Individuals might need to secure options and plan their expenses after retirement, considering tools like pension benefits. With the changes in the work environment over the years, people have become more attentive to their finances and have begun planning early for retirement by setting long-term financial goals. One cannot simply expect the retirement option to work for them. Instead, one must carefully analyze a pension fund to determine if the amount meets one’s financial needs.

Pension calculation
The Federal Employees’ Retirement System is a retirement plan for all federal civilian employees. It processes the total pension based on its pension calculator.

The formula uses the product of three components—high-3 salary, creditable years of service, and the multiplier, to calculate the gross annual pension of an individual. However, the net amount, i.e., what the individual can spend after retiring, has to be calculated after subtracting taxes and other deductions.

Components of pension
During each payment period, the government deducts a small amount from one’s salary, which goes toward the individual’s retirement pension. However, the amount received is not determined by the contributions made over one’s career. Here are three components used by FERS’s basic pension calculator:

High-3 salary:  One’s high-3 salary is determined by taking the highest average salary during 36 consecutive months of an individual’s career.

Many individuals’ last three years of service are often considered for the high-3 component as it is when they are likely to earn the most. However, if one has received a higher pay earlier in their career, that particular period (up to 3 years, not necessarily January–December) would be considered for the calculation. Not all types of pay are considered while calculating one’s high-3 salary, i.e., it does not include overtime pay, bonuses, overseas costs of living adjustments, travel allowances, and cash rewards. Only basic pay components like the basic salary, locality pay, and shift rates are considered in the government pension calculator.

Years of creditable service:  The second factor when calculating government pension is creditable service. The Office of Personnel Management (OPM) calculates creditable service years from an individual’s standard form 50 (SF-50). These forms are issued every time there is a change in job or pay; also, each individual would receive at least one form a year. The easiest way to calculate creditable service is by rounding up all the SF-50s in the file to check if they match the years of service. One’s Service Computation Date (SCD) is not considered for the calculation of creditable service. While there is no official document to show the Retirement Service Computation Date (RSCD) before you retire, you can use the component from SF-50s to calculate the number of full years and months between the RSCD and the retirement date. However, the OPM only takes into account the complete 30 days as the full month, so any additional days must be excluded from calculations. For example, if the time between the RSCD and planned retirement date is 20 years, five months, and 25 days, only 20 years and 5 months will count as creditable service.

Military time can be added to one’s credible service and is considered civilian service. However, one has to discontinue their military pension to add the military time as civilian service. 

Multiplier:  The third factor when it comes to calculating basic pension is the pension multiplier. The component is generally 1%. For those who retire at age 62 or older and have a minimum of 20 years of service, the multiplier is 1.1%.

While FERS is a public retirement plan that offers a pension, private companies offer different kinds of retirement plans and benefits. Additionally, to evaluate and choose between retirement pension plans, one can use other basic pension calculators to help them see if the pension would meet their needs.

Retirement tips
Pension calculation and benefits have become complicated over the years, considering that now people can access the funds after they turn 55. Not everyone’s pension benefit aligns with their expectations, especially when they start calculating it before retiring. This is why many tend to seek pension advice from professional advisors that can help people create a suitable plan to help secure future finances. One can even look for experts in their area to seek guidance regarding basic pension calculation. Further, here are a few tips to follow when thinking about retirement and planning for future financial needs:

Start saving and take early, unplanned retirement into consideration.
Pay off debts while working and not after retirement.
Draw up a health insurance strategy and plan for Medicare enrollment before the 65th birthday. People can be charged for not enrolling on time. The strategy is important as bills for treatments and other prescriptions after retirement can be expensive.
Increase HSA (health savings account) contributions to build up an emergency cash reserve for health expenses.
Figure out future financial needs and ensure that the retirement savings remain untouched before leaving the service.
Check for the benefits one may receive from social security.
Explore part-time work (if feasible) to secure additional funds after retirement.