Is FERS really a three legged stool?
Read the video transcript:
Okay, welcome to the channel, everybody. This morning, we’re going to talk about the three legged stool. So for those who don’t know, if you’re in the FERS retirement system, the FERS system was designed to be a three legged stool. That was the design. The three legs are your FERS pension, Social Security, and the Thrift Savings Plan.
Those are the three legs of the stool. And a FERS employee, the earliest age they can retire is MRA, minimum retirement age, for most people, it’s going to be age 57. Some people it’s 56, for most people it’s going to be 57. So, what I want to examine is, if somebody retires at the age of 57, will they have access to all three legs of the stool?
So, let’s go one by one. Your FERS pension, can you access your FERS pension at the age of 57? Sure, that’s the way the system was designed, of course. Next, can you access your TSP without penalty at the age of 57? Now, the reason why I ask this question is because, if you don’t know, the TSP is a retirement account.
Retirement accounts, you usually need to wait until 59 and a half to access your retirement accounts. If you access your retirement accounts before 59 and a half, There’s a penalty, early access penalty. The penalty is 10%. However, at 59 and a half, that’s when you’re old enough and mature enough to handle your own money, so they finally trust you with your money at 59 and a half.
But if you are trying to retire at the age of 57, you’re not yet 59 and a half. So do you have to worry about the early access penalties? So good news for you guys. Even though the general rule is 59 and a half, but there’s an exception to an employer based retirement plan. Some people call this the age 55 rule.
The exception is as follows. If you separate from an employer at the age of 55 or later, you can access that employer’s retirement plan without penalty. And by the way, listen to the words carefully. If you separate at the age of 55, you don’t even have to retire. Just separating at the age of 55 or later, you can access that employer’s retirement plan without penalty.
Let’s plug that in. Is the TSP considered an employer retirement plan? It sure is! It’s through your employment with the federal government that you have access to that TSP. So good news, if you separate from the federal government at the age of 55! Or, at MRA 57, you can access the TSP without penalty!
That’s amazing! Now, let’s go a little bit further with this one idea. What about an IRA? An IRA, is that considered an employer retirement plan? No, it’s not. An IRA is an individual retirement account. It has nothing to do with your employer. So, an IRA, you cannot access an IRA until you’re age 59 and a half.
Until you’re old enough and mature enough to access your money. However, if your creative juices are flowing, you may spot a good idea over here. What if you take your IRA and roll it into your TSP? Then you can access that IRA along with your TSP without penalty.
This same trick you could apply to a 401k. Is a 401k an employer based plan? Yes it is. So you can actually access a 401k. At the age of 55, so long as you separate from that employer at the age of 55 or later. But let’s say you separated from your previous employer before the age of 55. And now you have this 401k from that previous employer. Well, you’re not going to be able to access that employer plan at the age of 55 because you separated before 55.
What you’re going to have to do is you’re going to have to wait until age 59 and a half when you’re old enough and mature enough to access your money. But, if your creative juices are flowing, you’ll notice that you could do the same trick. Why don’t you just roll your 401k into your TSP? And once you roll it into your TSP, you can access that 401k along with your TSP without penalty.
So back to the three legged stool. If you are an MRA, can you access your FERS pension? Yes, you can. Can you access your TSP without penalty? Yes, you can. What about that third leg? Social Security. Can you access Social Security at MRA, age 57? Well, actually, the youngest you can access Social Security is age 62!
Oh man, so wait a second, so that means if somebody retires at the age of 57, they don’t have a three legged stool, they only have a two legged stool! They have their FERS, they have their TSP! But Social Security, they can’t touch until the age of 62. So that’s only a two legged stool. How does that stand?
It’s a little bit wobbly, huh? So OPM felt bad. Because remember, they designed your retirement to be a three legged stool. So what they did was, they created the FERS annuity supplement. They call it the FERS annuity supplement. I call it the fake Social Security. Why do I call it the fake Social Security?
Because it looks like Social Security, it acts like Social Security, but it’s not coming from Social Security. It’s coming from OPM. When I say it looks and acts like Social Security, here’s what I mean. It looks like Social Security in that the amount of money they will send you as this FERS supplement is gonna be a percentage of your real Social Security benefits.
What the percentage is, is a whole formula, and maybe we’ll explain that another time. But, it looks like Social Security in that they’re going to give you a percentage of the real Social Security amounts. It also acts like Social Security. Just like Social Security is subject to an earnings test. If you’re making too much money, they will reduce the real Social Security.
So to the fake Social Security. If you’re making too much money, they’re going to reduce the fake Social Security. There’s an earnings test. And by the way, FERS employees, every year you’re going to have to fill out an earnings report letting OPM know how much money you earned that year. This way they know whether they should reduce the fake Social Security.
And by the way, it’s only earned income that applies towards the earnings test. So, for example, wages, W2 employment, that applies towards the earnings test. However, your FERS pension is not considered earned income, so don’t worry about that. That does not apply towards the earnings test. So, the fake Social Security, it looks like Social Security, it acts like Social Security, but it’s not coming from Social Security.
It’s coming from OPM. This fake Social Security, this third leg of the stool, lasts up until the age of 62. So you can access it at MRA, but it goes to the age of 62. And then at 62, it disappears. So what that means is, from the age of MRA until 62, you have two real legs, and one fake leg! And then at the age of 62, the fake leg disappears!
And now you’re back to a two legged stool! What do you do then at the age of 62 when you’re back to a two legged stool? So then you have to decide whether you want to collect the real Social Security or not. And that’s a conversation we’re going to have on a different video. Whether you should collect Social Security at the age of 62, whether you should delay it to full retirement age, which for most people is 67, or whether you should even delay it to the age of 70 when you max out your Social Security.
That’s a conversation for a separate video. But what I’m hoping you guys can see over here is that somebody who retires at MRA, they do have a three legged stool. However, this three legged stool comes with some strings attached to it. Your FERS pension, that’s fine. The TSP without penalty, that is an exception for an employer based plan.
And you can access your TSP at the age of 55, so long as you separate at the age of 55. The third leg is Social Security. That third leg is a fake Social Security, not the real Social Security. And that third leg goes away at the age of 62, no matter what. And then you’re back to a two legged stool. And then it’s up to you to initiate the real Social Security as the third leg of the stool.
I hope you guys are following the content over here. Stay tuned for some more content in the future.