As a U.S. government employee, you have high-quality federal retirement benefits. Your federal benefits are different from private-sector employment benefits in a number of ways. Unlike private-sector workers, many federal employees have access to pensions as well as 401(k) like plans for their retirement futures, for instance.
The specific benefits you receive will depend on the government retirement system to which you belong. Depending on when you came into service as a federal employee, you may fall under one of two retirement systems: the Federal Employees’ Retirement System (FERS), or the grandfathered Civil Service Retirement System (CSRS).
Most of the federal civilian workforce will be FERS employees, but some will be designated as CSRS employees.
Retirement Coverage by FERS
FERS is the primary retirement system today for federal employees. It covers most of those who were hired on or after January 1, 1984. As of Fiscal Year 2016, over 90% of the current civilian federal workforce is enrolled in FERS, according to a report by Congressional Research Service.
Benefits under Federal Employees’ Retirement System (FERS)
In FERS, people have benefits from three sources:
- The Thrift Savings Plan (or TSP), a defined-contribution plan
- A Basic Benefit Plan, which is a pension annuity
- Social Security benefits that are based on work earnings history
For retirement income, the Basic Benefit Plan and Social Security will pay retired FERS employees in monthly fixed-sum payouts. These benefits are calculated based on years of service along with your personal record of employment earnings. You share in the upkeep of these benefits, as your agency withholds their costs in the form of payroll deductions.
Similar to a 401(k) plan, the Thrift Savings Plan gives federal employees the opportunity to accumulate retirement money by saving and investing. How much monthly retirement income someone might receive from their TSP will depend largely on the account balance when they retire.
More on the Thrift Savings Plan
The Thrift Savings Plan is, in some ways, similar to a 401(k) plan. Your agency automatically sets up your account for you. Every pay period, your account receives a deposit by your agency that equals 1% of the basic pay you earned for that period.
If you choose, you may also make your own contributions, and your agency will provide a matching contribution of up to 5%.
It comes with a unique menu of investment choices: five different TSP investment funds as well as a variety of lifecycle funds, or investments in the five investment funds with different asset allocation options.
The money will grow tax-deferred inside the account so long as it’s a traditional TSP. However, you may have the option to save and invest for retirement in a Roth TSP. With this option, you would put away after-tax dollars in exchange for tax-advantaged income later on.
Over time, your TSP account balance will depend on how much money was saved, how the TSP funds performed over time, and how well the money was managed over that time-frame.
Retirement Coverage by CSRS
As a grandfathered retirement system, CSRS predates FERS and even the Social Security program. Its roots go back to 1920, the year in which it became effective. Generally, CSRS covers most federal employees who were hired before January 1, 1984.
The primary way in which CSRS differs from FERS is in its design. It’s a defined-benefit system, which means its principal retirement benefit is a pension annuity. Although no longer the dominant system, CSRS still provides retirement coverage for many members and retirees from the federal civil service.
According to Congressional Research Service, 6% of the civilian federal workforce was enrolled in CSRS as of Fiscal Year 2016. And of the 2.6 million people who received civil service annuity payments in FY2016, over 70% received annuities earned under CSRS.
Benefits under Civil Service Retirement System (CSRS)
Under CSRS, you receive a basic pension annuity. In retirement, generally the CSRS pension annuity will give larger monthly payouts than the FERS basic annuity.
Since you participate in CSRS, part of your base pay goes toward the retirement system. You might contribute 7%, 7.5%, or 8% of your base pay to CSRS, and your agency will make matching contributions. CSRS employees usually don’t pay any taxes into Social Security, but part of their paychecks goes to Medicare taxes.
If you choose, you may increase your earned annuity by contributing to a voluntary contribution account. This gives you the chance to contribute up to 10% of your base pay for creditable service.
Thrift Savings Plan an Option
CSRS employees also have the option of saving and investing in a TSP account. This is a completely voluntary election. If the account is a traditional TSP, a portion of your basic pay can be contributed and will grow inside the account tax-deferred.
You may also have the choice of a Roth TSP account. Unlike with FERS, however, CSRS doesn’t offer the benefit of you receiving a government match on your contributions.
More on the CSRS Basic Annuity
Computing your CSRS pension annuity is similar to that of the FERS pension annuity. It’s based on your length of service as a federal employee as well as your salary history. Your duration of creditable service and your “high-3” average salary are factored into the calculation of the CSRS annuity formula.
“High-3” refers to the highest average basic pay you received during any three back-to-back years of service. For many CSRS employees, this will be in the final years of their federal career, but earlier periods with higher salary earnings may also qualify.
There are certain conditions in which your CSRS annuity may be reduced, including age-based and deposit-based rules. You can check with a federal benefits counselor if any of those situations may apply to you.
Federal Employees’ Group Life Insurance (FEGLI)
Alongside FERS and CSRS benefits, most federal employees also have the benefit of life insurance coverage. This program is called “Federal Employees’ Group Life Insurance,” or FEGLI for short.
FEGLI gives the protection of term life insurance coverage. In other words, a FEGLI policy won’t build cash value or paid-up value. Most members of the federal civil service will be eligible for coverage. And if certain conditions are met, they may choose to continue their life coverage under FEGLI into retirement.
However, the cost of premiums will generally increase significantly with age. It may be worthwhile to explore other life insurance coverage options as you move into the years when you are considering a departure from the federal workforce.
Federal Retirement Benefits are Complex
This is only a general overview of federal retirement benefits. Members of the uniformed services as well as certain types of federal employees may be covered by other, smaller systems: Social Security Only, Blended Retirement System, or CSRS Offset, for example.
Making the Most of Federal Retirement Benefits
To help you make the most of your benefits, consider help from a guide. You might benefit from the assistance of a knowledgeable federal benefits counselor or federal employee benefits-educated financial professional. They can help you identify options that you might not have known were available to you, help you avoid costly missteps, and help you maximize your benefits.
You can connect directly with a Federal Benefits-knowledgeable financial professional. Should you need a personal referral, please call us at 877.476.9723.