How Retirement Works for FERS Employees.mp3: Audio automatically transcribed by Sonix

How Retirement Works for FERS Employees.mp3: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Speaker1:
Well, welcome back to the Federal Retirement Show. I'm your host, Val Majewski, vice president of sales and marketing here at American Benefits Exchange. And today we're going to be talking about an extremely important topic, one that we get a ton of questions about. And we're going to be going over the firs system, firs eligibility for retirement, as well as calculations for your pension annuity. Now, these are two big questions that we get asked about when am I eligible to retire? When can I leave with no strings attached, full benefits, and what can I expect? How much do I get in my pension? How is it calculated? What's all considered when it comes to my pension or retirement? So we're going to dive in today and go over the firs system. Now, if you're a CSRs employee, I apologize, but let's get into the first system and find out what this is all about. What are the pension requirements and how do you calculate your retirement annuity? Well, first of all, let's dive into what it is. First, employees, if you're a first employees and you're watching this, you were hired after 1983. Part of your system is you're automatically covered under Social Security. Now, this is one of the retirement income sources that you automatically contribute to Social Security and you contribute if hired prior to 2013. I'll get into this in just a second. But hired in before 2013, you contribute 0.8% or 8/10 of 1% out of every paycheck goes towards the first system.

Speaker1:
Now in total, you actually put seven whole percent towards retirement. The other 6.2% goes towards Social Security. So seven whole percent out of every paycheck, if you're a first employee, goes towards two different retirement systems, 0.8 towards the first system, and 6.2% goes towards Social Security. Now you are eligible to contribute to TSP and you can receive up to a 5% match if you're not familiar with TSP and all the ins and outs. Visit our previous episode about TSP and there's a couple of others that talk about different options and things you can do with your TSP. I highly recommend checking those out. Now you may be thinking, okay, you said a traditional FERS employee is hired prior to 2013 and puts in 0.8%. But what about those hired after that? Well, if you're hired in 2013, you're considered a FERS or a E, which stands for Revised Annuity employees. Now you're going to find out it's not a revised annuity that you're going to receive in the future. It's actually just revised contributions towards that annuity. Because if you were hired in 2013 instead of just 0.8%, you're actually going to be putting in 3.1% towards retirement, still 6.2 to Social Security. That doesn't change, but you'll find out in the end that your calculations for your pension remain the same. So you put in more to get out the same. Now, this is just for folks hired in 2013. So what about those hired after 2013? Now you're considered a fers F, R, a E, which stands for further revised annuity employees.

Speaker1:
Again, not revised annuity. It should be revised contribution because these employees hired after 2013, the new hires are putting in 4.4% towards retirement, still 6.2 to Social Security. And again, do not see a change in the way retirement benefits are calculated. So the older fers 0.8% towards pension the rate which are those in 2013 hired in 2013 3.1% towards the pension system. And then the new hires, the FRA employees are putting in 4.4% towards retirement. So those are basically the different segments of the FERS retirement system. Now the first big question that we get asked is when can I leave? When am I eligible to retire with full benefits, no strings attached? What does that look like? Well, there are one of three criteria that you need to satisfy in order to retire with full benefits. As a FERS employee, you have to be at least 60 years of age and have at least 20 years of service, 62 years of age, and have at least five years of service or hit your minimum retirement age and have 30 years of service. Now, what is your IRA or minimum retirement age that is based upon your birth year and is going to be anywhere between age 55 and 57? If you need to know exactly, we can help you with that. We can look at your birth year and find out, yes, your minimum retirement age is age 56 and two months. This is not the same as Social Security full retirement age.

Speaker1:
This is for FERS retirement. As long as you satisfy one of these criteria, under normal circumstances, you can retire. With full benefits from the government. That means full immediate pension, UN reduced pension and full benefits going forward. Now there are some special groups and other people that have slightly different requirements for this, but this is a traditional FERS employee. Under normal circumstances, you need to satisfy at least one of those three criteria to retire with full benefits. The second biggest question we get asked well, if that's when can I leave, when am I eligible? The second question is what am I going to get? What can I expect? How do I calculate my future pension? What does that look like? Well, the formula is actually pretty simple. We've built different software systems and programs that can estimate your retirement in a variety of different ways. And I would highly suggest you reach out to us so we can run some of those reports for you. But if you want to do just a simple calculation of what your future pension could look like, you just use this formula that's on this slide. It all starts with your high three. Now, if you're not familiar about what your high three is, this is the average of your highest three consecutive years of total base pay, base pay plus locality. It's the highest three consecutive years. The average of those three years or 36 months doesn't matter if it's your first three years, your middle three years.

Speaker1:
Just typically speaking with pay raises and cost of living adjustments along the course of your working career. It's going to be your last three years, but it doesn't necessarily have to be. They're going to take that number, the average of your highest three consecutive years, and they're going to multiply that by a factor of one or 1.1. Now, when do we use either one of these? Well, we're going to use 1%. If you're retiring under the age of 62 and we'll use 1.1% if you're 62 or older and have at least 20 years of service, it gets you a little bit of an extra bump in your retirement calculation. And it can make a big difference if you're going to decide on retiring between, say, age 61 and 62. I've run the numbers for a lot of different federal employees, and that can make a pretty big difference when it comes to lifetime income just waiting that one extra year. Now we're going to take that result and multiply it by your years of service. Now, before I do that, let me go back real quick and talk about the high three. So I want to talk about what's included. So what's included again is base pay plus locality, but what's not included is extra. Generally speaking, bonuses and overtime are not included. Neither is leave. Leave is not included in there, but where is leave included? So let's go back to the years of service conversation here at the bottom.

Speaker1:
So we've got high three multiplied by a factor of one or 1.1% times your years of service. Now we're talking about first years of service, purchased military time, and then any left over sick leave can get added to the equation as well. So any added sick leave or any sick leave that's left over when you retire will get turned into additional service time and added to your total. As far as calculation is concerned. Now you can't use sick leave to be eligible for retirement, meaning if you're six months away from hitting your retirement age and you have six months of sick leave, you can't use that to get to retirement, but it will be added on. In the end. Any left over annual leave on the other side will be sent to you in a lump sum check. So how will they do that? They'll take your hourly rate based upon your salary at retirement, multiply it by your number of annual leave hours at the time of retirement, and they'll get that produced into a lump sum check which will be sent to you, generally speaking, by the next pay period after you retire. So you'll get something for those left over leave hours. Just some will be service time, some will be computed into a lump sum check. Now, going back to the math high three times, the factor times years of service that gives your annual retirement annuity annual retirement annuity gross numbers prior to any reductions. Right, for, say, taxes or benefits or it could be reduced based on your survivor benefit option.

Speaker1:
But that is the gross number when it comes to your pension. So pretty simple, pretty easy to look at. But general rule of thumb, if you're a FERS employee, a traditional FERS employee, non special group first employee, you're going to get 1% APR for every year of service that you have. So if you work 30 years, you can expect 30% of your high three, or at least that in the form of your pension. Now when we look at your total retirement income, though, this is one of those three parts you may be thinking, well, I just worked 30 years. You're saying I only get 30%? I can't live on that. Well, that's right. You can't live on that alone. But you're going to look at your total retirement income based upon the sources that you're supposed to use as a FERS employee. Now, typically, a FERS employee is using three retirement income sources pension, Social Security, or the first supplement I just mentioned. That you're putting in at every paycheck, 6.2% to Social Security. So you're going to count on that as part of your retirement income. Now, those two things are really out of your control. Pension and Social Security, you cannot decide how much to contribute to those if it's automatically taken from your paycheck. You don't decide how those things are invested. You don't decide how the calculations are done. They've already taken care of that for you.

Speaker1:
So those things will be automatic or automatically calculated, and it'll be up to you when you're going to retire and when you're going to take Social Security. The third piece of the puzzle is TSP. Now, this is the wild card. We've talked about TSP in previous episodes, but this is really reliant on you. You decide how much comes out of your paycheck. You decide where that money is invested, and then you can use that as one of the three retirement income sources when you decide to call it quits. If you're fortunate enough to plan ahead and maybe you looked at a retirement estimate and you said, you know what, I'm not going to have enough. Still, I need to look at a fourth source, or maybe you already have a fourth source in place. This could be a previous 41k. It could be a supplemental account. Perhaps you are a previously retired military or you're getting a VA disability benefit. Whatever it might be, you might have supplemental accounts to add to your income sources in retirement. Why do we talk about this and why is this important? Because it's not just about pension, right? You're not just going to work your 30 years, get your gold watch. You need to make sure you understand exactly where your income level is going to be and if that's going to be enough to live on. And if it's not exactly where you want it to be, you still have time to plan. Hopefully. Hopefully you've got enough time to set additional money aside or change what you're doing so you can be properly prepared.

Speaker1:
Why? Because most federal employees I talked to and I've talked to a lot over my decade plus of working specifically with federal employees, most federal employees want to get to or as close to 100% of their pre retirement net income, 100% of their pre retirement net income is where they want to be. Why would that be important? Because that means you wouldn't have to change your lifestyle. You can live basically the same as you did before. As long as your total take home pay is relatively close. But where do I see a lot of federal employees land? Their take home is 50 to 80% of the amount that they were used to before retiring. Now, hopefully you're not close to the 50%. Hopefully you're closer to the 80%. But still, most that I talked to want to get to 100%. So where does that shortfall get made up? Well, number one, you need to know where you currently stand. You need to know you need to know what your outcome is going to look like. I wouldn't want you to be working, working, working under the misconception that you are taking care of your set. You're doing good enough and you don't know where you stand. So get yourself a benefits review so you can see exactly where you currently stand and how you're trending as you get closer and closer to retirement. Because I wouldn't want you to get to the end.

Speaker1:
Think you're taking care of it. I that I can't live on this. Well, I wish I would have talked to you 20 years ago because we could have prepared for that. And guess what? If you end up saying, well, I'm going to overprepare right now and when I get to the end, perhaps, what's the problem if I've got too much money? I've never once talked to a federal employee that called me up and said, Val, I'm retiring. We screwed up. We messed up. This is horrible. I have way too much money in retirement. What did we do wrong? The future self of yours that's going to retire, whether it's five, ten, 15, 30 years from now, is going to love you for preparing properly and making sure that you're taking care of now. Another point to make you certainly don't want to put yourself in the poorhouse today just to make sure you're prepared in the future. I still want you to live your life while you're working, but if you have the ability to prepare properly, it is not a bad thing to be overprepared and to be absolutely certain that you're going to be able to retire when you want to on your terms and with the retirement income that you're going to need. So it's very important if you have never gotten a benefits review done, if you've never gotten a report run of what your projection is going to look like, go to our website, think ABC.com and fill out a request form for a benefits review, retirement analysis.

Speaker1:
And we can go over all the numbers so you can see exactly where you stand. It'll certainly be worth your time and effort. And worst case scenario, you just find out, Hey, I'm on the right track, this looks really good, and you get that piece of mind. Now you have that actual sense of security instead of a false sense of security, of knowing that you're doing what's right and what's beneficial for you and your family when it comes to your future retirement. Now, if you have specific questions, concerns, your situation may be a little more complicated. You may have some important questions that you want answered that we didn't talk about today during our time. Reach out to us. Let us get you those answers. Let us do the digging for you and take some of that guesswork out of it. We'd be happy to assist in any way possible. And look, we know a whole lot. We're not going to claim to know every single thing if we don't know the answer, because it is a 0.0001% of the time. We're going to get a question like that. We will find the answer for you. Be happy to do the work again. Thank you for tuning in to the Federal Retirement Show and join us on the future episodes. My name is Val Majewski, again, vice president of sales and marketing here at American Benefits Exchange, and look forward to seeing you on the future episode.

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