Each generation faces its own challenges when preparing for retirement, and for millennials, it’s the high levels of student loan debt, lower access to affordable housing, and, as of late, staggering inflation. These rising costs can make retirement planning tricky, as disposable income seems to dwindle for many.
However, the retirement burden for millennial federal employees becomes significantly lighter thanks to the Federal Employee Retirement System (FERS). In 2022 alone, around 114,505 retirees claimed their benefits.
Millennial federal employees should view FERS as a solid foundation for their retirement planning, but it should not, by any means, b. Identifying potential shortfalls early allows for adjustments to maximize long-term savings benefits, such as compound interest and employer-matched contributions.
Understanding the Federal Retirement System
FERS is a retirement system for federal employees that became effective on January 1, 1987. Retirees receive three sources of income through FERS: Social Security, a Basic Benefits Plan, and the Thrift Savings Plan.
FERS kicks in when an employee becomes eligible for retirement, which can be classified into four main types:
- Deferred retirement: A special retirement category for former federal employees, but who are still covered by FERS.
- Disability retirement: After 18 months of service, you may qualify for disability retirement if you meet all the eligibility criteria.
- Early retirement: There are several reasons early retirement may be considered, such as forced separation or the closure of a department. It may also be the employee’s choice. The minimum retirement age for millennials is 57, with 30 years of service.
- Voluntary retirement: When you meet the full retirement age and meet all the eligibility criteria.
It's also important to note that the percentage for employee contributions toward the Basic Benefit Plan can vary slightly depending on when the employee began federal service. For example, FERS employees hired in 2013 or later may contribute more than the standard rates due to updated contribution policies.
Key Components of Federal Retirement
If you’re a federal civilian employee you are required to contribute a portion of your earnings to FERS to receive an income at retirement. The FERS retirement system has three components:
- Social Security Benefits: Social Security benefits become payable when the retiree reaches the age of 62. The benefit is extended to eligible spouses and children, and on death, there is a lump sum payable to the beneficiaries. The benefit is calculated according to the average earnings of the retiree, their family composition, and the Consumer Price Index (CPI) rate at the time when the retiree becomes eligible for these benefits. You can calculate your estimated earnings using the calculator on the Social Security Administration portal. You contribute a portion of your salary to this benefit through your Social Security taxes. Your contributions are 6.2% of your earnings up to the maximum taxable wage. In 2024, the maximum wage is $168,800 and in 2025, this goes up to $178,100.
- Basic Benefits Plan: As a millennial, you would automatically be covered by FERS as a federal employee, whereas those employed before 1983 would transfer their benefits from the Civil Service Retirement System (CSRS). The Basic Benefits Plan is the second component of FERS. It pays out a monthly amount and in the event of your death, a lump sum is paid to an eligible beneficiary/ies. This benefit provides a provision for early retirement, called the Special Retirement Supplement, which provides an income until you’re eligible for Social Security. You contribute a portion of your monthly salary to the benefits plan. The contribution amount is the difference between 7% of your basic pay and 0.80% or Social Security’s old age, survivor, and disability insurance tax rate.
- Thrift Savings Plan (TSP): The TSP is the federal answer to a 401(k), offering matched contributions and special tax considerations to boost retirement savings. Your agency contributes 1% of your basic pay automatically, and matches your contributions up to 5%. For those seeking a balanced, hands-off investment approach, consider the TSP Lifecycle (L) Funds; these funds automatically adjust asset allocation based on your target retirement date, balancing growth potential with reduced risk as retirement approaches.
Learn more about your retirement benefits at our No-Cost webinars, featuring Ed Zurndorfer -
Action Steps for Millennials
While Social Security and the Basic Benefit plan are automatic, retirement planning for Gen Y federal workers doesn’t stop there. The TSP provides a tax-deferred option to help maximize retirement income. At a minimum, Feds should try to contribute at least 5% to secure the full employer match. To take full advantage, aim to contribute up to $23,000 per year for those under age 50, with an additional catch-up contribution of $7,500 for those age 50 and older.
Agencies automatically contribute 1% of basic pay to your TSP account, and you can add between 0% and 10% of your salary. If you contribute less than 10%, you can make additional "catch-up" contributions starting the year you turn 50.
Your TSP account opens with your first paycheck. To manage your account, log in via the online portal on the Thrift Savings Plan website. Through the portal, you can view statements, adjust contributions, and submit inquiries.
Resources for Millennial Employees Federal Employees
It’s important to learn all there is to know about FERS to ensure you receive the maximum benefits when you retire. At Serving Those Who Serve, we provide a wealth of information to those looking to maximize their benefits. As a start, we recommend you work your way through our online webinars presented by Ed Zurndorfer who digs into all things FERS and more.
Be sure to follow updates from government agencies such as the Social Security Administration to keep abreast of the latest developments that may affect your retirement income.
Once you’ve maxed out your savings, or if you feel there might be a shortfall in your retirement planning, it’s important to reach out to a financial advisor to ensure you’re exercising all the savings and investment options open to you.
Making the most of your federal benefits comes down to understanding the resources available to you and making a plan to maximize your effective use of them. If you need help getting started, reach out to the team at Serving Those Who Serve at [email protected].
The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Serving Those Who Serve writers and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **
