Federal Retirement Funds: Unlocking Investment Strategies

The Federal Employees Retirement System (FERS) is a pension plan for all US civilian employees, providing benefits from three sources: the Basic Benefit Plan, Social Security, and the Thrift Savings Plan (TSP). The Basic Benefit Plan is a pension where employees receive a set amount based on their length of service and average basic pay for their highest-earning three years. Social Security is paid into at the same rate as private employees. The Thrift Savings Plan is similar to a 401(k) and is administered by the Federal Retirement Thrift Investment Board. Employees can choose how these funds are invested, and their agency will match contributions up to 5%.

Federal Employees Retirement System (FERS)

The Federal Employees Retirement System (FERS) is a retirement plan for all U.S. civilian employees, including those in the executive, judicial, and legislative branches of the federal government. It was established by Congress in 1986 and came into effect on January 1, 1987. Since then, all new federal civilian employees with retirement coverage have been covered by FERS.

FERS provides benefits from three sources: the Basic Benefit Plan, Social Security, and the Thrift Savings Plan (TSP). The Basic Benefit Plan and Social Security require employees to contribute each pay period, with the agency also contributing. After retirement, employees receive annuity payments for life. The TSP is an account set up by the agency, with automatic deposits of 1% of basic pay each pay period. Employees can also contribute to their TSP, with the agency matching contributions (up to 5% of pay). These contributions are tax-deferred and can be invested according to the employee's preferences.

FERS offers flexibility, with Social Security and TSP benefits transferable to a new job if employees leave the federal government before retirement. Additionally, FERS provides options for early retirement, deferred retirement, and disability retirement. Eligibility for benefits is determined by age, years of credible service, and, in some cases, reaching the Minimum Retirement Age (MRA).

FERS is considered one of the best retirement packages available, offering a comprehensive benefits structure for federal civilian employees.

Basic Benefit Plan

The Federal Employees Retirement System, or FERS, is the retirement plan for all US civilian employees. Employees under FERS receive retirement benefits from three sources: the Basic Benefit Plan, Social Security, and the Thrift Savings Plan (TSP).

The Basic Benefit Plan is a pension plan that guarantees a set amount to the employee upon retirement, regardless of the amount they have contributed. The amount is determined based on the length of service and the "high-3" average salary—the highest three consecutive years of service, which are usually the last three years of employment. This calculation does not include overtime, bonuses, or other extra payments. The formula for the basic benefit plan is:

> High-3 Salary x Years of Service x Pension Multiplier = Annual Pension Benefit

For example, if an employee worked for 25 years and earned $75,000 per year, their monthly payment would be around $1,560. Employees who are 62 or older with at least 20 years of service will receive a higher multiplier of 1.1%, resulting in a 10% increase in their pension.

The Basic Benefit Plan is funded by both the employee and the agency. The start date of the federal employee determines how much of their salary is contributed to the plan. For example, if an employee started working between January 1, 1987, and December 31, 2012, they would deduct a total of 7% of their base pay, with 0.8% going to the FERS Basic Benefit Plan and 6.2% to Social Security. The contribution rates have increased over time; for employees hired on or after January 1, 2014, the total deduction is 10.6% of base pay, with 4.4% going to the Basic Benefit Plan and 6.2% to Social Security.

FERS participants are vested after five years of creditable civilian service, meaning they are entitled to receive retirement benefits even if they leave federal government employment before retiring.

Social Security

Under FERS, employees pay into the Social Security fund at the same rate as private employees, contributing 6.2% of their earnings, with their agency matching this contribution. This is different from some public pension plans, where employees do not pay into Social Security. It is important to note that Social Security only covers earned income, wages, or net income from self-employment. Pension payments, annuities, and interest or dividends from savings and investments are not considered earnings for Social Security purposes.

The Social Security Retirement benefit provides a monthly check to replace a portion of an individual's income when they reduce their work hours or stop working altogether. However, it may not replace all of their income, so individuals are advised to explore other ways to cover their monthly expenses as they age. Eligibility for Social Security benefits is always based on work, and most jobs will deduct Social Security taxes from an individual's paycheck, ensuring they receive a monthly benefit in retirement.

While Social Security is a vital component of FERS, there have been discussions and proposals regarding potential changes to the system. Some have suggested that Social Security should invest in equities to achieve higher returns and reduce the need for tax hikes or benefit cuts. However, critics argue that such investments could interfere with private markets and create a misleading impression of "magic money." The feasibility of these proposals is also questioned, as Social Security's trust fund is rapidly diminishing, and rebuilding it may not be feasible or wise.

Thrift Savings Plan (TSP)

The Thrift Savings Plan (TSP) is a defined-contribution retirement savings and investment plan. It is similar to a 401(k) plan and is only available to federal employees and uniformed service members, including the Ready Reserve. The TSP was established in 1986 by Congress and offers the same tax benefits and savings as a 401(k).

Each pay period, the agency you work for deposits an amount equal to 1% of your basic pay into your TSP account. You can also choose to make additional contributions, which your agency will match (up to 5% of your pay). These contributions are tax-deferred and are administered by the Federal Retirement Thrift Investment Board. You can choose how these funds are invested from a list of fund choices.

The TSP offers a choice of six funds and a mutual fund option:

• The Government Securities Investment (G) Fund
• The Fixed-Income Index Investment (F) Fund
• The Common-Stock Index Investment (C) Fund
• The Small-Capitalization Stock Index Investment (S) Fund
• The International-Stock Index Investment (I) Fund
• Specific Lifecycle (L) funds

The F, S, C, and I funds are index funds managed by the BlackRock Institutional Trust Company under contract by the Federal Retirement Thrift Investment Board (FRTIB). This independent government agency acts as a fiduciary, managing the TSP in the best interests of participants and their beneficiaries.

The contribution limit for a TSP is $23,000 for 2024, with employees aged 50 and over able to make additional "catch-up" contributions of $7,500.

If you leave your job, your TSP will remain as is if the balance is $200 or more, and it will continue to earn. However, if you are not fully vested, the government may withdraw its contributions and associated earnings from your account. You can still control the principal in the account and adjust your investments, but you cannot make further contributions.

Eligibility

There are four categories of benefits in the FERS Basic Benefit Plan: Immediate, Early, Deferred, and Disability.

To be eligible for immediate retirement, you must meet one of the following sets of age and service requirements:

• Retire at the MRA with at least 10, but fewer than 30 years of service. Your benefit will be reduced by 5% a year for each year you are under 62, unless you have 20 years of service and your benefit starts when you turn 60 or older.
• Retire with 30 years of creditable service and reach the MRA.
• Retire with 20 years of creditable service and reach the age of 60 or 50 under special retirement provisions.

Early retirement is available in certain cases of involuntary separation and voluntary separation during a major reorganization or reduction in force. To be eligible, you must meet the age and service requirements for immediate retirement.

If you leave federal service before you meet the age and service requirements for immediate retirement, you may be eligible for deferred retirement benefits. To be eligible, you must have completed at least five years of creditable civilian service. You may receive benefits when you reach the MRA, 62 years of age, or older.

To be eligible for disability retirement, you must meet the requirements for immediate retirement and have become disabled while employed in a position subject to FERS. The disability must be a result of a disease or injury that prevents useful and efficient service in your current position and is expected to last at least one year. Your agency must certify that it is unable to accommodate your disabling medical condition in your present position and that it has considered you for reassignment.

Frequently asked questions