Understanding how your federal benefits are actually going to work in retirement is key to you feeling comfortable/confident about your future. Image: ImagePixel/Shutterstock.com
By: Dallen HawsHaving a pension in retirement is one of the best benefits that federal employees enjoy.
Very few private sector employers are willing to provide pensions because of the cost to do so.
But unfortunately, just having a pension is not enough to guarantee a great retirement.
You have to understand how to maximize your benefits to make sure you are set up for success.
And one of the most important things to know is that there are a lot of things that have to come out of your pension before you ever see it.
Gross Vs. Net
If your salary is 100k per year, do you actually receive 100k per year in your bank account?
No!! Not even close.
There are tons of things that you have to pay for first.
Like Fica taxes, income tax, TSP savings, insurance premiums, etc.
So if your gross pay per year is 100k gross then you may only actually receive 50k per year net.
The same principle applies in retirement.
Your Gross Pension
But to get to your net pension we have to start with your gross pension.
For FERS federal employees it is calculated like this:
High-3 Salary x Years of Service x Multiplier
For traditional FERS, your multiplier would be 1% unless you retire at age 62+ with 20+ years of service at which point it would be 1.1%.
For Special Provisions (fire, law enforcement, air traffic control), your multiplier is 1.7% for the first 20 years and 1% for every year thereafter.
Example:
If you are traditional FERS with 30 years, high-3 salary of 100k, and multiplier of 1% then your numbers would look like this:
100k x 30 x 1% = $30,000 Gross Annual Pension
So you would have a gross annual pension of 30k.
However, pensions are paid monthly so let’s divide it by 12 to get the monthly amount:
$30,000 / 12 = $2,500 Gross Monthly Pension
If you don’t know what your gross pension will be in retirement you can calculate it yourself with the equation above or you can request a pension estimate from your HR.
Getting to Net
Here is a list of all the things that could come out of your pension:
● Survivor Benefits
● Health Insurance Premiums
● Life Insurance Premiums
● Dental/Vision Premiums
● Long Term Care Premiums
● Taxes
Survivor Benefits
If you want your spouse to be able to keep a portion of your pension if you die first then you’ll have to elect a survivor benefit at retirement. If you don’t elect a survivor benefit, your pension would stop when you die.
Here are the survivor benefits options:
● Full Survivor: Costs 10% of your pension, spouse would get 50% of your pension
● Partial Survivor: Costs 5% of your pension, spouse would get 25% of your pension
● No Survivor: Costs 0%, Spouse gets 0%
In a nutshell, a survivor benefit decreases your pension while you and your spouse are still alive in order to leave a portion to them after you pass.
If your spouse passes away first then you no longer have to pay for survivor benefits any more (the 10% or 5% reduction) but you don’t get any of the money back that you paid into the system.
Also, if your spouse doesn’t have a survivor benefit then they wouldn’t be able to stay on your health insurance if you died first.
Insurance Premiums
You’ll have to continue to pay for whatever insurance you want to take with you into retirement.
FEHB:
Federal retirees get the same FEHB (health insurance) premium prices as active federal employees.
So if you keep the same plan into retirement then you’ll have the same price (just paid on a monthly basis instead of every 2 weeks).
The one difference however is that your FEHB premiums are no longer pre-tax in retirement as they were while working.
FEGLI:
FEGLI (life insurance) can get very expensive in retirement depending on what parts you take.
So you’ll want to make sure you understand your options and the costs that come with them.
Dental/Vision:
These premiums don’t go up because of retirement but you do lose the ability to pay them pre-tax.
Long Term Care:
Long term care prices don’t change because of retirement.
Taxes
Your FERS Pension is subject to federal income tax. Your pension may also be subject to state income taxes depending on your state’s rules.
Example: Gross to Net
For this example, let’s say your gross monthly pension is $2,500/month and you have survivor benefits, FEHB, dental/vision and taxes to pay for.
Your numbers may look something like this:
Gross: $2,500
-Survivor Benefits: -$250
-FEHB: -$400
-Dental/Vision: -$80
-Taxes: -$350
Net: $1,420
So while your gross pension is $2,500 you’ll actually get $1,420 in your bank account every month.
Know Your Stuff
Understanding how your federal benefits are actually going to work in retirement is key to you feeling comfortable/confident about your future.
A good first step (if you haven’t already) is to reach out to your HR to get an estimate for your pension.
Dallen Haws is a Financial Advisor who is dedicated to helping federal employees live their best life and plan an incredible retirement. He hosts a podcast and YouTube channel all about federal benefits and retirement. You can learn more about him at Haws Federal Advisors.
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See also
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