Stepping Stones on the FS Path to FI: Understanding Your Pension

The Foreign Service Pension System (FSPS) is one of the spectacular benefits of the Foreign Service. In a world where pensions are going the way of the dinosaur, having a known annuity, in addition to any investments you have, and in addition to Social Security (which will hopefully still be there when you need it), is an incredible bonus.

What is the FSPS?

There are actually 3 different types of retirement pensions available to the Foreign Service:

  • FSPS – the Foreign Service Pension System;
  • FSRDS – the Foreign Service Retirement and Disability System;
  • FSRDS Offset – the Foreign Service Retirement and Disability System Offset;

Barring injury or extraordinary circumstances, most FSOs will fall under the FSPS. The FSPS is a branch or version of the Federal Employees Retirement System (FERS), which is different than the system for civil servants. This post also assumes that you joined the FSPS after 1983, as that’s when rules shifted significantly for the pension system.

With those caveats, the FSPS is a standard pension plan that both the employee and the Agency pays into every pay check. The money is used and invested to generate income and growth, and to pay for annuities (a fixed amount received monthly after retirement) for retirees from the program.

What Does the FSPS Cost?

Participants currently contribute 1.35 percent of basic salary to the FSPS.  The employing agency contributes an actuarially determined amount to reflect “normal cost” (less the employee contribution).

3 FAM 6110.

The FSPS is one of the (many) payroll pullouts you will see on your paycheck. To sort out what the FAM means, look at it this way. First, the people running the FSPS figure out how much you should pay in now to cover your expected cost to the FSPS later (‘actuarially determined amount’). Then, you pay 1.35% of your base salary, not including any of the locality bonuses. Any difference between that 1.35% and the amount the FSPS needs to keep running, is paid for by your agency.

What is this ‘normal cost,’ you ask? According to Note 10 of the
FY 2014 Department of State Agency Financial Report , “The Plan uses the aggregate entry age normal actuarial cost method, whereby the present value of projected benefits for each employee is allocated on a level basis (such as a constant percentage of salary) over the employee’s service between entry age and assumed exit age. The portion of the present value allocated to each year is referred to as the normal cost.” In 2014, this ‘normal cost’ for the FSPS was 25.07%

So, what does that actually mean for you? Let’s say that you are an FS-03-01. Per the FS Pay Scale, you are making $69,022, pre-tax, no bonuses. That means that, at least in 2014, the following went into the FSPS to be used for your pension:

  • $932 from you
  • $16,372 from the agency

For a grand total of $17,304. This money is expected to grow over time, hopefully outperforming both inflation and the draw down that you will eventually take, to ensure that there will be far more than $17,304 when you retire. The miracle of compound growth.

Who is Eligible for the FSPS?

Coverage

FSPS eligibility is covered by 03 FAM 6120, which states:

To be covered under FSPS, an individual must: (1)  Be an individual identified in section 803 of the Foreign Service Act of 1980; (2)  Be covered by Social Security; and

(3)  Have retirement deductions withheld from pay and have agency contributions made to the Fund.



Retirement Age

Section 811 of the Foreign Service Act of 1980 sets the ‘normal’ retirement age at 50, regardless of what your minimum retirement age would be elsewhere (which can get confusing when you look at the larger set of data on government retirement plans). Section 812 covers mandatory retirement at 65 for the Foreign Service.

Early retirement

Section 810 of the Foreign Service Act of 1980 states:

Any participant who voluntarily separates from the Service after obtaining at least 5 years of service credit toward retirement under the System (excluding military and naval service) may upon separation from the Service or at any time prior to becoming eligible for an annuity elect to have his or her contributions to the Fund returned in accordance with section 815, or to leave his or her contributions in the Fund and receive an annuity, computed under section 806, commencing at age 60.

In short, this means that if you decide to retire early you can either a) wait until age 60 to start pulling a pension from the system, or b) pull out everything that you’ve pulled in, apparently without any of the interest that money would have accrued, and plop it into your own retirement funds, presumably taking a tax hit on the money removed.

For my money, if you’ve been in for a while, it would make more sense to leave the money in and take the pension when it’s available. Or, work to 50 and make the calculations very simple. But, if you wanted to work to 50 you probably wouldn’t be here 😉

How Do I Calculate My Pension?

Before we can calculate your pension, we need a couple of numbers: your SCD and your ‘high-three’.

The SCD or TIS

If you look on your FSPS benefit statement, in the boxes on the top right you will see something that says SCD. This is your Service Computation Date, which is related to your Time In Service. Essentially, the USG smooshes all of your service together, and subtracts it from the current date to get the SCD.

For example, maybe you worked for 2 years for the FS in 2008-10, then took a break for a couple years, then rejoined on January 1, 2019. Your SCD is not going to be 2008, nor is it going to be 2019. Instead, they will subtract the 2 years from 2019, and give you a SCD of January 1, 2017.

To calculate your TIS, which is what’s used to determine the multiplier for your annuity, you subtract the SCD from your retirement date. In the current example, if you proceeded to work without another break until 2030, you would have 13 years of service instead of 11.

NB: IF YOU SERVED IN THE PEACE CORPS, BUY YOUR SERVICE BACK!! Time spent in the Peace Corps does count against your Time In Service, but because Peace Corps doesn’t take PSPS/FERS deductions from the laughably small volunteer paychecks, getting that time to count requires putting in the funds that would have gone in during those years, along with the interest that would have accrued. Don’t worry, the amounts themselves are pretty small – consider how much you were paid at the time. While this can be an annoying chunk of change that you didn’t budget for, the payout is likely much greater when you consider that your annuity will increase by between 2%-3.4% of your (much) higher salary at retirement age.

The High-Three

The ‘high-three’ is fairly easy to calculate, if you know what it is. Put simply, it’s the highest three consecutive base pay years. Usually, this is the last three years you spend at the agency. For example, if you retired at an FS-01, and your last three years were at steps 08, 09, and 10, you would have made $129,288, $133,167, and $136,659 for an average of $133,038.

The Calculation

Participants who are at least age 50 with 20 years of service receive a basic annuity of 1.7 percent of high three basic salary for the first 20 years of service and 1 percent of high-three basic salary for service over 20 years.

3 FAM 6110

Let’s use the scenario above, where you retired at the top of the FS-01 bracket, with a ‘high-three’ of $133,038. You’ve served the USG for 25 years, according to your TIS/SCD. Here’s what you would make:

  • 20 years x 1.7% = 34%
  • 5 additional years x 1% = 5%
  • Total: 39%

That 39% is then multiplied by the high-three, giving $51,885. That is how much you would receive, annually, from the FSPS. In the SCD example on buying back Peace Corps service, $2,661 of that, annually, comes from that transaction.

In calculating your FI number, the simplest way is to subtract it from your annual expenditures. For example, if your annual budget is $100,000, your pre-pension number would be $100,000*25 = $2.5M. However, factoring in your pension your FI number would be ($100,000-$51,885)*25= $1.2M. Quite the plus up on your path.

FAQ

What rules govern the FSPS?

The FSPS is governed by the Foreign Service Act of 1980 and 3 FAM 6110. This chapter of the FAM covers all things “FOREIGN SERVICE RETIREMENT AND DISABILITY SYSTEM AND FOREIGN SERVICE PENSION SYSTEM”. It’s part of 3 FAM 6000, which covers retirement in general. These are the chapters that I used to put together this article.

FAM chapters can be updated; the information provided here was valid as of January 2019. Please double check the FAM before making any final decisions on FI based on expected pensions.

Stepping Stones on the FS Path to FI: Make a Budget – in Local Currency

As Benjamin Franklin put it, “If you fail to plan, you are planning to fail.” Budgets are key to getting on the path to FI, whether you’re FS or not. As for why you should do all or part of your budget in the local currency, the short answer is that people are lazy at math when we really want something, so we often round down in our heads as to the true cost of things. Putting things you buy on the local economy in the local currency helps keep you on track.

Step One: Know Where You’re Starting From

Living an FS lifestyle is pretty grand, but it can get pretty pricy without warning. The first step to understanding how to get from point A to point FI is getting a better understanding of point A to begin with.

Before you start making budget buckets, track your spending for a week, or a month, to see where the money goes. Track Everything. The mortgage for the home in the U.S. if you have one, the Amazon shopping (I see you, Trailing Houses), the meals out, the groceries, etc. The really delicious cheese and the ‘I couldn’t help it they followed me home’ local handicrafts.

For some items, like consumables, you’ll need to ballpark your total spending and divide it over the length of your tour. Those packets of Kraft Mac & Cheese and Ghiradelli brownies didn’t come as part of your welcome kit! (If they did, I want your sponsor, please). If you buy your fuel from the Embassy rather than the local market, put that in there, too, averaging how many fuel tickets you go through per month, and how much that costs.

At the end of the period, take a look at what you’ve spent. Are you within the base salary? Are you within your base salary + COLA? Are there certain items that you are spending an exorbitant amount on? It’s ok if there are – at a post in West Africa I discovered that a quarter of my food spending would go to cheese if I wasn’t checking myself. The trick is knowing that you’re doing it, and reminding yourself, the next time you’re at the cheese counter and the chevre is calling you, that you have better uses for that money, or at least you could probably survive on a couple hundred grams, rather than the whole kilo. Probably.

Knowing where you currently spend will help with…

Step Two: Wrangle Yourself a Budget

Now that you’ve found where the money is going, we’re going to find a way to make it fit into our new lifestyle, and new goals. You’ll want to divvy up your spending into simple to track categories. Food, Car, Entertainment, etc. Personally, I use Mint.com, but there are a million apps and spreadsheets and ways to track your money. Do what works for you, but do it, and stick to it.

As I discuss in another post, for me, the best ceiling limit for your budget is your base salary, plus COLA if you need it. If you can’t get there yet, don’t worry, but that should be your goal. Look for areas to trim, and see if your purchases are things you do because you value what you’re purchasing, or just because it was there and you had the funds available. Part of the path to financial independence, for everyone, not just FSOs, is reducing unnecessary expenditures, which in turn reduces the amount of time and savings needed before you get to Financial Independence.

Make sure that you’re including space in your budget for your Individual Retirement Account (IRA) and your Thrift Savings Plan (TSP). Yes, you can contribute to an IRA in addition to the TSP. As of 2019, the annual contribution limit is $6,000 ($7,000 if you’re over 50) for the IRA and $19,000 (with catchup contributions of an additional $6,000 if you’re over 50). Monthly, that works out to $500 for the IRA and $1,583 for the TSP. This can seem steep, but you should be pulling the TSP funds out of your every pay check ($730.76 per pay period) so you don’t even see the money (and accidentally spend it). Yes, there are potentially better opportunities for the money once you’ve met the employer match, but that’s for another time.

Most people would stop here. You’ve tracked your spending, you’ve set yourself a budget that keeps you within your means. You’re all set. For FSOs, however, there’s one more step.

Step Three: Budget in Local Currency

Many of the items you’ve budgeted for are likely things that you buy on the local economy. Your fresh groceries, your cab fare, salaries for any hired helpers you may have (this is not a slight, I love having a housekeeper to make sure things run right and to be there when maintenance needs to fix something).

Identify those categories, and, at the beginning of every month, figure out what that budget bucket amount is in local currency. I use Xe.com, which has a handy app as well that you can install on your (personal) phone.

Why do we care what the local currency value is? Because, if you’re anything like me, you’re not interested in doing precise math on the fly. You say, oh, that carpet/picture/doll/jewelry/gadget is only 700 francs, there are 70 francs to a dollar, so that’s $10, which is precisely my budget. Which is great, until you realize that the currency when you pulled it out was actually 60 francs/$1, and now that item is $11.66, and with enough of those you’re over budget in every category. Knowing instead that you have 600 francs to spend that week on widgets helps keep you on track and within budget.

I hope this helps you, and please, if there are points of clarification or additional information that you’d like, reach out in the comments!