Look before you leap into a private sector job
It might not be the win you think it is when you do the math.
Earlier this week, Government Executive reported that federal employees in 2024 on average earned 24.72% less than their counterparts in similar private sector jobs, according to a new report from the Federal Salary Council that is based on Bureau of Labor Statistics data.
With that in mind, let's say you are a GS-13, Step 10 in the Washington, D.C., locality area making $153,354 a year in 2024. If this employee is 42 years old with 15 years of government service, they are around the "midcareer" point of their federal career and, may be considering a move to the private sector. Let's compare their benefits if they remain employed in federal service to age 57 when they would have completed 30 years of service with what they would have to earn in the private sector at a job that pays them 25% more than they were earning in their federal career.
Stay with the Federal Government to Age 57 or Older
FERS Basic Retirement Benefit: By continuing federal employment to age 57, this employee would have a total of 30 years of federal service and would be eligible for a FERS immediate, unreduced retirement benefit with entitlement to the FERS Special Retirement Supplement. The value of the Basic FERS benefit would be equal to their length of service times one% of their high-three average salary or in this example, 30% of their high-three average salary.
Since this employee is "topped out" at a GS 13/10, salary increases may include annual pay adjustments and the possibility of advancing to the Senior Executive Service. In today's dollars, this benefit would be worth approximately 30% x $153,354 = $46,006/year or $3,833.85/month. This benefit may be reduced by 10% to provide a survivor benefit of 50% of the unreduced benefit to a spouse.
Federal and state income tax may be withheld from this benefit as well as insurance premiums for health and life insurance, if eligible to maintain in retirement by meeting the test of being covered by those benefits for the five years immediately preceding their retirement. Federal Employees Dental and Vision Insurance Program and Federal Employees Long-Term Care Insurance Program* benefits may also be continued and/or added in retirement.
If this employee continues employment past age 57, they continue to accrue an additional 1% of their high-three through age 61 and if they stay until age 62, because they would have over 20 years of service, the factor for the retirement computation changes to 1.1%. Annual cost-of-living adjustments would also begin at age 62 (no COLAs prior to age 62 unless retiring under special provisions such as law enforcement or firefighters' retirement options or under the disability provisions of FERS).
*Currently the FLTCIP program is not open to new applicants under a suspension that is expected to last through 2026.
FERS Special Retirement Supplement: This benefit provides a bridge to qualifying for Social Security retirement benefits. The supplement is equal to the approximate value of Social Security benefits an employee would have earned if they were eligible to receive them when they retired. The supplement ends at age 62 and is subject to an earnings limit if the retiree has earned income above a certain limit.
Thrift Savings Plan: Contributions continue to the TSP throughout the career that are increased by an automatic 1% agency contribution and dollar for dollar matching contributions up to 3% of the employee's biweekly contributions and fifty cents on the dollar for the next 2% of employee contributions. No matching after 5%, however, employees may continue to contribute up to the annual elective deferral limits. For 2025, the limit is $23,500. Employees aged 50 to 59 may contribute an additional $7,500 next year and employees aged 60 to 63 may contribute an additional $11,250 each year. After age 63, these catch-up contributions return to a limit of $7,500 for the next year.
Leave the Federal Government and Go To the Private Sector
This employee is "vested" for the FERS Basic Retirement benefit if they leave at age 42 with 15 years of service. This means that they may apply for a deferred FERS benefit at age 62 worth 15% (1% x years/months of creditable service). If the high-three average salary is currently $146,000 (the average of the highest three years of basic pay), this benefit would be worth $21,900 at age 62. If they elect to receive it as early as their minimum retirement age (57 for employees born in 1970 or later), this would be reduced by 25% (five% for each year under age 62). There would be no allowance for reinstatement of insurance or unused sick leave credit. No FERS supplement would be payable under a deferred retirement.
Retirement benefits available in the private sector:
- According to the Bureau of Labor Statistics, in March 2023, 15% of private industry workers had access to a defined benefit plan. The FERS Basic Retirement Benefit is an example of a defined benefit plan. Among private industries, financial activities stood out as 33% of workers had access to a defined benefit plan and 19% of workers chose to participate.
- For 401(k) plans, a common percentage for matching contributions in the private sector is between 4% and 6% of compensation, according to carry.com. Anything above 5% of compensation is considered a good employer match.
- To make up for the loss of the FERS Basic Benefit if the move to the private sector doesn't prove a defined benefit plan, this employee would need to save enough to provide an annual income of around $24,000 (the difference between the deferred retirement that is currently vested for this employee and the value of the future benefit that is shown above in today's dollars). Using the "4% rule" this employee would need to save an additional $600,000 to withdraw $24,000 a year to make up for the loss of the benefit payable at age 57. The 4% rule is a retirement planning guideline that suggests retirees can safely withdraw 4% of their total retirement savings in their first year of retirement, then adjust that amount annually for inflation to maintain a steady income stream throughout their retirement, typically aiming for a 30-year period; this rule generally implies a balanced portfolio with a mix of stocks and bonds, often around a 50/50 split, to manage risk and potential market fluctuations while aiming for long-term growth.
- In a private sector position without the benefit of a pension and the FERS Special Retirement Supplement, this employee may need to work to age 62 instead of having the option of retirement at age 57.
- Comparing the amount of difference in retirement income at age 62, the FERS benefit would now be based on potentially 35 years of service. Using the 1.1% formula and the same $153,354 high-three, this would be computed at 38.5% x $153,354 or $59,041/year or $4,920/month, requiring a larger savings amount to make up for the difference between the $21,900 deferred FERS retirement benefit which now has increased to more than $37,000/year requiring additional savings of a little under $1,000,000 to replace this income.
Employees planning to move to the private sector will need to make at least 25% more in wages to replace the loss of the additional retirement benefits offered to federal employees who qualify for an immediate retirement after the completion of a career of federal employment. This is in addition to the ability to maintain lifetime coverage under FEHB, FEGLI, FEDVIP and FLTCIP insurance programs.
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