Benefits of Retiring as a Federal Employee
One of the benefits of a career with the federal government is that you are covered under the Federal Employees Retirement System (FERS). FERS is a retirement plan that provides benefits from three different sources: a Basic Benefit Plan, Social Security and the Thrift Savings Plan (TSP).
Basic Benefit
Under FERS, you will qualify for the Basic Benefit (pension) if you retire at your minimum retirement age and with the required number of years. As an example, let’s assume that you are single and that you retire at age 65 as a GS-13 with a “high-3” average pay of $100,000 per year (your “high-3” average pay is the highest average basic pay you earned during any 3 consecutive years of service). Your annual Basic Benefit at retirement will be: $100,000 X 30 years X 1.1% per year = $33,000.
Social Security
While working for the federal government, your salary was subject to social security taxes. If you qualify for a Basic Benefit under FERS, you will also qualify for social security benefits. Using the same example as above, at age 65 you would likely qualify for about $26,000 per year of social security benefits.
Thrift Savings Plan
The TSP is basically a 401K plan for federal employees. To encourage employees to contribute to their TSP account, the federal government will provide a matching contribution of 5% of your salary as long as you also contribute at least 5% of your salary to the TSP. If you donate less than 5% of your salary to your TSP account, you will lose some of the matching contributions. Thus, from a financial perspective, you never want to donate less than 5% of your salary to the TSP. You can then invest your TSP funds and they will grow tax free while you are working. Using the same example as above and also assuming you contribute 10% of your salary to the TSP throughout your career (with another 5% matching contribution from the federal government), you will likely be able to retire with about $700,000 in your TSP account (assumes normal career progression and a 7% annual rate of return over your 30 year career).
Income Before Retirement
Using the same example as above, if you make a $100,000 salary with the federal government before you retire, you will have to pay 7.65% of your salary to social security and 10% of your salary to your TSP, leaving 82.35% or $82,350 in available annual salary.
Income After Retirement
Using the same example as above, when you retire your annual income will be $33,000 from the FERS Basic Benefit and $26,000 per year from social security for a total of $59,000 before TSP withdrawals. Since your pre retirement available salary was $82,350, you will need to withdraw $23,350 each year from your TSP account to have an annual income of $82,350. With a TSP balance of $700,000 you would only need to withdraw 3.3% ($23,350) of your TSP balance each year to make up this difference. Given that most studies conclude that a safe withdrawal rate during retirement is somewhere between 3.3% and 4% of your account balance, you should be able to safely withdraw 3.3% per year from your TSP account throughout the remainder of your retirement. The other important thing is that all three of your income sources (Basic Benefit, Social Security and TSP) will adjust up each year with inflation, so your purchasing power should not decrease over time.
Conclusion
FERS is a great retirement system. If federal employees consistently contribute at least 10% of their salary each year to the TSP, there is a very good chance that their post retirement income can be about the same as their available salary before they retired!
