FEDERAL GOVERNMENT EMPLOYEES
Whether you are a CSRS (Civil Service Retirement System) participant or a FERS (Federal Employees Retirement System) participant, understanding the employee benefits and retirement benefits offered to you as a federal government employee can be a complicated matter. Do not let the complexity of your benefits packages as an active employee or future or present retiree prevent you from fully benefiting from the options available to you.
As a Chartered Federal Employee Benefits Consultant℠, Martavius D. Jones is a financial planning professional who has been specially trained on the complexities associated with the retirement and other benefits offered to the employees of the federal government.
Jones Wealth Management Group can assist you in developing a better working knowledge of some of the provisions offered under the federal government benefits and retirement plans so that the decisions you make are most beneficial to you and your family. For example, a 1% better return in the performance of one option versus another in the TSP (Thrift Savings Plan) over a long federal government career can equate to tens of thousands of more dollars in retirement.
Whether you are a new federal government employee, a mid-career, or approaching retirement as a federal government employee, trust your retirement future to a financial advisor that is familiar with and knowledgeable of the benefits and retirement options available to federal government employees.
CSRS versus FERS
The Civil Service Retirement System (CSRS) went into effect August 1, 1920, fifteen (15) years before the Social Security Act of 1935 went into effect, thereby creating the Social Security system. The Civil Service Retirement System (CSRS) is a defined benefit, contributory retirement system. Employees share in the expense of the annuities to which they become entitled. CSRS covered employees contribute 7, 7 1/2 or 8 percent of pay to CSRS and, while they generally pay no Social Security retirement, survivor and disability (OASDI) tax, they must pay the Medicare tax (currently 1.45 percent of pay). The employing agency matches the employee's CSRS contributions. (source: https://www.opm.gov/retirement-services/csrs-information)
Congress created the Federal Employees Retirement System (FERS) in 1986, and it became effective on January 1, 1987. Since that time, new Federal civilian employees who have retirement coverage are covered by FERS. FERS is a retirement plan that provides benefits from three different sources: a Basic Benefit Plan, Social Security and the Thrift Savings Plan (TSP). (source: https://www.opm.gov/retirement-services/fers-information)
After meeting the eligibility requirements, both a CSRS participant and a FERS participant will either a CSRS basic annuity or a FERS basic annuity. Because CSRS participants do not pay into the Social Security system, they generally do not receive Social Security benefits at retirement. The switch from CSRS to FERS resulted in a reduction (lesser amount that the government pays) in basic annuity payments that an employee would receive at retirement if the CSRS employee and the FERS employee had the same number of years of service.
The CSRS basic annuity for a federal government employee with 35 years of service would receive annual annuity payments equal to 66.25% of their Hi-3 average salary in retirement. A FERS basic annuity for a federal government employee with 35 years of service would receive 38.5% of their Hi-3 average salary in retirement. In dollar terms, on a Hi-3 average salary of $60,000 per year, a CSRS basic annuity payment would be $39,750 annually, but a FERS basic annuity payment would be only $23,100 by comparison. Because Social Security and the TSP are designed to help offset the differerence, proper allocation within the TSP is important.
The federal deficit currently stands at more than $19 trillion ($19,000,000,000,000) and it continues to increase. Because the federal government makes its money by collecting income and other taxes, it is likely that taxes will INCREASE as some point in the future (including taxes on the middle class) to help lower the federal debt.
As of May 7, 2012, federal government employees now have the same opportunity for TAX-FREE income in retirement that's been available to non-government workers since 2006. On that day, federal government employees could start making Roth contributions to the Thrift Savings Plan (TSP) in addition to the regular TSP contributions.
Upon retirement, withdrawals/distributions from your (regular) TSP account are taxable. The tax rates in the future could be higher as a means to help reduce the federal deficit, but withdrawals/distributions from the Roth part of your TSP could be TAX-FREE.
In both cases, (regular & Roth) TSP withdrawals before age 59½ are subject to ordinary income taxes and may be subject to a 10% IRS penalty, but withdrawals from the Roth TSP are TAX-FREE upon attainment of age 59½ and after 5 years of participation in the Roth IRA.
Federal Employee Group Life Insurance (FEGLI)
The life insurance you have at work may not provide the level or financial security you loved ones deserve.
Federal government employees should know that the cost of your FEGLI Option B insurance is ten times (10x) more expensive in your early 60s than it is in your early 40s. Insurance rates are "banded" together in 5-year bands and start to increase at greater rates starting at age 40. The bands are ages 40-44, 45-49, 50-54, 55-59, 60-64, 65-69, 70-74, 74-79, and 80+. For example, the monthly cost of FEGLI Option B at five times (5x) salary of $50,000 is $21.75 for federal governnment employees between the ages of 40 and 44, $59.50 per month between the ages of 50 and 54, and it is $238 per month between the ages of 60 and 64. (source:https://www.opm.gov/healthcare-insurance/life-insurance/program-information/#url=Premiums-for-Employees)
When you retire from the federal government, the amount of basic life insurance available to your loved ones is reduced by 75% by the time you reach age 68, according to FEGLI (Federal Employees' Group Life Insurance) rules.
As a federal government active employee, you are automatically provided basic life insurance. As a retiree, you are eligible to continue the basic life insurance into retirement. Generally speaking, the amount of basic life insurance you have is the basic insurance amount on your date of separation.
You are not automatically covered by optional insurance like you are with basic insurance. You must take action to elect Optional insurance. You pay the full cost for all Optional insurance you elect.
If you don't make an election regarding the post-65 reduction, you will automatically have the 75 Percent Reduction (unless you previously elected a partial living benefit).