is also needed to retire due to a disability incurred during your time of service.

If you have a medical condition that qualifies you for disability retirement, the first step is to provide your employer with documentation of the condition. You also must meet requirements for disability retirement, including having served for at least 18 months and apply for Social Security disability benefits. You then must fill out and submit an application for immediate retirement and documentation in support of disability. Both forms can be obtained by your employer.

To retire early, you will be subject to deductions depending on your age at time of retirement. You will also need a minimum years of service, typically 10. The OPM details your minimum retirement age based on your beginning date of service.

If you choose to voluntarily retire, such as if your company reorganizes, there may be requirements depending on your age and length of service. Learn if there are any special requirements you should be aware of as well as how to calculate your minimum retirement age. Like with early retirement, your annuity may be reduced under voluntary retirement.

Deferred retirement refers to former federal employees who may still be eligible for an annuity. If you paid into FERS and left your federal position, you can apply for a deferred annuity when you reach age 62. You also may do so at an earlier age but may receive a reduction in your annuity payment. The OPM outlines the minimum requirement age and other information you’ll need to compute your benefit.

It’s not uncommon to experience financial challenges after the death of a loved one. Understanding death benefits and final expenses is important to factor into your benefits. FERS provides a death benefit for surviving and former spouses of employees who die within 18 months of service. The death benefit is payable if the spouse meets certain requirements, including having been married to the employee for at least nine months. The basic death benefit is 50% of the employee’s final salary, plus $32,423.56 as a cost-of-living adjustment.

Surviving and former spouses and children are also eligible for a survivor annuity. The OPM outlines the full list of requirements to be eligible to receive the survivor annuity.

Federal employees have many options for retirement under FERS. There are varying requirements for each type of retirement and the benefits offered. As long as a worker meets certain requirements and completes the proper documentation, they are usually able to start receiving benefits.

If you are looking for more information on FERS, CSRS or any of the plan specifics, there are several resources available. You can find guides on withdrawing funds, for example, and calculators to compute your benefits.

• CSRS/FERS Handbooks: The OPM provides a list of documents that go over every aspect of CSRS and FERS, including refunds, spouse, former spouse and children’s benefits and computation of benefits.
• FEGLI Calculator: Determine the cost of your premiums and face value of the life insurance plan you selected using this calculator.
• FAQS: Thrift Savings Plan: If you need to make a change to your TSP account or withdraw funds, learn how to do so.
• Retirement Service: My Annuity and Benefits: Learn how to withdraw money from your TSP and who to contact if you have specific questions about the plan.
• Social Security Benefits for Federal Workers: A small number of workers hired before a certain date might be ineligible for Social Security. This page details who may not be eligible.