At the macro level, planning a financially-secure FERS retirement requires knowing how much income you can count on to cover all of your expenses once you’re no longer working. If you under-estimate how much money you’ll have coming in, you may find yourself coming up short and dealing with a retirement income gap.
Don’t Under-Estimate Income Taxes On Your FERS Annuity
Since you pay into your FERS annuity with after-tax earnings, a number of federal workers assume that a large portion is tax free. You may be shocked to learn that your FERS contributions make up a small amount of your total retirement annuity. The majority is comprised of the government’s untaxed contributions plus earnings that accrue on both your contributions and the government’s contributions. On average, the portion subject to federal taxes can be 90% or more. Depending on where you live, you may also owe state income taxes, too.
A Survivor Benefit Reduces Your FERS Annuity
When you elect a survivor benefit for your spouse, you have two choices: your spouse can receive 50% of your basic annuity or 25% of your basic annuity when you pass away. Both choices reduce the monthly annuity you receive: a 10% reduction for the 50% survivor benefit or a 5% reduction for the 25% survivor benefit.
Insurance Premiums Are Deducted From Your FERS Annuity
If you continue your Federal Employee Health Benefits Plan (FEHB) in retirement, your portion of the premium comes out of your annuity. Since the government continues to pay the same portion as it did when you were working, your portion will be around 30%. And don’t forget that premiums for FEGLI and FLTCIP are also deducted from your annuity.
Your Social Security Benefit Is Taxable, Too
As a FERS participant, you’re eligible for a Social Security retirement benefit. When your combined income in a given year exceeds thresholds established by the IRS, up to 85% of your Social Security benefit is taxable as income. These thresholds are surprisingly low. For example, in 2022, a portion of your Social Security income is taxable:
- If you file a federal tax return as an “individual” and your “combined income” exceeds $25,000.
- If you file a joint return, you must pay taxes if you and your spouse have “combined income” of more than $32,000.
Accurately calculating your retirement income and expenses is crucial to developing a strategic retirement plan. Consider working with an FRC® trained advisor who understands your benefits and can help you crunch the numbers.
