Annuity payments for life at the end of your career are one of the most valuable of the benefits of working for the federal government.
In a recent survey, eight-tenths of federal employees said that the availability of that benefit influenced their decision to take a job with the government to a moderate or great extent. Once they saw it in more detail, it took on even greater value: nine-tenths said the same of their decision to remain with the government. Almost everyone polled rated that benefit as important or extremely important to them.
But how do you get the most out of such a valuable benefit?
The short-hand answer many federal employees would give is “earn more and work longer.” There is some truth to that, since the formula under both the Federal Employees Retirement System and the Civil Service Retirement System involves salary level and length of service.
But there are other considerations. Some of them can make a major difference, others may make only a small one. But even the latter are worth knowing.
This publication explores those issues, starting with a brief review of when you will be eligible to begin receiving a civil service annuity, whether you are under CSRS (including the hybrid CSRS Offset) or FERS and how benefits are calculated under each.
Then we’ll examine how to make sure you receive the maximum credit on the service time half of the equation and the impact of working longer on both that and the other half of the computation, the salary used. Finally, we’ll look at some of the finer points, some of which apply generally, others of which apply only to employees in limited situations.
ELIGIBILITY FOR VOLUNTARY FEDERAL RETIREMENT
Under CSRS/CSRS Offset, you may retire voluntarily at age 62 with five years of service, 60 with 20, or 55 with 30.
Under FERS, an employee who meets one of the following age and service requirements is entitled to an immediate retirement benefit: age 62 with five years of service, 60 with 20, minimum retirement age (MRA) with 30 or MRA with 10 (but with reduced benefits). MRA varies according to the year of birth, as shown on the following chart:
If you were born Your MRA is
Before 1948 55
In 1948 55 and 2 months
In 1949 55 and 4 months
In 1950 55 and 6 months
In 1951 55 and 8 months
In 1952 55 and 10 months
In 1953 – 1964 56
In 1965 56 and 2 months
In 1966 56 and 4 months
In 1967 56 and 6 months
In 1968 56 and 8 months
In 1969 56 and 10 months
In 1970 and after 57
A variant is “deferred retirement.” Employees under CSRS/CSRS Offset who leave federal service before meeting the age and service requirements for an immediate retirement benefit may receive a deferred annuity at age 62, if they have at least five years of creditable civilian service, do not receive a refund of all retirement contributions and are not eligible for an immediate retirement benefit. Under FERS, employees are eligible at age 62 with five years of service; 60 with 20; MRA with 30; or MRA with 10 (but with a benefit reduction, one that can be lessened or eliminated by postponing receipt of benefits as described below).
Note: Federal law enforcement officers, firefighters and air traffic controllers are under a modified arrangement in which they may retire voluntarily at age 50 with 20 years of such service, or at any age after 25 years of such service. Those in the former two occupations generally are subject to mandatory retirement at age 57 and those in the latter at age 56, although exceptions apply.
HOW FEDERAL RETIREMENT BENEFITS ARE CALCULATED
The basic benefit calculations are fairly straightforward, based on an employee’s length of creditable service, the highest-paid 36 consecutive months of service, called the “high-3” and formulas involving multipliers.
While the formulas differ as described below, the high-3 number is calculated in the same way for each. It is the average of your highest rates of basic pay over any three consecutive years of creditable civilian service, with each pay rate weighted by the length of time it was received. That three-year period starts and ends on the dates that produce the highest average pay.
The figure is based on pay from which retirement deductions are taken. For most employees, it’s the salary of the position you occupy, including locality pay. For some employees, it will also include such things as night and/or environmental differentials and premium pay. It doesn’t include such things as bonuses, military pay, cash awards, holiday pay, travel pay outside the regular tour of duty, or lump-sum payments covering unused hours of annual leave.
If you are like most federal employees, your highest three years of basic pay will be the ones that immediately precede the day on which you retire. If that’s the case, you can find the starting date for your high-3 calculation by subtracting three years from the date you plan to retire. If you’ve had some breaks in service, the three years used to calculate your high-3 don’t need to be continuous. Two or more separate periods of service may be joined together.
CSRS—The CSRS benefit is:
.015 x first 5 years of service x high-3
.0175 x next 5 years of service x high-3
.02 x all full years of service over 10 years x high-3, with additional full months credited proportionately
CSRS Offset—The dollar amount of a basic annuity payable to a CSRS Offset employee is calculated in the same way as that for a regular CSRS employee. However, CSRS Offset employees who retire and are eligible for a Social Security benefit at age 62 (or later if they retire after age 62) will have their CSRS annuities reduced by the amount of the Social Security benefit that is attributable to their offset service. If they are not eligible for Social Security benefits at those points in time, there will be no offset to their CSRS annuities.
Note: Under both CSRS and CSRS Offset, for law enforcement officers and firefighters, the formula is 2.5 percent of high-3 for each of up to 20 years of such service plus 2 percent for each year after; for air traffic controllers, there is an additional guarantee of no less than 50 percent of high-3.
FERS—The benefit is calculated as 1 percent of high-3 average pay multiplied by years of creditable service. For those retiring at age 62 or later with at least 20 years of service, a factor of 1.1 percent is used rather than 1 percent. There is also a 1 percent add-on for periods of disability of two months or more. Full months beyond a full year are credited proportionately.
Note: FERS employees who accumulated five or more years of service under CSRS and transferred to FERS will have that component of their annuity calculated using the CSRS formula.
FERS employees who meet certain requirements will receive a Special Retirement Supplement, which is paid as an annuity until they reach age 62. This supplement approximates the Social Security benefit earned while employed by the federal government.
Note: For law enforcement officers, firefighters and air traffic controllers, the formula is 1.7 percent of high-3 for each of up to 20 years of such service plus 1 percent for each year after.
Social Security—The Social Security benefit, for those federal employees eligible for one—primarily, FERS and CSRS Offset employees—is based on a complex formula involving past covered earnings and an adjustment of those earnings to account for inflation, and applying a formula that results in weighting benefits toward lower-paid workers. In addition, benefit levels vary according to the age, typically between 62 and 70, at which the individual chooses to draw benefits, and there are various offsets that apply in certain circumstances to those who are continuing to earn income or who are drawing benefits from a retirement program, such as CSRS, that doesn’t include Social Security.
The Social Security Administration no longer sends annual benefits estimates to everyone but does send them annually to those over age 60 who are not already drawing benefits and who have not registered for a personal account at www.socialsecurity.gov/myaccount. That site allows you to check your earnings records on file with the SSA and view estimates of benefits you would receive if starting at different ages. It does not take into account those potential reductions, however.
The Added Value of Unused Sick Leave
Unused sick leave can’t be added to your actual service to make you eligible to retire. It will, however, be used to increase your annuity once you have met the eligibility requirements.
Since full-time employees get 13 days (104 hours) of sick leave a year with no limit on how much you can carry from year to year, this can be a substantial benefit, adding months or even a year or more of credit. It depends on your length of service and how much of that leave you used through your career.
The calculation is tricky but the bottom line is that 174 hours of unused sick leave equals one month of added service credit.
Any hours of actual service beyond the last full month also will be converted into retirement hours in that way and will be added to the unused sick leave. Any days beyond the last full month are dropped.
Note: Unused annual leave is not credited as time served but rather is paid to you as if you had continued working for that time, as described below.
GETTING CREDIT WHERE CREDIT IS DUE
Check Your Work History
For retirement benefit calculation purposes, length of service includes all periods that are countable for retirement service. That applies to more types of employment than you might think.
For example, it covers work such as service with the Peace Corps and Vista, volunteer service under the Economic Opportunity Act, employment as a United States Capitol Guide, and work as a substitute letter carrier. Maybe you once worked for the Census Bureau part-time during a census, or served on a temporary holiday season appointment with the Postal Service, or perhaps you held a temporary position with the IRS during tax season. These may very well be creditable towards retirement.
Write down every job you’ve ever had that has any connection to the government. Then check to see if that service is creditable. You’ll find that information at 5 U.S. Code 8332, which you can access by searching online. The fact that this section of the law covers several pages is a good indication of just how many different jobs are eligible for inclusion in determining your length of service and used in your annuity computation.
Now check that against your official personnel folder (which actually may still be a folder but more likely is an electronic file) at your personnel office. Notify that office immediately if you discover that your file is not complete.
Since it may take some time to straighten out any omissions, do not leave this to the time immediately before your planned retirement.
Below are three special considerations for capturing service credit for which special deposits to the federal retirement fund are required. Contact your personnel office to obtain the appropriate forms and instructions. Whether it makes sense to make these deposits depends on how much is owed versus what will be returned through an annuity over time, a calculation that can only be done on an individual basis. An agency retirement counselor should be able to help.
A period of military service may be credited for federal retirement purposes if:
• It was performed before the date of separation upon which title to an annuity is based.
• It was active duty.
• It was not included in the computation of military retired pay, or if it was included in retired pay, the retired pay was awarded based on disability incurred in combat with an enemy of the United States or caused by an instrumentality of war and incurred in the line of duty during a period of war; or granted under the provisions of chapter 67, Title 10, of the U.S. Code.
• It was honorable service.
• A deposit is made (note: this did not apply to military service performed before 1957).
The deposit must be received before you retire. Because of the time involved with getting the right number, making the deposit, and having it recorded, you’ll want to start this process well before you retire—at least six months, a year or more would be safer.
An estimate of the needed payment can be obtained through http://go.usa.gov/8mqr. While this will not be exact, it may be sufficient to reach a conclusion on whether to make the deposit.
Some federal employees leave the government, withdraw their retirement contributions, and then return to work for the government. In those cases, the prior service time is counted toward years of service for determining retirement eligibility and the salary paid is counted for the high-3 calculation if pertinent.
However, for that service to count in the calculation of an annuity, FERS employees must make redeposits with interest to count that time in their FERS benefit calculations.
The same applies under CSRS with one exception: instead of paying the redeposit, anyone who received a refund covering a period of service that ended before March 1, 1991 can choose to have their annuity actuarially reduced based on their age and the amount of redeposit, including interest, owed at the time of retirement.
Contact your personnel office to obtain the appropriate forms and instructions.
While it has not been the practice for many years, in the past some employees worked in federal jobs where retirement contributions were not taken out of their salaries.
Under CSRS, such a period that occurred prior to October 1, 1982 will count when computing length of service. However, the annuity will be reduced by one-tenth of the amount that the employee would have paid into CSRS plus interest had the service been covered by CSRS. For such a period on or after October 1, 1982, an employee must make a deposit before that service can be used in any annuity computation. If the deposit is not made, the time involved can still be counted for meeting the minimum length of service for an immediate annuity, and for determining high-3 average salary. However, no credit will be allowed in the computation of the annuity.
Under FERS, employees cannot make a deposit for non-deduction service after 1988. To get credit for any such service performed before 1989 (as might be the case of an employee initially hired under CSRS but later switched to FERS), FERS employees must make a deposit.
BOOSTING YOUR BENEFITS
Unless you are in law enforcement or one of the few other occupations in which retirement is mandatory at a certain point, you can continue working at your option, so long as you continue to perform acceptably. By doing so, you will increase both of the factors that go into a retirement calculation, your length of service and your high-3.
Most federal employees in fact do continue working past their earliest eligibility date. Only about a fifth retire in the first year they are eligible, and even 10 years past that point, about a fifth are still working.
The table below provides a sample illustration of the potential impact on your high-3 of working two, four or six years beyond your initial retirement eligibility (or beyond some point afterward that you may have targeted to retire). The middle column is based on roughly the average current federal salary, the other two on salaries $30,000 below and $30,000 above that figure.
The table illustrates the impact of 3 percent annual salary growth. This could be achieved by a combination of general annual pay raises (which have been in the 1-2 percent range in recent years) plus potential value of promotions and within-grade increases, for those eligible. (Note: Of course, your salary may increase in other ways, such as through gaining a promotion or changing to a higher-paying job.)
Growth of High-3 Salary from Continued Working, at 3 Percent Annual Salary Growth:
Current | $55,000| $85,000 | $115,000
In Two Years | $58,349| $90,176| $122,004
In Four Years | $61,903| $95,668| $129,433
In Six Years| $65,673| $101,494| $137,316
Now let’s combine the salary growth with the impact of added years of service.
Under the standard formulas: each year of CSRS service beyond the initial 10 is worth 2 percent of your high-3, each month 1/6th of 1 percent; if you retire under FERS with less than 20 years of service and/or below age 62, each year of service is worth 1 percent of your high-3, each month 1/12 of 1 percent; if you retire under FERS at age 62 or later with at least 20 years of service, the multiplier for a year is 1.1 percent, each month 1/12 of 1.1 percent.
Note: For simplicity’s sake, we’ll assume the years of service in each example includes the increase for unused sick leave. In most cases continued work would add to it, but it also could decrease, if during those additional years you used more than you earned.
Let’s take someone under CSRS now age 62 with 38 years of service and a high-3 of $85,000. That person, retiring today, would receive a $5,117 monthly annuity. Waiting two years, with 3 percent salary growth each year, would raise that to $5,730, based on both the higher salary and two additional years of service.
Now, let’s take someone under FERS currently age 57 with 27 years of service with the same high-3. Waiting two years would increase that person’s monthly annuity from $1,913 to $2,179 due to the impact of higher salary and additional service time; waiting four years would raise it to $2,471.
But note the added value to that person of working six additional years, past age 62—which, with more than 20 years of service as here, adds 10 percent to the benefit. That brings the monthly benefit under these assumptions to $3,070. Those additional six years increase by more than half the value of a benefit earned over 27 years.
Note: Working longer also will allow you to continue building up your Thrift Savings Plan account and other retirement savings; a calculator for making projections is at www.tsp.gov/calculators. It also likely will increase your Social Security benefit; a calculator for that impact is at www.socialsecurity.gov/myaccount.
Unused Annual Leave
When federal employees retire (or separate for other reasons) receive a lump-sum payment equal to the pay the employee would have received had he or she remained employed until expiration of the period covered by the annual leave.
Most federal employees can carry no more than 30 days of accumulated annual leave from one leave year to the next; special rules apply to certain categories. However, the carry-over limit does not apply to the lump-sum payment.
This is a main reason many federal employees retire just before the beginning of a new leave year: they can carry forward as much as their maximum carry-forward amount plus the annual leave they accrued but did not use during their last year of federal employment.
An agency calculates a lump-sum payment by multiplying the number of hours by the employee’s applicable hourly rate of pay, plus other types of pay the employee would have received if he or she had remained in service for an equivalent time.
That includes the value of holidays and any raises the employee would have received in that time, such as the general federal employee raise that typically occurs effective with the first pay period of January. However, allowances paid for the sole purpose of retaining a federal employee in government service (for example, retention allowances and physicians comparability allowances) are excluded.
A listing of leave year ending dates through 2030 is at https://www.opm.gov/policy-data-oversight/pay-leave/leave-administration/fact-sheets/leave-year-beginning-and-ending-dates.
Picking a Retirement Date
Under CSRS, you can retire up to the third day in any month and be on the annuity roll for that month, meaning your first annuity payment will come the following month; it will be reduced proportionately for each day, up to three. If you retire after the third of the month, you will be on the annuity roll for the following month.
Under FERS, you will be the annuity roll in the following month regardless of which date in a month you retire. While retiring earlier than the last day gains you nothing in your annuity, that doesn’t mean that you should never retire earlier than that. You may have a good reason for doing so, for example, the cutoff date for an early retirement offer or buyout, or fitting your departure to new employment or vacation plans.
Note: Annuity payments begin with “interim” amounts pending a final calculation by the Office of Personnel Management of your benefits. These payments commonly equal about 80 percent of your regular payments and last for several months, after which the difference is made up. However, there can be a substantial variation in both the percentage of the benefit paid and the length of time it takes for regular payments to begin.
Timing of retirement also affects the initial cost-of-living adjustment. Those retiring under CSRS are eligible immediately regardless of age, while under FERS those adjustments are not paid until after age 62 except for those retired under disability and those retiring under special provisions for law enforcement officers, firefighters, and air traffic controllers.
The initial COLA is prorated according to the date on which they retired. If you retire in January, your first adjustment will be made in January of the following year and will be for 11/12ths of the COLA amount. If you retire in February it will be 10/12ths, and so forth. Future COLAs will be for the full amount.
Note: You can retire on any day of the week you want to, even on a holiday. However, be aware that if you retire before the end of a pay period, you won’t receive any credit for the annual and sick leave you would have otherwise accrued during that pay period.
The FERS MRA + 10 Annuity
The “MRA + 10” annuity option allows FERS employees to retire at their minimum retirement age (see above) with as few as 10 years of service. The downside is that your annuity will be reduced by 5 percent for every year you are under age 62. That’s 5/12ths of a percent per month.
However, there is a way for you to reduce or eliminate that penalty: you can retire but postpone the receipt of your annuity until a later date. And if you have at least 20 years of service, you can begin receiving a penalty-free annuity at age 60.
When you finally begin receiving your annuity, the amount will be calculated in the same way it would have been on the day you retired. Your high-3 won’t be increased by any pay increases or cost-of-living adjustments that occurred since you left.
The CSRS Annuity Limit
Under CSRS, your beginning annuity cannot exceed 80 percent of your high-3. Under the standard formula, you would reach that amount with 41 years and 11 months of creditable service; those with service time under special retirement provisions with higher benefit accumulation rates reach the limit earlier.
If you continue working past that point, retirement contributions will continue to be taken out of your salary. However, at retirement, those excess contributions will be returned to you with interest or used to purchase an additional annuity on the same terms as a voluntary contributions annuity (see below).
The 80 percent limit does not apply to additional annuity purchased with excess contributions or through the Voluntary Contributions Program, cost-of living-adjustments, or as a result of additional retirement credit given for unused sick leave.
There is no annuity limit under FERS.
The CSRS Voluntary Contributions Program
CSRS and CSRS Offset employees may make voluntary contributions to the retirement fund and earn market interest rates tax-deferred. These contributions may only be made if you do not owe a deposit or redeposit to the retirement fund.
Voluntary contributions may be made at any time and in any amount, as long as they are at least $25 (or multiples of $25). Total contributions can be up to 10 percent of the total basic pay you received during your entire federal career. To open an account, use SF 2804, Application to Make Voluntary Contributions, at www.opm.gov/forms.
On retirement, the funds can be used to purchase additional annuity. Each $100 will buy $7 a year plus a 20 cents for each year you are over age 55 when you retire. The annuity will not be increased by cost-of-living-adjustments.
Alternatively, you can withdraw the money at any time (not just after retirement) and for any reason. Withdrawals can be transferred into an IRA; consult a tax adviser on this issue.