Many federal retirees are surprised to learn how much is deducted from their monthly FERS annuity (pension). To help ensure you’ll have the retirement income you’ll need when you separate from service, it’s important to understand how much is taken out of your benefit each month.
Income Taxes
There’s a tendency to assume a your FERS annuity (pension) is tax free because you made contributions with post-tax earnings. However, your FERS contributions make up a small percentage of your total pension.
The government calculates your monthly benefit by spreading out your contributions over the projected number of years of your retirement. The remaining portion is taxable as income. On average, the taxable portion can be 95% or more of your monthly payment.
Unless you specify a monthly withholding rate or amount, the OPM will usually withhold federal income tax as if you’re married and claiming three dependents. Once you’re retired, you can use Services Online to start, change, or stop the taxes being withheld from your monthly payment. You can also use the Federal income tax withholding calculator to determine how much should be withheld from your monthly payment.
“When you understand how much is deducted from your monthly FERS benefit, you can clearly see if you’ll have enough income in retirement to cover all your expenses.”
Survivor Benefits
Part of planning your federal retirement is providing for a surviving spouse. When you complete your retirement application, the survivor benefit you elect reduces your monthly basic FERS annuity (pension). There’s a 10% reduction when you choose the 50% survivor benefit or a 5% reduction if you choose the 25% survivor benefit. If you’re thinking about electing “No Survivor Benefit” to avoid the reduction, keep in mind that your spouse’s FEHB coverage will end upon your death.
FEHB, FLTCIP & FEGLI Premiums
When you continue your FEHB coverage in retirement, the government continues to pay the same portion of your premiums as it did during your working years but your portion will be deducted from your monthly basic FERS annuity (pension).
Since the Federal Long Term Care Insurance Program (FLTCIP) is a John Hancock insurance product, you can choose to pay your premium out of pocket or elect to have it automatically taken out of your pension. If you choose to keep your Federal Employee Life Insurance (FEGLI) coverage in retirement, the premiums will also be deducted from your benefit.
When you understand how much is deducted from your monthly FERS benefit, you can clearly see if you’ll have enough income in retirement to cover all your expenses. Consider working with an FRC® trained advisor who fully understands how your benefits work and can help you crunch the numbers.
