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What is the Federal Employee Retirement System Annuity and What to do with my Thrift Savings Plan in Retirement? Thumbnail

What is the Federal Employee Retirement System Annuity and What to do with my Thrift Savings Plan in Retirement?

Retirement Funding

Understanding and synthesizing your FERS retirement annuity and The Thrift Savings Program (TSP) options can be daunting. Here at Water Street Financial, we have vast experience and expertise educating our current and former Federal employee clients. We simplify the various aspects of FERS annuity and the TSP and incorporate the benefits into a thorough and accurate comprehensive financial plan.

What is the FERS Retirement Annuity?

It is one of three potential income streams in retirement (Social Security and The Thrift Savings Program [TSP] being the other two). The FERS annuity provides monthly income for life. It is calculated based on the High-3 Average Salary defined the highest average basic pay one received in any three (3) consecutive years of service. It does NOT include overtime pay, bonus pay, etc.

The computation for the Basic annuity for Under Age 62 at Separation with less than 20 years of service is 1% of one’s High-3 average salary for each year of service. Caution, if you choose to retire before Age 60 and with less than 20 years in service, you could see a 5% reduction in annuity payments for each year under Age 62. Also, if you retire before Age 62 you could qualify for the FERS Supplement.

The computation for Age 62 or older at Separation with 20 or 20+ years of service is 1.1% of one’s High-3 average salary for each year of service. There are some exceptions to the above calculations for certain Federal positions such as Capitol Police, Members of Congress, etc.

What is Survivor benefit and what are my options? – The Survivor benefit provides the FERS monthly income to your spouse if you pre-decease him or her.

Three options available for Survivor benefits:

  1. Maximum Survivor Benefit allows the spouse to receive 50% of the unreduced FERS pension annuity.  The 50% survivor benefit reduces the annuity by 10%.
  2. Partial Survivor Benefit allows the spouse to receive 25% of your unreduced FERS pension annuity. The 25% survivor benefit reduces the annuity by 5%.
  3. Waive Survivor Benefit is exactly as it sounds. The spouse will receive $0 survivor benefit. The monthly FERS pension annuity is not reduced. Note: the spouse is automatically entitled to the Maximum Survivor Benefit unless he or she consents to the Partial Survivor Benefit OR Waives Survivor Benefit. Water Street Financial can run multiple scenarios to determine the best option for Survivorship based on the client’s financial situation and legacy plan.

The cost-of-living adjustments (COLA) will increase the annuity if: one is over age 62; or retired under special provision for certain positions; or one retired on Disability; or retirement includes a portion under Civil Service Retirement System

What are my options for The Thrift Savings Program (TSP) in retirement? 

The TSP is the tax-deferred retirement savings and investment plan that provides a similar retirement plan that the private sector offers to their employees via 401(k) plans. Your options upon retirement are: 

  1. Leave the money in the TSP. Keep in mind that you will have to take distributions (withdrawals) at Age 72. Investment options are limited within the TSP.
  2. Turn on Monthly TSP Distributions (Withdrawals). If you need the income, you could draw from your TSP after Age 59.5 with no penalty and pay Ordinary Income tax on the withdrawals. Caution: you may draw from the account if the money lasts…this is not an annuity.
  3. Annuitize the TSP with MetLife. This option allows you to purchase an annuity through MetLife for guaranteed monthly income for life. Similar mechanics as the FERS Retirement annuity. Here, MetLife will use the total value of the TSP to determine your monthly income payment.
  4. Transfer or Rollover the TSP to an IRA in your name. There is no tax consequence to execute a direct rollover to an IRA. Typically, the IRA will provide many more investment options than the TSP. Like the TSP, you are not required to take distributions until Age 72. Distributions taken after Age 59.5 will incur Ordinary Income tax on the withdrawal amount just like the TSP.

Water Street Financial can educate you on all the above options and run scenarios to help you make a decision in your best interest. Contact us today to learn more.


Source: United States Office of Personnel Management (OPM)

Important Disclosures

This material was created for educational and informational purposes only and is not intended as tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material. 

Annuities are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.

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