Your FERS retirement benefits consist of three main components: The Basic FERS Retirement Pension, Social Security, and the Thrift Savings Plan (TSP). And while your FERS pension is one of the more unique parts of your retirement package, Social Security is an equally important benefit providing guaranteed income. Since Social Security is such an essential part of your retirement benefits, you must understand how it interacts with other benefits, how its COLAs work, and when your benefit may be reduced. So, this week we’ll dive into the three things that every federal employee must know about Social Security.
1. Social Security And The FERS Supplement
Suppose you’re a FERS federal employee that retires under the immediate annuity option and is under age 62. In that case, you’re eligible for a pension supplement called the Special Retirement Supplement (SRS), also known as the FERS Retiree Annuity Supplement (RAS), or simply the Supplement. Because Social Security is a key component of your FERS pension, the SRS is designed to bridge the gap between when you retire and when you become eligible for Social Security (age 62).
Hence, if you retire under an immediate annuity and before age 62, the Supplement will be a critical part of your retirement income. Now contrary to what many have heard, the Supplement is not paid by Social Security but instead is paid by OPM. And receiving the Supplement Does Not impact your Social Security benefits. Once you reach age 62, your Supplement payments will stop, and if you choose to, you may begin receiving your Social Security benefits.
2. Social Security COLAs And FERS COLAs Can Be Different
While your FERS pension and your Social Security benefits will receive Cost of Living Adjustments (COLAs), the calculation used differs for both benefits. So, it is likely that you’ll see both benefits grow at different rates throughout your retirement.
Social Security’s COLAs are determined by the change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which the U.S. Department of Labor calculates from the third quarter average of the previous year to the third quarter average for the current year. This means that if the CPI-W shows that prices have increased, then your Social Security benefits will receive a COLA.
Unlike Social Security and a variety of military benefits, the FERS COLAs may not be identical to the changes in the CPI-W. The FERS COLA formula is as follows: If the increase in the CPI-W is 2 percent or less, the COLA is identical to the increase. But if the CPI-W increase is more than 2 percent but no more than 3 percent, then the COLA is limited to 2 percent. However, if the CPI-W increase is more than 3 percent, the adjustment is 1 percent less than the CPI-W increase.
So, the bottom line is that while your Social Security benefits will keep up with inflation, your FERS pension might lag the increases in the cost of living throughout your retirement years. This disparity further illustrates the importance of your Social Security benefits in retirement.
3. What Will Reduce Your Social Security Benefits?
If you decide to claim your Social Security benefits before your full retirement age (FRA), your benefits will be subject to an earnings test. Your FRA ranges between ages 66 and 67 and is based on your birth year. You can find your FRA by checking the table below:
If you are subject to an earnings test and have earnings from wages or self-employment that exceed the Social Security annual earnings limit, your benefits will be reduced or stopped until your earnings fall below the threshold. The earnings limit for 2022 is $19,560, and for every $2 that exceeds this limit, your benefits will be reduced by $1. It’s important to note that the earnings test does not include investment income, rental income, or TSP and IRA distributions. Now let’s look at an example of how this threshold works:
Let’s say Bob is under his full retirement age all year and receives a monthly Social Security benefit of $1,600 ($19,200 for the year).
He also earned $29,560 ($10,000 over the $19,560 limit) during the year. In this case, his Social Security benefits would be reduced by $5,000 ($1 for every $2 earned over the limit). Therefore, his annual benefits would now total $14,200 ($19,200 – $5,000) and his monthly benefit would be $1,183 ($14,200/12).
Keep in mind that there is no earnings limit after you reach your FRA, so you can work and earn any amount while continuing to receive your full benefits.
In addition to the reduction when your earnings exceed the threshold, if you claim your Social Security benefits before your FRA, your benefits will be permanently reduced by roughly 6% a year for every year you’re under your FRA (5/9 of 1% for the first 36 months, then 5/12 of 1%).
Said differently, if you claim your Social Security benefits at 62, your benefits will be reduced up to 30%! That is a significant pay cut when considering the reduced income over a 30-year retirement.
Now, in contrast, if you delay claiming your benefits after reaching your FRA, your benefits will increase by nearly 8% per every year that you delay until you reach age 70. So, by postponing receiving your benefits, you can permanently increase your benefits by up to 32%! Needless to say, deciding when to claim your Social Security benefits is a critical retirement planning decision that requires careful analysis.
As a federal employee, Social Security is a critical part of your retirement benefits package that provides additional guaranteed income. However, like your other benefits, there are many nuances that must be understood for you to maximize your benefits. So, taking the time to understand how Social Security will interact with your other sources of income, when your benefits will increase, and when they decrease is crucial. So, take charge of your future to ensure you have the next chapter of life you deserve. And remember to consult with a qualified financial planner if you don’t feel confident creating your financial plan.
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2023 Legislative Change Notice
The SECURE ACT 2.0 passed and impacted many of the articles on this website. While the articles were correct when written, it’s impossible to re-write every article. Please consult a qualified professional (i.e., CFP®, CPA, or attorney) before implementing any strategy.