What Is the Federal Employees Retirement System (FERS) and How Does It Work?

Reviewed by David KindnessFact checked by Yarilet PerezReviewed by David KindnessFact checked by Yarilet Perez

The Federal Employees Retirement System (FERS) is a retirement plan that covers all employees in the executive, judicial, and legislative branches of the federal government. Employees under FERS receive retirement benefits from three sources: the basic benefit plan, Social Security, and the Thrift Savings Plan (TSP).

Key Takeaways

• The Federal Employees Retirement System, or FERS, is the retirement plan for all civilian employees in the U.S. federal government.
• With FERS, employees receive retirement benefits from three sources: the basic benefit plan, Social Security, and the Thrift Savings Plan (TSP).
• The plan covers all employees in the executive, judicial, and legislative branches of the federal government but employees of state or local governments.

Basic Benefit Plan

The basic benefit plan is a pension where you receive a set amount in retirement, regardless of the amount you have contributed during your working years. The amount depends on your length of service and your “high-3” average. “High-3” refers to your highest three consecutive years of service.

This calculation only takes into account your basic salary. It does not include overtime, bonuses, or other extra payments. Your years of credible service are reported on the SF-50 form you receive at least once per year. Then, the agency you work for adds a 1% multiplier to your high-3.

Note

Employees who are 62 or older with at least 20 years of service will receive a multiplier of 1.1%.

The formula for the basic benefit plan is as follows:

High-3 Salary x Years of Service x Pension Multiplier = Annual Pension Benefit

For example, if you worked for 25 years and earned $75,000 per year, your monthly payment would be around $1,560, according to the formula.

Social Security

Unlike some public pension plans, employees covered under FERS pay into Social Security at the same rate as private employees. Anybody paying into Social Security will pay 6.2% of earnings with the agency matching the contribution.

For example, if you were born in 1975, earn $50,000 per year, and plan to retire at age 65, your estimated payments would be about $3,500 per month adjusted for inflation (almost $1,900 in today’s dollars).

Thrift Savings Plan

Established by Congress in 1986, the Thrift Savings Plan (TSP) offers the same types of tax benefits and savings as a 401(k). Each pay period, the agency you work for deposits 1% of your basic pay into your TSP. On top of that, you have the option of making additional contributions, which your agency will match (up to 5% of your pay).

These extra contributions are tax-deferred and administered by the Federal Retirement Thrift Investment Board. Just like a 401(k), you can choose how these funds are invested. Upon setting up the TSP, you will be given a list of fund choices.

For example, if you earned $40,000 and had agency contributions of 5% and a 6% rate of return, after 30 years of service, you would have earned about $335,200, or about $1,400 per year for 20 years. Because the TSP does not function as a pension like the basic benefit plan and Social Security, your earnings after 30 years would be based on the funds you choose, the amount of money you contribute above the amount your employer deposits, and market conditions that are outside of your control.

Just like a 401(k), there is a limit to how much you can contribute to your Thrift Savings Plan. The limit for how much you can contribute to your Thrift Savings Plan is $23,000 in 2024 if you’re under 50. (It was $22,500 in 2023.) If you’re 50 or older, you can take advantage of the catch-up contribution provision and contribute up to an additional $7.500. (It was also $7,500 in 2023.) Annual additions (for “mostly members of the uniformed services who can exceed the annual elective deferral limit”) are limited to $69,000.

“The biggest federal employee mistake I see is not contributing up to the 5% agency match. Simply choosing to contribute 5% and leaving it in the G-Fund will guarantee an automatic 100% rate of return. No investor can consistently beat that,” says Cooper Mitchell, president of Dane Financial LLC, in Springfield, Mo., and creator of FedRetirementPlanning.com.

Types of Retirement

Disability Retirement

If you have completed at least 18 months of service and meet the requirements for disability, you may receive benefits from all three parts of your retirement plan.

Early Retirement

Early retirement can include retiring at the federal minimum retirement age (MRA), which, for anybody born after 1970, is 57 years old. It can also include early retirement due to a reduction in force or discontinued service because of involuntary separation.

Voluntary Retirement

Traditional retirement provides you with full benefits, provided you meet all requirements.

Deferred Retirement

This type of retirement is for former federal employees covered by FERS.

How Do You Receive Federal Employees Retirement System (FERS) Benefits?

The Office of Personnel Management (OPM) provides helpful information that covers the steps you need to take to prepare for retirement five years prior to the projected date. Once you are within two months of your retirement date, complete the required application found on the OPM website. The responsible agencies will work with you to complete the application and ensure that you begin receiving benefits soon after your retirement date.

What Types of Retirement Are There for the Federal Employees Retirement System (FERS)?

With the Federal Employees Retirement System (FERS), there is disability retirement, early retirement, voluntary retirement, and deferred retirement.

Who Does the Federal Employees Retirement System (FERS) Cover?

FERS covers federal employees in all three branches of the government. FERS does not cover employees of state or local governments.

The Bottom Line

Employees eligible for the Federal Employees Retirement System (FERS) receive benefits from three separate plans. In a world where pensions are being discontinued by corporations and governments, FERS is still seen as one of the best retirement packages available. Some believe, however, that as the federal government continues to rein in costs, FERS could undergo changes that would make it less attractive.

Read the original article on Investopedia.