Navigating federal retirement benefits and government downsizing

In a memo published Wednesday, February 26th, The White House directed federal agencies to prepare for large-scale reductions in force (RIFs) no later than Mar. 13, 2025. This came after the Postal Service offered up to $15,000 in early retirement incentives for certain employees in January. With changes rapidly unfolding, it’s likely that downsizing of the federal workforce is coming sooner rather than later. DOGE has set its sights on cutting federal spending and it does seem likely that targeted reductions in the federal workforce will occur within the next two weeks.

So what do federal employees need to know about how all of this could affect their federal retirement benefits?

Let’s start with reviewing the six retirement benefits available to federal retirees, as well as a brief overview of what to consider about each.

We will also be discussing these topics during a live webinar on Thursday, March 13, 2025 at 1 p.m. ET. Click here to register for this free, educational webinar: Federal Retirement Benefits and Government Downsizing.

Pension

There are actually two federal employee pension systems: The Civil Service Retirement System (CSRS) and the Federal Employee Retirement System (FERS). Most federal employees these days are on FERS; only federal employees who began their service before January 1, 1984 are on CSRS. CSRS offered feds an annuity that amounts to a percentage of the average of their three highest-earning years of employment. FERS offers a pension that is a lower percentage of their high-three, but combines it with Social Security benefits and the Thrift Savings Plan, the government’s version of a 401k plan.

The FERS pension formula is 1% of your high-three average salary, multiplied by your years and months of service. If you retire at age 62 or older and have 20+ years of service, that percentage becomes 1.1%. So someone who is 62, with 20 years of service and a high-three average of $70,000 would receive an estimated annual pension of around $15,400, or about $1,283 monthly.

Social Security

Federal employees pay 6.2% of every paycheck into Social Security, the second leg of the FERS retirement income tripod. The government matches that, which means 12.4% of every paycheck is going toward their retirement. It’s more complicated with CSRS employees, who should consult a financial adviser who specializes in federal retirement to see if they qualify for Social Security.

FERS retirees need 40 quarters of qualified employment to earn Social Security benefits, which will then be based on their highest 35 years of earnings. They can begin taking Social Security at age 62, but that’s technically considered early retirement. Feds who chose to do that will receive the smallest payments, but will also receive the most payments over time. The payment amount goes up a percentage every year until age 70, when it maxes out. Feds who retire at 70 will get the biggest payments, but the fewest. It does not grow after 70; feds who don’t claim Social Security at age 70 are leaving money on the table for no reason.

TSP

Finally, there’s the TSP. The government’s version of a 401k plan consists of five core funds: G, C, I, F and S. Then there are the Lifecycle funds, which consist of a blend of each of the core funds targeted at a specific retirement year.

The TSP is one of the most important and beneficial government benefits. While it is one of the simplest 401k structures, it can do a great job of accumulating retirement dollars while you work if used correctly. The biggest reason for that is the matching contribution: The government will match up to 5% of each paycheck if you invest that much in your TSP.

Another benefit is that unlike the pension or Social Security, TSP has liquidity. Retirees have far more control over how much they withdraw from it. Finally, the contribution limits are huge; federal employees and retirees can find out what those limits are and keep up with yearly changes at TSP’s website.

While TSP is a great accumulation tool, it has limitations in the pre-retirement and income phases because of the lack of diversification. It is vitally important to consult with a financial professional who truly understands TSP, its options and the rules that apply to it so you can Maximize it later in your career and into retirement.

FEHB

The Federal Employee Health Benefits (FEHB) program is the government’s health insurance, of which it pays 72%; employees only pay 28% of the cost. Feds can take their FEHB into retirement as long as they were covered for five consecutive years, up to their retirement date. That also includes qualified family members, who can also be added during major life events or any Open Season.

One common myth about the FEHB in retirement is that it gets more expensive. But what’s actually happening is the same yearly deduction is being split across 12 pension payments, rather than 26 paychecks. So the payments are larger, but fewer. However, the deductions do come out after taxes in retirement, unlike when feds are working.

Survivor benefits

If a retired federal employee passes away before their spouse, that spouse does get some benefits. However, those are difficult to calculate and generally require the help of a qualified financial adviser to determine. In addition, there are differences between how that’s calculated between FERS and CSRS.

FEGLI

Finally, there’s the Federal Employee Group Life Insurance (FEGLI). This is often the most confusing because most people don’t know which option they have or what they’re paying. Those options are:

• Basic: Costs $10-30+ per pay period. It’s very inexpensive while you work but the price increases dramatically in retirement. It pays your adjusted base salary rounded to the next thousand, plus $2,000.
• Option A: Cheapest at $2 per pay period, then $6 per pay period once you turn 60 (regardless of if you’re retired). It pays $10,000.
• Option B: Pays up to five times your salary. It’s generally a good deal while you’re young but becomes expensive as you get older because the cost rises every five years. This can create a life insurance trap as you get older if you don’t understand the price increase and plan accordingly.
• Option C: Optional family coverage with up to five multiples. Each multiple is $2,500 for children or $5,000 for spouses.

Now that we’ve reviewed the six federal retirement benefits, let’s go over the latest updates federal employees also need to consider:

Schedule F

Schedule F is back, a new designation for thousands of federal employees in policymaking positions that would exclude them from civil service protections. Initial estimates found roughly 50,000 federal employees would be impacted by Schedule F when it was first introduced, although federal employee unions say there’s evidence of a “far higher” impact on the federal workforce.

The Difference Between VERA and RIF

VERA (Voluntary Early Retirement Authority)

Because VERAs are voluntary, the big question federal employees should be asking is whether taking a VERA is the right move for them. Their main consideration in this should be their age and their retirement plans. If they’re planning to retire from work altogether, then they’ll need to run the numbers on their retirement accounts, Social Security, annuity and what their expected budget will be for the lifestyle they intend to lead. That will be a personal calculation for each individual, and they should work with a federal retirement consultant to make that determination.

One other thing to remember while deliberating over a VERA: If a federal employee is in their 50s, they may have a decade or more before they can take Social Security. That means they’d likely be relying more on their Thrift Savings Plan earlier in their retirement, which may not be desirable. Every withdrawal from the TSP comes with a long-term ripple effect, as that’s less capital gaining compounding interest over time.

Meanwhile, federal employees who may consider taking a VERA and transitioning into the private sector should not take Social Security, whether it’s an option or not. They should also roll their TSP into an IRA when they leave federal service, as there’s no limitations on an IRA the way there are on the TSP or other 401k plans.

RIF (Reductions in Force)

An RIF is an entirely different beast, as it’s not voluntary. Federal employees whose agencies are talking about the possibility of RIFs may want to prepare, just in case. So what can they do?

Again, their best move in this case would be to see a federal retirement consultant and run the numbers. They’ll need to bring their current TSP information, their pension information — including years of service and their average high-three salary — their Social Security estimate, and any other outside investments they may have. They should also visit the Office of Personnel Management’s webpage about RIFs to ensure they’re eligible for severance pay, and calculate what that would be.

They should also know that if they’re not immediately eligible for an annuity, they will only continue receiving Federal Employee Health Benefits for free for 31 days after separation. After that, they can request in writing within the first 60 days of their separation a temporary extension of up to 18 months. However, continuing the plan in this manner would require them to pay their own portion of the coverage, the government’s portion, and a 2% administrative fee, totaling 102% of the cost of the plan.

Finally, they should consider their stage of investment in the TSP, and the amount of risk they currently have in their portfolio. They may want to adjust their risk exposure to be more conservative if the possibility of an RIF would significantly shorten their timeframe to retirement.

While the government landscape is changing rapidly, know that Federal Employee Benefit Advisors (FEBA) is there to answer your questions and offer any clarity they can. Justin T. Pierce and James M. Campbell are fiduciaries, federal retirement consultants (FRCs), and the managing partners of FEBA.

Whether you’re considering VERA, want to prepare for potential RIFs, or simply want to learn about your federal retirement benefits, you are invited to attend FEBA’s free educational webinar on March 13th where Justin Pierce and James Campbell will discuss all six federal retirement benefits and the most up-to-date information related to government downsizing.

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