July 13

Coffee with Mike- FERS Breakdown Series Part 1



Employees want to know, what are they going to get at the different components of their retirement? So, we've been talking about that over the last few weeks. Today we're going to focus on the FERS Basic Annuity. What can you expect from it? Well, it depends on when you retire, and it also depends on when you actually got hired. How would you learn if you're going to retire before the age of 60? You have to wait until you're 56 or 57, depending on when you're born, and you've got to have at least 30 years of service. 

So, if that is the case for you, then you become eligible at 57, or 58, or 59 with 30 years of service, then more than like likely you're going to have 30% of your high-3 for retirement. That's a significant amount of money, but it also tells us that we need 70% from somewhere else. While we can get a little nit-picky about the percentages we're actually going to get from the FERS Basic Annuity, it's good for us to melt because it begins to tell us whether we're on track elsewhere. Think about this: every year you put into the FERS career, you get 1% of your high-3 at retirement. It actually it builds on per month, so you actually get 1/12th of 1% each and every month. 

In order to vest in this program for retirement, you have to put in at least five years. If you leave FERS before then and you take your money out, then you're going to get back your contributions plus some interest. But if you have five years in and you quit, well you can leave that in and you can get some retirement money at 62. But here what we're really thinking about is, are you actually retiring as a FERS employee? if you are, then you're going to get 30% of your high-3 at age 57, 58, or 59. If you wait until you're 60, they drop the requirement down to 20 years. So you could end up with 20, maybe 21, 22, 23%, however many years of service you actually have at 60 or 61. 

As you think about what impact that can make on your retirement decisions, then you begin to realize that this guaranteed income, no matter how small it is, actually is pretty important to your plan. Think about what you want to really achieve as a FERS employee in terms of building for retirement income. How much retirement income do you actually want that's absolutely guaranteed? It doesn't matter what the interest rate is, it doesn't matter what the rate of return is. All that matters is you put in the time, you had the career earnings you have, and now you're being rewarded in retirement for the rest of your life. I think that's really important. 

Now some of you might be thinking about another career, leaving and going to something else like state government, and is a state government retirement plan better than FERS? Well, some of them are. There might be a better retirement system out there for you, but I will say this: be careful that you understand what liabilities that particular state has, and whether they're going to be able to sustain their retirement program, compared to: is the federal government going to be able to sustain it's retirement program? 

"Why wouldn't you think about your FERS career and decide: am I getting enough out of this, and if I stay another year, is it going to be worth it to me?"

My perspective is that the federal government being able to control its money, being able to control its tax, is a lot better than a state can. It's a better situation to be in, even if something else looks a little bit more attractive. From a point of security, I don't think anything can compete with the federal program in terms of potential. Maybe some things can compete, but let's be careful about understanding the creditworthiness of that particular state. 

As you consider your continued career in FERS, let me encourage you to think about it in 12 month segments. I believe that as the FERS employee, you're going to get reviewed by your superiors every twelve months, every single year. If that's the case, why wouldn't you review that? Why wouldn't you think about your FERS career and decide: am I getting enough out of this, and if I stay another year, is it going to be worth it to me? This is what I think you should be thinking about, and this is the path I'm trying to put you on: understanding what the benefit can actually provide, and then understanding is it really worth it to you? Is it going to be worth it to you to stay one more year?

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