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Understanding FERS Retirement: Why Federal Employees Are Unique

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The Federal Employees Retirement System (FERS) offers a distinctive and robust retirement package that sets federal employees apart from their private-sector counterparts. This system comprises several key components, including an inflation-adjusted pension, Social Security, defined contribution plan (TSP), government-subsidized health benefits, along with other benefits that will help ensure a financially comfortable retirement.  

Given that FERS employees represent a distinct subset of the American population, it’s crucial for federal employees to understand that many prominent financial planners focus on broader audiences and may overlook the specific needs of niche groups like themselves. As a result, the financial advice they receive should be customized to their unique circumstances.

FERS Annuity

A key feature of FERS is its defined benefit plan, known as the FERS annuity, which is designed to provide retirees with a stable income stream during retirement. The total monthly benefit that a retired federal employee receives is based on their age, years of service, and High-3 average salary.

In contrast to some private pensions, the FERS annuity includes adjustments for inflation through a cost-of-living adjustment (COLA). However, it’s important to note that the COLA for the FERS annuity is structured to lag behind the rise of the Consumer Price Index (CPI), the most commonly used measure of inflation. Consequently, while FERS annuitants enjoy a degree of inflation protection, these adjustments may not fully cover the increased living expenses they may face. To help bridge this gap, retirees have additional sources of fixed income, such as the Supplement or Social Security benefits, along with access to the Thrift Savings Plan.

Additionally, for regular FERS employees, COLAs do not commence until they reach the age of 62.

Social Security & FERS Supplement

FERS Special Supplement: For FERS employees who become fully eligible and retire before the age of 62, Social Security benefits are unable to be collected right away. To address this gap, the Office of Personnel Management (OPM) provides these annuitants with what is known as the FERS Supplement, which is paid alongside their FERS annuity. This supplement serves as a temporary financial bridge until they reach age 62 and can begin receiving Social Security.

For individuals covered by the Special Retirement Provision or those retiring under a Voluntary Early Retirement Authority (VERA), there are additional rules concerning the FERS Supplement. It is advisable to consult a federal retirement expert for more detailed information on these specific circumstances.

Social Security: Federal employees, whether working or retired, become eligible to start collecting Social Security benefits at age 62. However, the majority choose to delay these benefits until retirement or full retirement age, whichever happens first. Social Security serves as a second source of fixed income for federal employees in retirement. This monthly benefit is adjusted for inflation and is generally more effective than the FERS annuity in preserving purchasing power over time. Determining the correct time to begin collecting Social Security payments is unique to the individual and should be discussed with a federal retirement expert before making a decision. 

Thrift Savings Plan

The TSP is a defined contribution retirement savings plan that enables employees to save and invest a portion of their salary. With the government matching contributions up to 5%, this plan can significantly boost an employee’s retirement savings, providing greater control over their financial future.

Among the three primary components of the FERS system, managing their TSP account is where feds have the most control. They can determine how much to contribute, up to the maximum limit, and have the flexibility to choose their investment options and make changes to their funds as needed. A robust TSP can transform an average retirement for a federal employee into an exceptional one.

Federal Employee Health Benefits

In addition to a stable income stream, federal employees have access to the Federal Employees Health Benefits (FEHB) program. Postal employees are now covered under the Postal Service Health Benefits Program (PSHB). Provided they meet all eligibility requirements, individuals can carry this health insurance into retirement for themselves and their qualified family members.

The government heavily subsidizes this program, covering a significant portion of the premiums. As a result, retirees can obtain quality healthcare at a lower cost, which is especially important given the rising healthcare expenses in the United States. The FEHB offers a variety of plans, allowing employees to select coverage that best fits their needs, making it an essential element of their overall retirement strategy.