Once you retire from federal service, you’ll no longer pay FICA or Medicare taxes and your contributions to your FERS pension and TSP will also end. However, depending on the elections you made at retirement, there will be a number of deductions taken from your monthly annuity. Knowing your net retirement income after deductions is crucial because you need to cover your monthly living expenses. If you miscalculate, you may find yourself with a serious income gap.
First, Calculate Your Gross Retirement Income
To estimate your gross FERS annuity, use the Federal Ballpark E$timate® calculator on the OPM website.* This provides an approximate amount of your gross pension before any deductions. For Social Security, create your online “my Social Security account.”** This gives you access to personalized information based on your birth date and earnings record. It includes a chart that shows your estimated, monthly benefit starting at age 62 and every year thereafter through age 70. Of course, the amount you withdraw from your TSP each month is up to you.
Next, Calculate Federal & State Income Taxes On Your income
Since you paid into your FERS pension with post-tax dollars, the portion you contributed is tax free. However, as much as 90% or more of your annuity is taxable because it’s comprised of the government’s untaxed contributions and accrued earnings.
Up to 85% of your Social Security benefit is taxable when your combined income exceeds limits established by the IRS. For 2023, the limit is $25,000 for single filers and $32,000 for joint filers.
Every dollar withdrawn from your traditional TSP balance is 100% taxable (only Roth TSP distributions are tax-free). Depending on where you live, you may owe state income taxes on all of your sources of retirement income.
Other Deductions From Your Monthly FERS Annuity (Pension)
- The survivor benefit you elected: a 10% deduction for the 50% spousal annuity or a 5% deduction for the 25% annuity.
- Your portion of your FEHB premium and your FEDVIP premium are deducted from your monthly pension.
- If you keep FEGLI in retirement, premiums are deducted from your monthly pension.
- You can pay your FLTCIP premium out of pocket or have it deducted from your monthly pension.
Finally, Do The Math
Now that you have a ballpark estimate of your total net income, will it be enough to cover all of your living expenses in retirement? If not, consider working with an FRC® trained advisor who can develop strategies to tackle your retirement income gap before it’s too late.
