Key Takeaways

1. Combining Social Security benefits with your FERS pension can help maximize retirement income, but it requires careful planning to avoid reduced benefits.
2. Federal employees need to understand how Social Security and their Federal Employees Retirement System (FERS) pension work together to make informed decisions about their retirement strategy.

What No One Tells You About Combining Social Security with Your FERS Pension

Retirement planning for federal employees involves more than just securing a Federal Employees Retirement System (FERS) pension. While your FERS pension provides a substantial base for retirement income, it’s important to understand how it works alongside your Social Security benefits. For federal workers, this combination can be both an asset and a challenge. Let’s dive into some key factors you need to know to navigate this financial landscape effectively.

Understanding FERS and Social Security

The Federal Employees Retirement System (FERS) is a three-part retirement plan for federal employees that includes a pension, the Thrift Savings Plan (TSP), and Social Security. Unlike the Civil Service Retirement System (CSRS), which largely excludes Social Security, FERS is designed to work hand-in-hand with Social Security, making it essential to understand how these benefits interact.

Your FERS pension is based on your years of service, your “high-3” average salary, and a calculation formula. This provides you with a defined benefit, paid monthly throughout retirement. Meanwhile, Social Security offers additional income, but the timing and amount of your benefits will be affected by several factors, including when you choose to start collecting them and whether or not you continue to work.

Timing Matters: When to Claim Social Security

One of the biggest decisions for any retiree is when to start claiming Social Security benefits. The standard advice for the average worker is to wait until full retirement age (FRA), which is between 66 and 67 depending on your birth year. However, as a federal employee under FERS, you might face different considerations.

FERS allows retirement as early as 55 to 57, depending on your age and years of service. This means you could start receiving your pension while still delaying your Social Security benefits. Claiming Social Security early (as early as age 62) reduces your monthly payments, while delaying past full retirement age increases them. However, you may qualify for a FERS supplement, a temporary payment that bridges the gap until you can claim Social Security, making the decision on when to claim even more complex.

The FERS Supplement: Bridging the Gap

For federal employees retiring before they are eligible for Social Security, the FERS supplement, sometimes referred to as the Special Retirement Supplement (SRS), can be a valuable benefit. This supplement mimics what your Social Security benefit would be at age 62 and is payable until you reach that age. It helps cushion the financial impact for those retiring early, providing additional income until regular Social Security kicks in.

The catch? The FERS supplement ends at age 62, regardless of when you plan to start your Social Security benefits. Therefore, understanding how the supplement works and when it stops is critical for long-term planning.

The Earnings Test: How Working Affects Your Benefits

If you plan to work after you start receiving either your FERS supplement or Social Security, you should be aware of the earnings test. Both Social Security and the FERS supplement are subject to earnings limits, which can reduce your benefits if you earn more than a certain threshold.

For example, if you’re under full retirement age and continue to work while receiving Social Security, your benefits may be reduced if your earnings exceed the limit set for the year (which is adjusted annually). In 2024, the earnings limit is expected to be around $22,000, but this can change. For every $2 you earn over the limit, $1 of your Social Security benefits will be withheld.

The FERS supplement also has an earnings test, similar to Social Security. If you earn above a certain amount, the supplement will be reduced or even eliminated entirely. Federal employees who retire early but plan to work part-time or consult should carefully evaluate how their earnings will impact both the FERS supplement and Social Security benefits.

Maximize Your TSP Contributions

While the focus of retirement planning often centers around the FERS pension and Social Security, the Thrift Savings Plan (TSP) should not be overlooked. As the defined contribution part of your FERS package, the TSP is similar to a 401(k) in the private sector, offering federal employees the ability to grow their retirement savings through tax-advantaged contributions and employer matching.

Maximizing your TSP contributions while you’re still working can help offset any potential reductions in Social Security or the FERS supplement. This is particularly important if you plan to retire before full retirement age and rely on your TSP for income in the interim.

TSP Withdrawals and Social Security

Another factor to consider is how withdrawals from your TSP in retirement might affect your Social Security. Withdrawals from tax-deferred accounts like the TSP are considered taxable income, which could push you into a higher tax bracket or increase your taxable Social Security benefits. This is especially important for federal employees who may be drawing from multiple income sources in retirement.

Planning for a Secure Retirement: Consider Longevity

With life expectancy increasing, one of the major challenges in retirement is making sure your income lasts. Federal employees typically have strong retirement benefits, but careful planning is still necessary to ensure financial security for the long haul.

A key aspect to consider is your expected lifespan. If you come from a family with a history of longevity, delaying Social Security benefits may be a wise choice. Delaying until age 70 can significantly increase your monthly benefit, which can provide more income later in life when other savings or pension benefits might be reduced.

Additionally, longevity should factor into how you manage your FERS pension, TSP, and other assets. While your FERS pension is a stable, lifelong source of income, it may not keep up with inflation as well as Social Security or other investments, so planning for inflation adjustments and long-term care costs is essential.

Social Security’s Role in Survivor Benefits

Another important consideration is how Social Security integrates with survivor benefits from your FERS pension. The FERS system allows for a survivor benefit for your spouse, but Social Security also provides benefits for surviving spouses. The rules for both systems can be complex, so it’s vital to plan for how your spouse or dependents will be taken care of in the event of your death.

When coordinating your benefits, make sure to take into account how both Social Security and your FERS pension can provide for your spouse. In some cases, maximizing one benefit (such as delaying Social Security) can enhance survivor benefits.

Can You Optimize Both Social Security and FERS?

Balancing Social Security with your FERS pension is a delicate dance. For many federal employees, the best strategy is to delay claiming Social Security as long as possible while living on the FERS pension and TSP. However, everyone’s situation is different, and it’s essential to assess your personal needs, income expectations, and long-term goals.

Consulting with a financial planner who understands the intricacies of both FERS and Social Security can help you create a customized strategy to maximize your benefits. For example, you may find that it makes sense to claim Social Security early if you’re facing health issues or expect a shorter retirement, while others may benefit more from delaying and maximizing their monthly benefit.

Don’t Forget About Taxes

Taxes can have a big impact on your retirement income. Your FERS pension is subject to federal income taxes, and your Social Security benefits may also be taxable, depending on your total income. If you have a high combined income, up to 85% of your Social Security benefits could be taxed.

It’s crucial to understand how all your income sources—FERS pension, Social Security, and TSP—interact with one another in terms of taxation. Smart tax planning can help you minimize the amount of taxes you pay and maximize your take-home income.

Preparing for a Stronger Retirement

Combining Social Security with your FERS pension can provide federal employees with a reliable and substantial source of income throughout retirement. However, the key to getting the most out of your benefits is a strategic plan that takes into account the timing of Social Security, the FERS supplement, TSP withdrawals, and tax implications. Each decision will have long-term consequences on your financial security, so taking the time to plan can help ensure a stable and comfortable retirement.