By Dallen Haws
The FERS Pension or Annuity is an incredible federal benefit but many people overestimate what they will actually receive in retirement. Did you know that there are 6 main reductions to your pension in retirement that can dramatically affect how much you think you need in retirement?
When you start taking your pension in retirement, you have two choices: first, you could take the survivor benefit. What this means is that once the FERS employee passes away, your spouse continues to receive half of what you received during your lifetime. But for that benefit, while you and your spouse are still alive, you take a 10% reduction to your pension payout every month. It is not a free benefit. It’s your choice whether you would like 100% of your pension and your spouse will get nothing if you were to die first. Or the other way around, wherein you take the 10% deficit and if you pass before your spouse, then your spouse will get 50% of your pension that you received during your lifetime.
Most federal employees don’t realize that about 99% of the pension they receive every month is taxable income. In retirement, most FERS are looking at a 10% to 20% tax rate for all that money. (ask.FEDweek.com: Taxes on Benefits – Federal Retirement)
FEHB (FEDERAL EMPLOYEE HEALTH BENEFITS PLAN)
If you keep FEHB (in 99% of cases you should) in retirement, your premium comes out of your pension. The good news is that your premium cost isn’t going to change from your pre-retirement to your retirement FEHB costs. For a good family plan, it’s generally around 300 to 400 plus, so make sure to take that into consideration when you are planning.
MRA + 10 Retirement Before Age 62
Some types of retirement don’t offer your full pension. For example, if you retire with MRA+10 retirement, for every year that you retire before age 62, you will take a 5% reduction to your pension. For example, if you retire at age 60 and not age 62, with the MRA plus 10 retirement, this means that you’ll take a 10% decrease to your pension. There is a way to get around that. It’s called a postponed retirement and that means that you will not receive your pension until age 62. For most people that’s a great deal as long as they have the funds to survive until they turn 62. This way they do not take a huge hit in their pension.
FEGLI (FEDERAL EMPLOYEE LIFE INSURANCE)
During your career, this is often a great insurance option and very cost effective. But as you retire and get older, this insurance gets very expensive even compared to those on the private side. For most federal employees, it doesn’t not make sense to keep FEGLI when they retire. But if you do happen to keep this in your retirement, make sure that you reduce what you expect to receive from your pension by your premium payments. (ask.FEDweek.com: FEGLI Coverage After Retirement)
FEDERAL LONG TERM CARE PROGRAM
This program is offered through John Hancock and they have some good options for retirees for long term care. There are some good options on the private side as well. If you choose the federal option, you can choose to pay it out of pocket or to get it reduced out of your pension automatically. Whatever you choose, just make sure it’s planned so that you know exactly, month by month, how much you’d get from your pension.
As you can see, these 6 things that can reduce your pension dramatically. It is crucial to know what to expect so you can have a lifestyle and retirement that you love. The federal government has incredible benefits and the pension is one of those benefits that you really can’t find anywhere else on the private side. So enjoy it, but educate yourself to get the most out of it. Learn about all these reductions to know exactly how much you will receive and need from other sources, like your investments from TSP or social security. Remember, the government is not responsible for making your retirement amazing. That is your job.
Dallen Haws is a Financial Advisor who is dedicated to helping Federal Employees live their best lives. He loves talking about the security and freedom that a strong financial plan can bring to our lives. He has seen how good information can change everything. You can learn more about him at https://planyourfederalbenefits.com/.