How much is your FERS annuity worth? More than you think it is! FERS is a defined benefit plan that is funded by mandatory contributions from both you and the government. You pay significantly less for this benefit than does Uncle Sam. Your FERS annuity is calculated by your length of service (in years and months) and your high-three annual salary. Those who retire under the age of 62 will receive an annuity based on 1% per year, while those who retire at or older than 62 and have at least 20 years of service will receive an annuity based on 1.1% per year. Those who are 62 or older but have less than 20 years get the 1% factor. Special category employees (e.g., law enforcement officers, firefighters, air traffic controllers, etc.) will receive a higher percentage.
How much would you have had to save on your own to get a benefit that is equal to what you have will receive in your FERS annuity? Quite a bit! Let’s say that you retire under the age of 62 and have a total of 30 years of federal service. Your high three salary is an even $100,000 a year. Your FERS annuity will be $30,000 per year and will (once you reach 62) have a cost of living adjustment. The COLA kicks in upon retirement for special category employees. How much would you have had to save in order to be able to generate an inflation indexed income of $30,000 per year?
The commonly accepted answer is $750,000. This comes from the so-called 4% rule; a rule that says that you have a very small chance of running out of money if you begin withdrawing from a lump sum at the rate of 4% and adjust the withdrawals for inflation each year. This rule was derived from looking at historical stock and bond returns over the 50 year period from 1926 to 1976; a period that included the great depression and then looking at withdrawal rates that would preserve money. The financial planner who did the analysis, Bill Bengen, concluded that even during extremely adverse market conditions, there was no scenario in which a person who followed the 4% rule would have run out of money in less than 33 years. In fact, Bengen said that a 5% rate would be more realistic, changing the amount that needed to be accumulated to roughly $625,000 for the person in our example.
A recent MetLife study showed that the median retirement savings amount is expected to be $450,000 – that would not be enough to replace the value of the FERS annuity for the person in our example. Could (would) you have saved enough so that you could replace 30% of your pre-retirement income? Your FERS annuity is a relative bargain when it comes to providing for yourself in retirement.