You wake in the morning and switch your lights on. You wait until the traffic light turns red and the crosswalk sign illuminates, indicating it is safe to cross the street. You reach in the fridge to check the expiration date on your suspicious-looking milk. These are some things that we take for granted every day. Who is responsible for making these simple, but crucial, aspects in our lives possible? The answer is government workers.
Whether it be the U.S Department of Agriculture, Homeland Security, the Food and Drug Administration or other agencies, it is important for us to take a moment to recognize and appreciate all they do to support our daily lives.
As a car can’t go without its wheels, these government agencies can’t function without their workers. When these employees reach retirement age, there are two main benefits that they are given: their pension and their Thrift Savings Plan, or TSP. Given where we are located, a lot of my clients work for some sort of government agency. When my clients retire, they want to make the most out of what they have worked their whole lives for. Government workers are no different. They do, however, have major differences in their retirement programs, and I want to go over them here.
Government retirement programs are split into two systems. The first system is the Civil Service Retirement System, or CSRS, and the second is the Federal Employee Retirement System, or FERS. CSRS is referred to as the “old system,” with FERS being called the “new system.” All federal employees hired today are under the FERS system.
CSRS started in 1920 and was replaced by FERS in 1987. CSRS is known as a “defined benefit plan” or a “pension plan.” Employees and the government contribute money into the plan that will ultimately create a monthly pension paid out for the life of the worker, along with benefits to the spouse. CSRS employees generally do not pay into Social Security, therefore not receiving any Social Security benefits directly from their federal employment. They generally did not pay into the TSP either.
I do have some clients who did pay into TSP, but it was optional and came without any match. If the worker was able to get enough credits working outside the federal government, and thereby earning Social Security benefits, their payment is reduced by something called the “Windfall Elimination Provision” (WEP), which lowered the amount paid by Social Security.
FERS employees, by contrast, paid into Social Security by working for the federal government, as well as receiving matching contributions to their TSP. The employing agency contributes 1 percent of a worker’s base pay every pay period. A worker can also contribute their own amount into the plan, and the amount matched depends upon the employing agency. In this regard, this is referred to as a “defined contribution plan,” much like a 401(k) in the private sector.
What differentiates FERS from private sector plans is the pension that coincides with it. The pension is ultimately the 1 percent being contributed to the plan. That pension is paid to you, or you and your spouse, for life. This benefit is similar to the CSRS pension plan in that it guarantees income for life. To make FERS even better, employees are offered the FERS supplement. The FERS supplement offers a Social-Security-like payment for those who retire before Social Security eligibility. For example, one could retire at age 55 and receive a bonus payment monthly on top of their pension, until age 62 when that will expire and when Social Security payments could begin. The FERS supplement is based upon meeting certain eligibility requirements.
The TSP is consistent between the two programs and works like a 401(k). Contributions, whether they are employee or employer, are added to a fund that can be allocated into several options. The options include equity allocation for both domestic and international, bond allocation, and a money market option. Depending upon the allocation, that will dictate the outcome of the account, which is similar to a 401(k).
What is the better program you might ask? From what I have seen, FERS employees thought of their program as inferior to CSRS due to the significantly larger pension available to CSRS employees. If you were to compare the monthly benefit of a CSRS employee and a FERS employee, the CSRS payment would be significantly higher, at least double or triple. While the pension payment is significantly more for CSRS employees, they are not receiving Social Security and they did not receive any match to their TSP, so generally speaking, their TSP is smaller if they have one at all.
By contrast, the FERS employee can have a much higher pension compared to the general public, who in most cases don’t have a pension in retirement at all, and they have a Social Security check on top of that pension. In many cases, when you add the two payments together, the gap between the two programs can be much smaller.
What really makes me favor the FERS program is the TSP. Not only are FERS retirees receiving a guaranteed income for life via the pension and Social Security, but they can also have, depending upon how long they worked for the government, a significant amount saved in their TSP.
The TSP provides something valuable in today’s world: choice. If a person wanted to withdraw all their TSP funds and buy 15 cars with it, they could do that. That may be a foolish thing to do, but they have the choice to do that. If you are receiving a monthly pension, you don’t have the option of taking all those future payments as a one-time lump sum payment. In other words, the FERS program offers a diversified three-pronged benefit: pension, Social Security and TSP. In today’s world, I find that attractive, and when you add the FERS supplement with it, that is a valuable retirement package.
Before all the CSRS retirees get angry with me, their program is beneficial as well. The CSRS pension payments are among the highest monthly benefits I have ever seen, if not the highest. It’s never a bad thing to know that you are going to receive a significant monthly payment just by waking up in the morning. CSRS retirees are also not concerned with market swings. Their pensions do not change when the market is down. Given market conditions, that can be beneficial.
I have come to really enjoy helping government workers retire, as they require a specific set of skills and knowledge in preparing for retirement. I also feel compelled to return the favor to them, as I know when I put my children to sleep at night, I know they are safe in large part because of the government workers at the National Security Agency or the Department of Defense. Thank you.
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The views depicted in this material are for informational purposes only and are not necessarily those of Cetera Advisor Networks LLC. They should not be considered specific advice or recommendations for any individual.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
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