What You Need to Know: Retirement Benefits

By Eric Yoder
Washington Post Staff Writer
Wednesday, November 19, 2008 12:00 AM

If you're looking into government employment or have been hired only recently, possibly the last thing on your mind is retirement.

Still, you should understand that benefit. It could be important in your career planning. One reason so many federal employees stay with the government is that its retirement benefits stack up well against what's available elsewhere¿so well that they're often called "golden handcuffs" because they induce people to stick around for the payoff at the end.

In recent years many private sector employers have dropped "defined benefit" programs, which are traditional retirement programs that pay a certain amount based on a formula involving the employee's years of service and salary level. If they have retirement programs at all, they're more likely to offer "defined contribution" plans such as 401(k)s where the employer and employee typically make a contributions but the money available to the employee at retirement depends on the earnings of those contributions.

The government, though, offers both types of benefits.

Almost all newly hired federal employees are put in a program called the Federal Employees Retirement System--people who worked for the government before 1984 and who are returning after a break in service may be put in an older program called the Civil Service Retirement System. The FERS program consists of Social Security, a civil service pension and the Thrift Savings Plan.

Employees under FERS participate in Social Security under the same terms as other American workers. They pay 6.2 percent of their salary into the Social Security trust fund. An additional 1.45 percent goes toward Medicare, which sometimes is lumped in with the Social Security deduction. The government kicks in an equal amount, just as other employers do. Employees accumulate Social Security benefits just like other workers and are eligible to draw benefits under the same terms¿full benefits beginning at age 66, reduced benefits available as early as age 62. The Social Security Administration sends out an annual estimate of benefits, and individuals may request one from that agency, www.ssa.gov, as well.

An additional contribution of 0.8 percent of salary goes into the civil service retirement trust fund, which along with government contributions pays for the civil service benefit portion. Its basic payout formula is simple: for each year of service, it pays 1 percent of your "high three" salary, the salary you earn in your highest-paid three consecutive years of employment, in most cases the last 36 months. If you work past age 62 and have at least 20 years of service, the multiplier rises to 1.1 percent.

Most employees can draw those benefits starting at age 62 with five years of service, age 60 with 20 years or age 55 with 30 years. Special age and service combinations apply in certain situations. Like the Social Security benefit, this pension is increased annually by cost of living adjustments, although somewhat reduced. Also, survivor benefits are available, at the price of a reduced annuity to the retiree.

The third leg is the TSP, a 401(k)-style program. All employees covered by FERS automatically get an account and the government pays an amount equal to 1 percent of their salary into it even if they do nothing. Employees may make annual investments up to the same limits set by the IRS applying to all retirement investors¿in 2008, $15,500, in 2009, $16,500. The investments come from pre-tax payroll dollars and grow tax-free until withdrawn.

For FERS employees who invest their own money, the government will match the first three percent of salary dollar-for-dollar, and the next two percent at 50 cents on the dollar. So, by investing, employees can effectively force the government to give them a raise. Participants can allocate their money among a government bond fund, a government/corporate bond fund, a large company stock fund, a small and mid-sized company stock fund or an international stock fund. The TSP also offers five "lifecycle" funds that automatically split investments among those funds according to ratios considered appropriate for the investor's age.

Participants can change the level of their investments or the allocation of their money pretty much at any time, with some minor restrictions. When they leave government, either for another job or to retire, they can leave their TSP accounts in place and continue to manage them, roll the money over into an individual retirement account or other retirement savings plan, or withdraw the money as a lump-sum, as monthly payments or as an annuity. The TSP Web site, www.tsp.gov, has a calculator for estimating account growth and how that would translate into payouts.

Chances are, by the time you reach the point of making that decision, retirement will be far from the last thing on your mind.

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