Basic Retirement Computations

In last week's column, we opened our discussion of the importance of estimating your future retirement benefits. You should request a retirement estimate from your agency's human resources office at least a year before you plan to retire. This estimate will be prepared by a trained retirement specialist who works in your agency's human resources office. She or he will use sophisticated retirement software to provide you with an accurate estimate based on your personnel records and payroll information.

The Office of Personnel Management will provide you with your actual retirement benefit after you retire, but you surely will want to have a reasonably accurate estimate before you depart so you can prepare confidently for your future financial security. If you understand the method used to compute your benefits, you should have more trust in the estimate you receive, and you'll be able to ask questions if you think there are errors in the computation. And don't worry: You don't have to be a math whiz to figure this stuff out.

Defined Benefit

Before we begin, it is important to remember that under both the Civil Service Retirement System and the Federal Employees Retirement System, the basic benefit comes from a "defined benefit" rather than a "defined contribution" plan. Here's the difference:

• A defined contribution plan provides an individual account for each participant. The benefits are based on the amount contributed and are also affected by income, expenses, gains and loses. The Thrift Savings Plan is a defined contribution plan.
• A defined benefit plan promises the participant a specific monthly benefit at retirement. Under CSRS and FERS, monthly benefits are calculated through a formula that considers a participant's salary and service. Most public sector defined benefit systems require employee contributions. CSRS requires contributions of 7 percent of basic pay. (Law enforcement officers and firefighters contribute 7.5 percent.) FERS requires contributions of 0.8 percent of basic pay. (Law enforcement officers and firefighters contribute 1.3 percent). In defined benefit plans, participants are not required to make investment decisions. Social Security retirement is a form of defined benefit plan.

So how can you go about estimating your basic benefit? It's a three-step process. First, compute your high-three average salary, since your retirement will be figured as a percentage of that salary. The easy way to estimate your high-three is to assume that it's roughly equal to your annual salary rate for the year before the year you're retiring. For example, if you are planning to retire at the end of 2007, your high-three period would be 2005, 2006 and 2007. The average of those three years would be somewhat close to the 2006 rate.

Second, determine and compute your length of creditable service. How much federal service do you have and how much longer do you plan to work? This is usually the amount of service that will be used to compute your CSRS or FERS basic retirement benefit. Under CSRS, you also get credit for unused sick leave.

Third, apply the CSRS or FERS formula to compute the basic benefit:

• FERS provides 1 percent of your high-three average salary for your total years and months of service. For example, 30 years of service equals 30 percent of your high-three average salary.
• CSRS provides roughly 2 percent of your high-three average salary for your total years and months of service. For example, 30 years of service equals a little more than 56 percent of your high-three average salary.

That's the simple version. Next week, I'll go into more of the details of computing your basic benefit.

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.