Key Takeaways

• Maximizing FERS retirement benefits involves understanding all aspects of your pension, Social Security, and Thrift Savings Plan (TSP).
• Careful planning and strategic withdrawals from your retirement accounts can help you optimize income and minimize taxes in your retirement years.

Ready to Retire? Here’s How to Squeeze Every Last Dollar from Your FERS Benefits

The Federal Employees Retirement System (FERS) is a powerful tool for government employees preparing for retirement. But as with any retirement program, the key to making the most of your FERS benefits is understanding all the moving parts. Whether you’re thinking about retiring soon or are in the planning stages, it’s crucial to take a strategic approach to get the most out of your hard-earned benefits. Let’s explore how you can maximize your FERS retirement income.

The Three Components of FERS

FERS is made up of three primary components: your Basic Benefit Plan, Social Security, and the Thrift Savings Plan (TSP). To squeeze every last dollar from your FERS benefits, it’s essential to understand how each of these parts works and how to use them in tandem.

1. Basic Benefit Plan: The Foundation of Your Retirement Income

The Basic Benefit Plan operates as a pension, where both you and your employer contribute to the fund throughout your federal career. Upon retirement, you receive a monthly annuity for the rest of your life.

Maximizing Your Pension:

• Boost Your High-3 Average Salary: The Basic Benefit Plan calculates your annuity based on your “high-3” average salary, which is the average of your highest-paying consecutive three years of service. Timing your retirement when you’re earning your highest salary will maximize your pension.
• Years of Service: Your total years of creditable service also play a major role in the size of your annuity. Working additional years can increase your retirement income. For instance, if you’re close to the 30-year mark, it might be worth staying to achieve full benefits.

2. Social Security: Don’t Overlook It

FERS retirees are eligible for Social Security benefits, which can provide a significant portion of your retirement income. The key to maximizing Social Security benefits is knowing when to claim them.

Strategies for Social Security:

• Delay Benefits for a Bigger Payout: If possible, delay claiming your Social Security benefits until age 70. While you can start taking benefits as early as age 62, your monthly payments increase by about 8% for every year you delay after your full retirement age.
• Understand the Earnings Test: If you plan to work after you start receiving Social Security benefits, be aware that earning too much could reduce your payments before reaching full retirement age. Consider the earnings limit to avoid a surprise reduction.

3. Thrift Savings Plan (TSP): Your Investment Powerhouse

The TSP is a defined contribution plan similar to a 401(k). You can contribute a portion of your salary to the TSP, and your agency may match your contributions up to a certain limit. The choices you make with your TSP—both during your career and in retirement—can greatly impact your financial security.

Optimizing Your TSP:

• Contribute as Much as Possible: Contributing up to the IRS limits ($23,000 for those over 50 in 2024) maximizes your retirement savings. Be sure to take advantage of any employer match, as this is essentially free money.
• Consider a Roth TSP: A Roth TSP allows you to contribute after-tax dollars now, which grow tax-free, and can be withdrawn tax-free in retirement. This option might be especially appealing if you expect to be in a higher tax bracket later in life.
• Smart Withdrawals: Upon retirement, carefully plan your withdrawals from the TSP. You can take monthly payments, periodic payments, or lump sums. Consider your tax situation, as TSP withdrawals are typically taxed as ordinary income.

Planning for Healthcare Costs in Retirement

One of the biggest expenses in retirement is healthcare. As a federal retiree, you have access to the Federal Employees Health Benefits (FEHB) Program, which can be a great way to manage healthcare costs. However, making sure you select the right plan and understand how FEHB works with Medicare is critical.

Key Healthcare Considerations:

• FEHB and Medicare Coordination: Once you turn 65, you’ll be eligible for Medicare. Many retirees choose to keep their FEHB coverage and also enroll in Medicare Part A (hospital insurance), which is typically premium-free. Coordinating both plans can help lower your out-of-pocket healthcare costs.
• Long-Term Care Planning: Consider planning for potential long-term care costs, which are not covered by Medicare. The Federal Long Term Care Insurance Program (FLTCIP) is available to federal employees and can help cover these types of expenses.

Understanding Survivor Benefits

If you’re married or have dependents, understanding how survivor benefits work is essential for protecting your loved ones after you’re gone. FERS offers two survivor benefit options: a full survivor benefit or a partial survivor benefit. With the full benefit, your spouse will receive 50% of your annuity after your death, while the partial benefit provides 25%.

Maximizing Survivor Benefits:

• Choose the Right Option: Carefully consider whether to elect the full or partial survivor benefit based on your family’s financial needs. While electing the full benefit will reduce your monthly annuity slightly, it may provide better security for your spouse.
• Life Insurance: Some retirees opt for life insurance instead of, or in addition to, survivor benefits. Be sure to weigh the costs and benefits of each option to make the best choice for your situation.

Tax Strategies for FERS Retirees

Your retirement income will be subject to taxes, but with careful planning, you can minimize the impact. Understanding how your FERS pension, Social Security, and TSP withdrawals are taxed is crucial.

Key Tax Considerations:

• Location Matters: Consider where you plan to live in retirement. Some states do not tax federal pensions or Social Security benefits, which can significantly reduce your tax burden.
• Roth Conversions: If you have a traditional TSP account, consider converting some of it to a Roth account during years when your income is lower. This can help reduce your tax liability later in retirement when you begin withdrawing funds.
• Required Minimum Distributions (RMDs): Once you turn 72, you are required to start taking RMDs from your TSP, which are taxed as income. To avoid large tax bills, consider a withdrawal strategy that smooths out your taxable income over time.

Consider Working a Few More Years

While retirement can be enticing, staying in the workforce a little longer might significantly boost your financial future. Continuing to work gives you the chance to further increase your high-3 average salary, add years of service to your retirement calculation, and delay tapping into your retirement funds.

Why Delay Retirement?

• Increased Pension: Each additional year you work increases your FERS pension.
• Delay TSP Withdrawals: By continuing to work, you can delay withdrawals from your TSP, allowing your investments more time to grow.
• Higher Social Security Benefits: Working longer means you can delay claiming Social Security, leading to higher monthly payments.

Avoiding Common Mistakes

Many FERS retirees leave money on the table simply by failing to plan properly. Avoiding common mistakes can help you squeeze more out of your retirement benefits.

Watch Out For:

• Claiming Social Security Too Early: Taking benefits at 62 can result in permanently reduced payments.
• Overlooking Survivor Benefits: Failing to elect survivor benefits or adequate life insurance can leave loved ones financially vulnerable.
• Neglecting Healthcare Costs: Underestimating healthcare expenses can quickly deplete your retirement savings.

Making the Most of Your FERS Benefits

Maximizing your FERS retirement benefits requires careful planning and a deep understanding of how each component of the system works. By focusing on boosting your high-3 salary, making smart decisions about Social Security and TSP withdrawals, and being mindful of tax and healthcare considerations, you can ensure a more comfortable and financially secure retirement. Don’t rush the process—taking the time to make informed decisions can pay off significantly in the long run.

Planning Your Next Steps

As you approach retirement, it’s essential to review all of your options and develop a comprehensive plan. Consider working with a financial planner who specializes in federal retirement to make sure you’re taking advantage of every opportunity to maximize your benefits. Taking a proactive approach today can help ensure you get the most from your FERS benefits in the future.