The Investment Scientist

Federal employee retirement: Like everything else, it’s complicated

Posted on: October 8, 2012

Is this your retirement fund?

A client of mine is about to retire, and she asked me when she should start to receive social security payments.

Complicating her decision is that her husband passed away 10 year ago, and she is currently working for the federal government.

It quickly dawned on me that this is actually a very complicated question, one that this advisor, most of whose clients are doctors and business people in their 40s and 50s, is not well-equipped to answer.

You can imagine my delight when I found out on a flight that the foremost social security expert of the country, Mary Beth Franklin, was sitting right next to me.

She is a former senior editor of Kiplinger. After she retired from the job, she became a contributing editor of InvestmentNews, a magazine for financial advisors.

After briefly exchanging our opinions of the news of the day, I quickly moved on to ask her the social security question on behalf of my client. Her answer confirmed my suspicion: it’s complicated – like everything the federal government does.

There are actually two retirement systems for federal employees: the pre-1984 one is called CSRS and the post-1984 one is called FERS. Those who were under CSRS and opted to stay in CSRS did not pay social security tax; therefore, they are not eligible for social security benefits. My client is under FERS, so she is entitled to social security benefits.

As a surviving spouse, my client is also entitled to 100% of her husband’s benefits, on top of her social security benefits, but not at the same time. To maximize her benefits, she could start the surviving spousal benefits as soon as possible, but wait until she turns 70 to claim her own benefits. For every year she delays her benefits after 66, they increase by 8%.

But there is a catch: if she starts her spousal benefits before she retires, her benefits are offset by her federal employment income using an archaic formula. So she should only start her spousal benefits after retirement.

That’s why I love my job so much. I get to meet great people – last month it was Allan Roth; I get to help my clients make smart financial decisions; and I get to share my newly acquired knowledge through my blog.

If you want to become knowledgeable about social security, following Mary Beth on her blog: Retirement 2.0.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

4 Responses to "Federal employee retirement: Like everything else, it’s complicated"

Clarifying one point: People in FERS pay Social Security taxes. This is why they can claim benefits. I have read way too many uninformed comments elsewhere attacking federal employees with the wrong information.

In addition to Social Security, my understanding is that she still qualifies for her FERS annuity with no offest (reduction).

In disability retirement there is an offset. Whatever Social Security pays for disability, the FERS disability retirement annuity is reduced. They use a “complicated” formula that involves length of disability and percentages of benefit.

With FERS disability when you reach age 62 you can convert to regular retirement. At that time they consider all of your working time plus all of the time disabled. This becomes your “service time”. Again, with a formula, they calculate regular retirement based on “Service Time”. Although I know all of the time factors , I cannot begin to calculate what my retirement annuity will be, it’s that complicated.

I have enquired several times to be sure. The answer always goes back to this. As a federal employee FERS (Federal Employee Retirement System) is a benefit. Since I also paid into Social Security and Medicare those benefits are available to me with no offset of the annuity.

There is one troubling aspect. I once asked if this annuity is an insurance product or is it similar to Social Security. The answer was, “The annuity is backed by the full faith and credit of the United States of America. You won’t have to worry about an insurance company going out of business.”

At that time I began to plan my life as if there were no benefits because the full faith and credit isn’t what it once was. Planning this way, any benefit is extra instead of the mainstay of my retirement.


Thank you very much for the additional insight. You are definitely more knowledgeable than I am on this and real estate investment.

Michael, We become want life challenges with. No challenges, not so much growth.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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