Arthur Stein, a financial planner and former fed told The Federal Drive with Tom Temin and Emily Kopp Wednesday that FERS has been a boon for feds.
“Twenty-five years ago, I think the federal government was looking at the cost of the [Civil Service Retirement System] and it was extremely generous, very expensive and they were also looking at what was going on in the private sector and state and local governments too, which were downsizing their retirement systems to something less expensive and more affordable,” Stein said. “So, they came up with FERS, which is probably the second-best retirement system in the United States. The best one being CSRS.”
What makes FERS so great, he said, is that it provides federal employees with two pensions (the federal annuity and Social Security) and the Thrift Savings Plan with a 5 percent match.
On top of that, feds receive subsidized health insurance and a relatively high level of job stability.
“This is just a very powerful, excellent package,” Stein said. “Most people in the United States, if they understood what was going on, would be extremely jealous of the benefits that FERS employees have.”
Unlike under the older system, most FERS employees during their retirement, if they have a long retirement, are going to need to take money out of their investments to subsidize their Social Security and pension, Stein said. This is because the cost of living adjustment is not as generous and the pension is not going to be as high a percentage of someone’s salary as with CSRS.
“Putting money in the Thrift Savings Plan, investing appropriately, these are really key decisions for all FERS employees,” he said.
When FERS was introduced 25 years ago, it was perceived as a downgrade of the older retirement system, although it was still a very generous system.
“I’m sure that people at the time thought it was an assault on their benefits, although existing employees didn’t have to switch, as I understand it,” Stein said. “But it’s still a great system, and I don’t think people should sit around and worry about whether it was a downgrade at this point or not. What they need to think about is, ‘Hey, I’ve got a great set of benefits, and if I handle them appropriately, I’m going to have a very comfortable and secure retirement.”
While many other retirement systems struggle today, FERS continues to thrive, mostly because it’s got the federal government behind it.
“You’re not hearing anyone say, ‘Oh, we’re going to run out of money funding FERS,'” Stein said. “Or, ‘There’s not enough money to pay the FERS pension.’ And you are getting those kind of arguments and concerns with state and local governments, which can’t run budget deficits.”
According to Stein, younger federal employees need to answer three questions when it comes to their FERS planning:
How much money should they put into their TSP?
Which funds should they put the money in?
Should they choose a Roth TSP or a regular TSP for their contributions?
An employee should put in at least 5 percent into their TSP account, Stein said, because the government matches the first 5 percent of their contributions. “It’s like doubling your investment automatically, right away,” he said. “That means right away they’re getting 10 percent of their salary going into the TSP. That’s a good number to start with.”
In choosing which fund to invest in, Stein recommends younger feds put a “healthy dose” of their money in the stock funds — the C fund, the I fund and the S fund.
Different factors figure in whether to go Roth or “regular.”
“Money that goes into the regular TSP, that’s deducted from someone’s salary, that’s going to reduce their taxable income,” Stein said. “When they withdraw the money, when they’re retired many decades later, the money they take out is going to be taxable.”
With a Roth contribution, the money put into the TSP does not reduce the employee’s income at the time of the contribution; therefore, that money is not taxable when it’s withdrawn years later. “Which is a huge benefit,” Stein said, “but, of course, very far in the future.”
For that reason, Stein said younger people, who most likely have lower income levels than long-time feds, would receive less of a benefit from the tax deduction.
“Their money, of course, hopefully, is going to grow over a very long period of time,” he said. “I like the Roth TSP for their contributions. The federal government match is always going to be into the regular TSP, so they do have a foot in both worlds. They’ve hedged their bets a certain amount just by the nature of the way the system is set up.”