Doing the Math

Doing the Math

By Steve M. Niu

A look at the ‘new’ federal retirement system—almost 30 years later

In the 1980s, Congress made a draconian change to the federal employees’ retirement system, changing from a 100% defined benefit (DB) plan called Civil Service Retirement System (CSRS) with up to 80% Replacement Ratio[1] (RR) to a three-prong retirement system that includes: (1) a less expensive DB plan called Federal Employees Retirement System (FERS) which has a 30% RR with 30 years of service, (2) an annuity from the Social Security (SS) system, and (3) a defined contribution (DC) plan called Thrift Savings Plan[2] (TSP) with government matching contributions. Any federal employees hired after 1983 (including United States Postal Service [USPS] workers] are covered in the new three-prong retirement system (FERS/SS/TSP).

Like many private-sector employees, federal employees (including USPS) wrestle with the same million-dollar question at or near retirement: “Do I have enough money saved in my retirement accounts?” Over the years, many private-sector employers have either frozen or terminated their DB plans and replaced them with DC plans. The 80% RR retirement goal is not a simple calculation anymore when you have a DC plan that provides a lump sum value instead of an annuity.

This paper will try to answer the other million-dollar question—“How much TSP should a federal employee have to achieve the retirement goal of 80% RR?” Many federal employees who just missed the cutoff for CSRS in 1984 may be wondering about this next question: “How much TSP should a federal employee have to get the most out of the new retirement system (FERS/SS/TSP) vs. the old one (CSRS)?”

As shown in Table 1, It was reported[3] that there were 112,880 participants (or 2% total participants) with at least $1 million in their TSP account as of December 31, 2021.

It has also been reported that we are living longer, so this raises the question—“Do we retire earlier or later?” As you can see in Table 2, federal employees retired on average at age 61, with most retired at age 62 in 2021 vs. retired at age 58 with most retired at age 59 in 1994 (almost 30 years ago). The average retirement age has increased from age 58 in 1994 to age 61 in 2021, leading to another question—“Do federal employees work longer because they retire later now?” The answer is a resounding “NO,” because the total years of service at retirement remains unchanged at 26 in 1994 and 2021 as shown in Table 2. In other words, federal employees on average join the federal government three years later from age 32 to age 35 with the career age shifted from age 32 to 58 vs. age 35 to 61.

Let’s circle back to our two million-dollar questions earlier: (1) How much TSP should a federal employee have at retirement to achieve the employee’s retirement goal of 80% RR? and (2) How much TSP should a federal employee have to break even under the new three-prong retirement system (FERS/SS/TSP) vs. the old system (CSRS)?

Let’s try to answer the second question first. As shown in Table 2, the average monthly annuity for those retired under CSRS and FERS during 2021 are $5,239 and $2,006, respectively. FERS annuity[6] is defined as 1% times the average of the highest three years (or 36 months) of pay at retirement, so we can solve the average of high-3 years’ salary per month for 2021 FERS retirees to be $7,715 [= $2,006 / (1% times 26 years of service)] or $92,585 (=$7,715 times 12) per year. Next, we can use the Social Security Quick Calculator[7] to compute the estimated monthly SS annuity to be $1,600 at age 62 (earliest age for SS annuity) based on an average federal employee with last year salary before age 62 as $100K (rounded up from $92,585). Hence, the breakeven TSP annuity can be computed as CSRS annuity of $5,239 minus FERS annuity of $2,006 minus SS annuity of $1,600, which equals to $1,633. We can then use the “4% Safe Withdrawal Rule”[8] to convert the TSP monthly annuity to a lump sum by multiplying $1,633 by 12 and dividing by 4%. The result is rounded to $490K and shown in Table 3.

Only 7% of TSP participants have at least $500K, as shown in Table 1. Seven percent may look relatively low; however, TSP covers not just the federal employees but also those who are retired as well as military members (under the 2001 National Defense Authorization Act). Some CSRS employees and annuitants also participate in TSP voluntarily without any government matching contributions. There are 2.8 million and 1.1 million active federal employees and annuitants (including USPS), respectively, covered under FERS/SS/TSP as of Sept. 30, 2020, according to the FY2021 Civil Service Retirement Service Disability annual report.[9] It was reported that there are 2.4 million military members covered in TSP as of April 2022.[10]

Now, let’s answer our first million-dollar question: How much TSP is enough for federal employees to retire comfortably (achieve 80% RR)? If we can find the replacement ratio for the new retirement system (FERS/SS/TSP), then we can easily solve the question. In order to find RR, we need to convert all three (FERS, SS, and TSP) benefits to an annuity. So, the question becomes “How much TSP equivalent annuity do I need to achieve the 80% RR?”

First, we can quickly determine 80% RR to be $6,172 (=80% times $7,715—high-3 average monthly pay) per month. Next, we can subtract FERS annuity of $2,006 and SS annuity of $1,600 from $6,172 to get the TSP equivalent annuity of $2,566. Using the same 4% Safety Withdrawal Rule, we can convert the TSP monthly annuity of $2,566 to a single lump sum by multiplying $2,566 by 12 and dividing it by 4% to get $770K to achieve the 80% RR in the three-stools retirement system, as shown in Table 4. As we can see in Table 1, only 3% in TSP enrollees have over $750K.

The actual TSP amount needed to achieve 80% RR can vary by an individual’s pay, age at retirement, gender, health status, genetics, lifestyle, and other debts or savings, etc., because these numbers are based on averages of the federal employees including USPS. For example, if an employee makes more than the average pay, then the employee will need more than $770K to achieve 80% RR. Similarly, a female employee will need more than $770K to achieve 80% RR because females live longer than males.

STEVE NIU, MAAA, FSA, EA, is the chief actuary of the Office of Personnel Management.


[1] Many retirement experts, including many actuaries, agree if a person can have 80% of pre-retirement income replaced after retirement, then they have enough money to retire.

[2] https://www.tsp.gov/

[3] https://www.fedsmith.com/2022/01/04/more-than-100000-tsp-millionaires

[4] OPM Statistical Abstract Reports.

[5] Fiscal year ending September 30.

[6] https://www.opm.gov/retirement-center/fers-information/computation/.

[7] https://www.ssa.gov/OACT/quickcalc/.

[8] 4% Safe Withdraw Rate is commonly used by financial planners to safely withdraw the retirement money over the next 30 years of retirement (without running out of money).

[9] https://www.opm.gov/about-us/budget-performance/other-reports/fy-2021-csrdf-annual-report.pdf.

[10] https://www.militarytimes.com/pay-benefits/mil-money/2022/10/07/this-coast-guardsman-became-a-millionaire-with-his-thrift-savings-plan/.

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