Entering retirement as a federal employee often brings surprises regarding the deductions from your monthly FERS annuity (pension). To ensure your retirement income meets your needs, it’s vital to comprehend the deductions from your benefit each month.
Understanding Income Taxes
While some assume their FERS annuity is tax-free due to contributions from post-tax earnings, this is only partially accurate. Your FERS contributions constitute a small fraction of your total pension. The government spreads these contributions across your projected retirement years, with the remainder taxable as income. Typically, 95% or more of your monthly payment is taxable. By default, the OPM withholds federal income tax as if you’re married with three dependents unless you specify otherwise post-retirement.
Survivor Benefits
Planning for your retirement should involve provisions for a surviving spouse. Choosing a survivor benefit upon retirement reduces your monthly basic FERS annuity. Opting for a 50% survivor benefit entails a 10% reduction, while a 25% survivor benefit incurs a 5% reduction. Electing “No Survivor Benefit” to evade this reduction means your spouse’s FEHB coverage ends upon your demise.
FEHB, FLTCIP & FEGLI Premiums
Continuing FEHB coverage in retirement entails the same government contribution as during employment, with your share deducted from your FERS annuity. For FLTCIP, premiums can be paid out of pocket or deducted automatically from your pension. Similarly, FEGLI coverage premiums are deducted from your benefit if retained in retirement.
Gaining Clarity on Deductions
Understanding the deductions from your monthly FERS benefit is crucial for assessing your retirement income’s adequacy. Working with an FRC® trained advisor well-versed in federal benefits can facilitate comprehensive financial planning, ensuring you’re equipped to make informed decisions for a secure retirement.
