Your Federal Retirement—Back to Basics

2.7.25: Audio automatically transcribed by Sonix

2.7.25: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Speaker1:
Welcome back to the federal retirement Show. I'm your host Val Majewski with American Benefits Exchange. Appreciate you taking the time out of your schedule to join us, to view our content and all the information that we're putting out there for you. The federal employee who's looking to find all this information regarding your benefits and retirement, so you can make the best decisions going forward. Now, um, a lot of things in the news recently when it comes to federal employees and retirement. There's the deferred resignation option that has been out there. We've been getting asked a lot of questions about this is what is this? Is it a buyout? Is it something that I need to consider? Is it something that I should look into? And a lot of federal employees unsure of what this is now, there's a lot of good information out there. Opm has been fairly Transparent with it. They have an FAQ on their website that you can go to in order to see what all the details are, and I'm going to summarize it in the simplest of fashions. But what it is, is if you want to take advantage of this deferred resignation option, it means that you're essentially going to say, hey, I'm not wanting to go back to work. I'm going to, you know, put in for this. And you only have, uh, just a couple more weeks or not even that week, about a week and a half until you can decide this.

Speaker1:
And when it comes to the deferred resignation, you're saying, I'm going to stop working and I am resigning essentially at the end of September, September 30th, you're going to be on like a paid leave. Until then, you don't have to work. You're still going to get paid. You're still going to accrue benefits. All of that. You're still going to accrue time for retirement. And then once you're done, you can decide what you want to do. And if you're eligible to retire, you can retire and collect an immediate pension. If you're not eligible for an immediate retirement, you can do a deferred type of retirement and figure out what the next step is for you. But we've been hearing the term buyout. This in itself is not a buyout. You're not being bought out. There is no cash option or things like that. Now, the real gist of today's conversation, though, goes back to the basics as I'm saying it. And we want to talk about your retirement in general because we've been asking again or been asked the question of should I do this and what is my retirement going to look like if I do, am I eligible to retire? So we want to go back to the basics and share with you. If you're a federal employee, and I know we're going to be talking more about Fers employees today, so I apologize if your CSRs please reach out to us and we'll go through that a little more detail with you.

Speaker1:
But for Fers employees, when we're looking at should you retire, if you should you take this option just retirement in general. I want to go back to the basics and talk today about your federal retirement. So what am I talking about? Well, the different retirement systems is what we want to discuss. Right. So we're talking about, uh, those that work for the federal government. You're a part of two main systems. You are part of the CSRS system, the old school system, or you're part of the Fers system. There's actually five subsets when it comes to this. Just so you're knowledgeable of the different, uh, subsets of the federal retirement System and which one you belong to depends upon when you got hired. So if you've got, um, time, we can cover it in more detail. I said, if you are a CSRs, but for right now, let's just in general talk about the older system. Now, this is for folks that were hired prior to 1984. Okay. Uh, CSRS stands for Civil Service Retirement System. You're not covered under Social Security. You contribute seven whole percent goes to each paycheck or comes out of each paycheck. Sorry. And goes into the retirement system. And TSP did not exist prior to 1984. So you're eligible now to contribute to TSB but do not receive any matching funds. Fairly simple. For the old school system, you are relying heavily on one check in retirement.

Speaker1:
No social security. When this plan came out, TSB didn't exist, so a lot rode on the pension check or everything rode, I should say, on the pension check and all the retirement contributions were going towards the CSRS system. Well, the Fers system came out and if you're a traditional Fers employee, you were hired after 1983. So January 1st, 1984 until 2013, you were automatically contributing to Social Security. And you contribute again if you're hired prior to 2013 as a Fers employee. Point 8% 0.8%, 8/10 of 1%. So we go back to the previous slide. The CSRS employees were contributing seven whole percent. Where does the other 6.2% go? Now, if you thought or said out loud Social Security, you'd be correct. So you still have seven whole percent out of every paycheck going towards your future. But 6.2 is going to Social Security and point eight going towards the first system. And then yes, TSP became available and you're able to put in, um, up to the limit, but you get up to a 5% match in your TSP. So pretty awesome there. Now you are dealing with a three part retirement income plan. Pension, Social Security and TSP. Now it depends on when you got hired, right? Is what I said what what subset you belong to. Because if you were hired in 2013 you're considered a a fers ray that stands for revised annuity employees. Uh, it's kind of a play on words because for me the word annuity means payout.

Speaker1:
It's not revised payout employees. It's revised contribution employees. Because if you're an RA you have to contribute more to the pension system. So our AE will contribute 3.1% going back to the previous slide. Traditional Fers is 0.8%. So this is 2.3% more for Ras. Still 6.2 to Social Security. And you do not see a change in the way your retirement benefits are calculated. So we'll get into that in a second. But you're putting in a little bit more to get out the same. That's only for those in 2013. So if you're after 2013 you're considered an Fre, which stands for Further revised Annuity employees. And you put in a little bit more 4.4% again, still 6.2 to Social Security. And you still do not see a change in the way your pension calculate pension benefits are calculated. So just understand newer hires are putting in more than a traditional Fers employee. Uh, two biggest questions we get asked. And this is what's going to lead into your decision if you're going to be taking this, uh, deferred resignation also is when are you eligible for full unreduced. Immediate pension. Full retirement. Full retirement. Unreduced immediate pension. You need to satisfy at least one of these three criteria as a traditional Fers employee. Now if you are law enforcement firefighter air traffic controller, this will be slightly different. We're going to call that special groups. And we have an episode on special groups retirement.

Speaker1:
I'd highly recommend you go back and view that that episode. But traditional Fers employees, you have to be age 60 with at least 20 years of service, 62 with at least five, or have 30 years of service and hit your minimum retirement age. If you satisfy at least one of these requirements, you can retire full benefits. Immediate pension. Now for that minimum retirement age, if you have 30 years and you're wondering what is my minimum retirement age? It's based upon your birth year. It'll be anywhere between age 55 and 57. You know, for those that are born after 1970, it is 57. So just understand if you if you satisfy one of those three requirements, you can retire. Again, immediate pension unreduced. That's considered full retirement. Now there is something that is not a full retirement, right? There's early retirement. We're not talking about early retirement, a buyout. This is just available to everybody. The first thing is deferred retirement. Now what is deferred retirement mean. This means that you can retire at any age. Any age, as long as you have at least five years of service. Now, you will not be eligible for an immediate pension, but you can retire, do a deferred retirement, and you can start collecting your benefits at age 62. You've got to wait that long. So if you retired at age 45 with ten years of service, you're not eligible for anything immediately. So you'd have to wait until age 62 to collect your deferred retirement benefits.

Speaker1:
Okay. Not something I generally recommend, but I've seen a few people do it over my career of working with federal employees. There's something called the MRA plus ten provision that allows for early retirement. Now, what is this? This is the way you can retire early and collect an immediate pension. Immediate pension? So you don't have to wait until age 62. The problem is there's a reduction. So MRA again is minimum retirement age. If you hit that MRA which is anywhere we just showed between 55 and 57. And you have at least ten years of service, you can retire and collect an immediate pension. However buyer beware. Right. There's a warning. There's a reduction permanent reduction of 5% for every year before the age of 62. Now, if you already have 20 years of service, it's for every year prior to the age of 60. But in general, it's a 5% reduction for every year under the age of 62. So if you retired at 57, let's say, and you had 15 years of service, we go back a couple slides. 57 at 15 years of service does not satisfy any major requirement there for full immediate pension. So you can retire under the MRA plus ten provision. But it's 5% for every year under 62. So that's five times five. That's a 25% permanent reduction. After calculating the benefits. Not something I would normally recommend, but it is a way you can retire with an immediate pension early.

Speaker1:
Now what if you said, okay, I want to retire early under the plus ten, but I don't want the reduction. That's where postponed retirement comes in. So if you are in that scenario 57 with 15 years of service, again, you don't satisfy any of the immediate full benefit retirement requirements. You can say I don't want that 25% reduction. So I'm going to postpone my benefits until age 62. So that would avoid the reduction, that permanent reduction. But you have to wait until 62 to start collecting. So these are ways that you can retire. So it factors in which one are you eligible for. If you're looking to take this deferred resignation can you retire immediately once the that deferral is up on September 30th? Do you have to do you want to take the eight plus ten? Are you Are you looking to postpone? Which one? Is it right for you at all to do any of this? But you need to know all of the calculations. Okay, now, when it comes to the calculation, what does that look like? When we talk about a Fers employee, how do we calculate your pension? Well it's a fairly simple mathematical equation but it starts with your high three. Now what is your high three. That is the average of your highest consecutive three year period. They take whatever the highest three year period of total earnings. That's usually base pay plus locality.

Speaker1:
Now if you're part of a special group, some of your overtime or some of your premium pay or leap pay if your law enforcement is included in there, but it was generally not included in their bonuses, overtime, um, and other things like, you know, your sick leave not included in there any of that is not in your high three. It's generally base pay plus locality. Take your highest consecutive three year period. Get the average of average of that. It doesn't have to be full calendar year. It can be March to a march. It can be June to a June, but it's a consecutive three year period. The average of that, we take that and we multiply it by a factor of 1 or 1.1%. Now when do we use either one? 1% if you're under the age of 62. 1.1%. You get a little bit of a bump. If you're 62 or older and have at least 20 years of service. Now, there's a lot of cases that I've run where it makes sense for people to work a little bit longer to get that extra 0.1%, that extra 10% bump. Now we take that result and multiply it by your years of service. Now total years of service. Include your service time as a Fers employee or CSR. Well, in this case, the first employee, sorry, the total service time plus any military time you've purchased back, plus any leftover sick leave time you have at the time of retirement.

Speaker1:
All of that is calculated as your years of service for pension calculation that gets you to your annual retirement annuity. So Annuities. So just general rule of thumb. As a first employee, you'll get 1% of your high three for every year of service that you have. You work 30 years. You'll get approximately 30% of your high three in retirement. Okay, there's a couple other pieces to factor in when it comes to this. Now, if you are eligible for full retirement prior to the age of 62, you might be thinking, Val, you said earlier that it's a three part plan and I'm thinking correctly. You said it was a pension, Social Security and TSP. Those are my three parts. But you also said that I can retire with full benefits prior to being age 62, right? Mra was 55 to 57. If you have at least 30 years of service, that's you're not eligible for Social Security. Or if you had, uh, age 60 with at least 20 years of service, you're not eligible for Social Security at that point. So what do you do? That's where the Fers retirement supplement comes in, and it's designed to help bridge the gap from when you retire until you are Social Security eligible, it's a free benefit. You don't pay for it. It's automatic. You don't have to elect it like you do social Security. It comes automatic, but it is available only to those Fers employees who retire with full benefits prior to age 62.

Speaker1:
It will continue until you become Social Security eligible at 62. It will automatically shut off. It does not mean you need to take Social Security at that point, but the supplement will shut off. So who's eligible? Those who retire voluntarily with full benefits on an immediate pension. Immediate. So I said you satisfy one of those full retirement requirements and you're before age 62. Great. You get the supplement, but you might still be eligible if it was due to a major reorganization or a reduction in force. You might still be eligible for the supplement. Who is not eligible? If you do, if you do receive a deferred benefit or a postponed Benefit, um, where you took that immediate MRA plus ten benefit that reduced early retirement? You're not eligible. Also, if you're on disability. Now this is disability retirement. This does not mean the VA disability benefit you get. This is disability retirement because once you select or you're eligible for or you get accepted for disability retirement, you have to apply for Social Security disability, which supersedes the the need for the supplement. So just just understand that part of it. How do we calculate the first supplement. We need to know two things. We need to know your age 62 Social Security benefit and the number of years of Fers service. So for your pension calculation, I mentioned years of service calculated it was first service military time, leave time or said sick leave time that converts into service for the first supplement is just fers years only.

Speaker1:
It is not um military time or sick leave. This is only for service years. So we take your first service years divided by 40 multiplied by your age 62 benefit. And we get your supplement. And again, that supplement will be there for when you retire until you become Social Security eligible at age 62. So just an example. Let's say somebody had 30 years of service and they were going to collect $2,000 at age 62. We take 30 years of service. Divide by 40, multiply it by 2000. They're going to get 1500 a month from whenever they retire until they become Social Security eligible. This is subject to an earnings test just like your Social Security is. So prior to hitting your full retirement age for Social Security, which is anywhere between 65 and 67, you can earn up to in 2025, now 23,400 per year, before seeing a reduce or reduction in your benefit. This is earned income. This is not your pension. This is not TSP money. This is earned income. So we're talking about, you know, W-2 or earned business income in the year in which you do hit your full retirement age for Social Security. You can earn up to 62,160 per year. And this is not for the supplement. This is more for your Social Security election. But again, just understand that the supplement will be subject to an earnings test.

Speaker1:
If you decide to work in retirement, it could be reduced depending on how much money you make. So summarizing this whole thing, you know, going back to the basics on your federal benefits and when you should retire and what is your retirement going to look like and planning for retirement. What are your income sources? We talked about the calculation. So that's for your Fers retirement. And if your CSRs remember this was only supposed to be a one paycheck system but refers employees. It's a three part deal. We've got the first retirement we have the supplement or Social Security is part number two. And then TSP rounding out that three parts. You might also have a supplemental account. You might have had a previous 401 K from another job. You may have that VA disability benefit you might have had prior military service. You got a military retirement, you might be looking at a reserve, retirement, whatever it might be. You may have saved up a supplemental account. You've got other incomes coming in. We total all of that up. And most federal employees I talked to want to earn or take home 100% of what they were making prior to retirement. Why is that? Well, the take home pay is what I'm talking about. They want to take home the same amount so they can retire how they want and live the lifestyle they want. I don't want you to ever retire and have to reduce your lifestyle because you're not making as much money.

Speaker1:
That doesn't make any sense. That's not a joyful retirement. So we want to get as close to 100%. But what do I see? I see a lot of federal employees that I talk to are in the 50 to 80% range. Hopefully you're not there. Hopefully you're closer to 80 or 100. But why is this the case? This comes with a lack of planning, a lack of understanding of a false sense of security thinking. They work for the government, and now all of a sudden they're going to take care of them. So you So you need to know your numbers. You need to know what's going on. How do you know? So how do you properly plan? Or how do you even know if taking this, this deferred resignation is going to be good for you or to retire at any point is going to be good for you. You need to run the numbers. And when do you run the numbers? You got to talk to somebody who's an expert. You got to go over everything, review the entire situation and look at all the details. That's what we do for each and every person that we talk to. We run a couple different reports. We share with you all the numbers. We can project out what your future is going to look like. So if that's something that you want to do, I highly recommend you go to our website, Federal Retirement Show.com fill out the form one of our reps.

Speaker1:
Again, if it's not me personally, we'll be reaching out to run the numbers for you. Look at your current situation. Look at how you're trending as you get closer to retirement, and then run some projections so you can see if you're on the right track. It's it's imperative that you do so if you've never done it. So we were going back to the basics. We want to talk again just about planning properly, making sure you understand all the factors that go in to your retirement and all of these things. Right. So if you like the information, you like what you see, you know, do me a favor. Hit the button below. Make sure you subscribe for more content. View all of our other episodes because that's what it's there for. It's for you, the federal employee. If you have any questions or comments, please drop us a comment. Let us know how we're doing, what we need to be talking about. We get emails all the time on suggestions and things that you think are important. So really, we appreciate all of that and thank you. Thank you for your your diligence, your obedience in watching this, because it is only for you. And this is the reason why we put on the show. So thanks for watching the Federal Retirement Show and we'll talk to you again real soon.

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