Don’t Make These Mistakes When Calculating Your FERS Pension
Your FERS pension is an extremely important piece of the 3-legged stool in your federal retirement. The other two legs of the stool include your TSP and Social Security benefits.
We work with federal employees every day.
Many feds get confused on how their FERS pension amount is calculated.
Let’s dive in and go through the basics.
First, we’ll calculate your “gross” FERS pension amount. It’s based on the 3 things.
- Your High-3 Salary
- Years of Creditable Service
Pretty straightforward, right?
Now let’s dig a little deeper into each of the components.
Your High-3 salary is the three highest earning, consecutive years of federal service you’ve had. This includes basic pay only (your salary), and does NOT include any overtime or bonuses.
Years of Creditable Service
Next, you’ll need to figure out your years of creditable service. As a rule, creditable service is the time during which your pay is subject to FERS retirement deductions. OPM looks at your SF-50s to calculate your creditable service. Also, one thing to note, many people falsely believe their creditable service starts with their service computation date (SCD), but OPM actually uses your retirement service computation date (RSCD).
If you have active, honorable military service, you can typically ‘buy back’ this time, and it will count towards your federal retirement. Cost-wise, it almost always makes sense to do this when possible.
Your unused Sick Leave (not Annual Leave) will also contribute to years of creditable service.
Your factor is going to be either 1% or 1.1%. For most FERS employees, the factor is 1%. However, if you are age 62 or older, and have at least 20 years of service, your factor will be 1.1%. Many federal employees believe their factor is 1.1% because they’ve reached age 62 — this is incorrect. You need to be age 62 with at least 20 years of service.
To recap, to calculate your FERS pension, you’ll take your High-3 Salary x Years of Creditable Service x Your Factor. Remember, this is the gross amount, it will not be the actual amount you’ll take home. Many federal employees don’t take into consideration these reductions and are surprised when they get their first check. Let’s take a look at some of the most common reductions.
Common Reductions to FERS Pension
There are 7 possible reductions to your FERS pension. Remember to take these into consideration when planning your monthly income. The three we’ll discuss include Taxes, Survivor Benefits and FEHB (health insurance).
Taxes: Most of your FERS pension will be taxed at ordinary income tax rates. Typically, this is in the ballpark of 12-20%, however each individual’s tax situation is unique, and state taxes differ. With taxes, we recommend planning on the high-side and assume more rather than less.
Survivor Benefits: If you elect to leave a survivor annuity, your FERS pension amount will be reduced. However, If you predecease your spouse, they will receive a benefit amount monthly, for the duration of their own life. If you elect the “Max” survivor benefit, you FERS pension will be reduced 10% and your spouse will receive half of your pension if you pass away. If you elect the “Minimum” survivor benefit, your FERS pension will be reduced by 5% and your spouse will receive 25% of your original FERS pension.
FEHB: This reduction applies if you elect to continue healthcare coverage. These coverages and amounts will also vary by state. Plan for anywhere from $300-$500 per month for coverage. Most federal employees carry this coverage into retirement and for good reason – it’s one of the best healthcare plans in the marketplace. One important thing to note, you must elect at least the Minimum Survivor Benefit if you predecease your spouse and they want to continue the federal health insurance coverage.
If you have any questions about how to calculate your FERS pension amount, please reach out to your friends here at GPIS and we would be happy to help.
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