Federal pension beats high salary and savings rate? (fed vs contractor for employment)

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doss
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Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by doss » Mon Mar 27, 2017 9:44 am

Hello, I am a defense contractor looking for advice/consensus from this forum on whether I should leave the contracting world and cross over as a federal government employee. I realize that there is a consensus from this board to secure a federal gov position, but I think my situation may be a little different.

Stats:
  • 37 years old
  • 130,000 salary, software developer
  • Security clearance
  • Live in low cost of living area
  • 2.5yrs as a federal employee
  • 4 yrs as a defense contractor
  • 200k saved for retirement (2045 and 2050 Vanguard Target Retirement Funds)
  • 401k with 6% match
  • 1 spouse (SHM for now, but will return back to teaching position [position provides a pension])
  • 1 baby
  • $800/mo mortgage (started in 2014)
  • Would like to retire at 60
I am the only contractor in my job role at my office -- the rest are government employees. However, they want to convert me to a federal employee but the salary tops out at 113,000 (assuming I can negotiate with HR to start at the max). The benefits are the same with the exception of the FERS annuity, sick leave, and FEHB after retirement for federal employees. I don't get to carry over more than 120 hours of leave, whereas federal folks get to keep 240hrs per year.

Very hard to fill my position...many open positions (get about 3 calls a month from recruiters) and believe I can get 150k (i've been too chicken to accept 140k offers as I'd have to start over on my accrued leave) now.

Question: At what point does it make sense to go the federal employee route? I was saddened to hear that you now have to contribute 4.4% to annuity (I was not able to get grandfathered in to the earlier 0.8% contribution because I only had 2.5yrs invested).

Contractor:
According to the Vanguard Retirement Income calculator, if I want to retire at age 60, and I save 23% of my salary every year until then, and want to live a lifestyle at 68% of my current income, with 7.4% annual return from investments, I may have a monthly income of $7,756 in today's dollars, This puts me slightly ahead of what the calculator says I may need ($7,367).

Federal employee:
However, assuming a salary of 110000, retirement age 60, with 25 years of civil service, and only save 14% of my salary (15k/yr) and with an income replacement of 80% in retirement, the calculator says I may have $7,925 in today's dollars in monthly retirement income.

The pension really does seem to trump the high contractor salary.

Thus, I wanted to double check this with you guys. It seems the federal annuity is really the key here. It doesn't matter how much I try to save towards retirement as a contractor (nor the salary quite matters) because at the end of the day the tortoise pension is going to come out ahead.

Am I wrong in my assessment?

Calculator link: https://retirementplans.vanguard.com/VG ... meCalc.jsf
Last edited by doss on Mon Mar 27, 2017 10:14 am, edited 3 times in total.

fishmonger
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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by fishmonger » Mon Mar 27, 2017 9:47 am

Federal benefits (including contribution amounts) are always subject to change at the whims of Congress. Also, fair to assume you will get simple COLA raises for the next 20+ years.

Sidenote, you have an $800k mortgage at gross income of $130k?

doss
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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by doss » Mon Mar 27, 2017 9:49 am

fishmonger wrote:
Sidenote, you have an $800k mortgage at gross income of $130k?
800k? No, i meant I only pay 800/month for my house (30 year mortgage).

twins2012
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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by twins2012 » Mon Mar 27, 2017 9:56 am

I would take fed job in a heart beat.

dbltrbl
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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by dbltrbl » Mon Mar 27, 2017 9:57 am

take the pension. After 5 years, most likely if something happens to you, spouse and child will get pension/monthly payments for all dependents. Also in retirement it is god to know you have two streams, one not at all dependent on vagaries of market and other depends on the market. Pension should cover 80% or more of your needs. Even if congress cuts the budget and you are let go, your pension is there once you are vested.

fishmonger
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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by fishmonger » Mon Mar 27, 2017 9:58 am

doss wrote:
fishmonger wrote:
Sidenote, you have an $800k mortgage at gross income of $130k?
800k? No, i meant I only pay 800/month for my house (30 year mortgage).
Ha, my bad! Reading too fast!

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Cobra Commander
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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by Cobra Commander » Mon Mar 27, 2017 10:04 am

I would also consider job security. I don't just mean whether you could be replaced (it sounds like this is not an issue) but whether the contract under which you work could be eliminated or not renewed.

Also, you didn't mention it but I would factor in 401k match. You'll get 5% with the feds, this may be more or less than you're currently getting.

doss
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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by doss » Mon Mar 27, 2017 10:13 am

forgot to include....I currently get 6% match from current company (who knows how long that will last).

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dm200
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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by dm200 » Mon Mar 27, 2017 10:18 am

With 20/20 hindsight (and now over 70) and having worked in that field, often on federal contracts, I now see folks of my age getting very, very nice federal pensions and getting health insurance benefits (for them and spouses) in retirement. An alternate career path of working for 30 years as a federal employee and being able to "retire" at age 56 or 57 now looks very, very good.

delamer
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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by delamer » Mon Mar 27, 2017 10:21 am

The pension is important, although your contribution rate is high (relative to those who were grandfathered into the old rate).

My husband and I will be able to comfortably live off our pensions (fed in my case) and Social Security, without touching our savings. That is pretty much an ideal position in my book. I assume you are aware of the FERS supplement paid to those who retire before age 62?

Currently, the ability to carry FEHB into retirement is probably just as important. Having affordable premiums with multiple plan options prior to age 65 (Medicare eligibility) is what makes early retirement possible for many feds. Unfortunately, there is no crystal ball to determine if that benefit will still be available when you are ready to retire.

This is not a popular stance on this forum but I believe that a federal employee who will have 30 years of service and expects to own their home free-and-clear at retirement should be fine with just contributing enough to TSP to get the match. Obviously, a married fed needs to take into account his/her spouse's needs when deciding how much to save (for instance the impact on the spouse of a reduced pension if the fed dies first). But most people on the forum will retire with only Social Security and their savings to live on -- not to mention having to cover medical expenses if retiring early -- and so they need to save much more aggressively than the average fed.

You seem to have taken the lower fed job savings rate into account to a degree in your calculations, although not the added 4+% FERS contribution. But using income replacement rates is of limited benefit. Better to do a rough estimate of your retirement expenses, and figure out how much you'll need.

Good luck.

doss
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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by doss » Mon Mar 27, 2017 10:26 am

delamer wrote:
You seem to have taken the lower fed job savings rate into account to a degree in your calculations, although not the added 4+% FERS contribution. But using income replacement rates is of limited benefit. Better to do a rough estimate of your retirement expenses, and figure out how much you'll need.
Good catch, and yes I forgot to add that into the savings rate!

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by supertreat » Mon Mar 27, 2017 10:38 am

Are you expecting 80% of your salary as a pension? Under FERS you should expect a maximum of about 1/3 of your income as a pension.
Assets - Liabilities = Equity + (Income - Expenses)

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by VictoriaF » Mon Mar 27, 2017 10:43 am

I have retired from a Federal government job where I have interacted with both government employees and contractors. I strongly recommend that you don't reduce your decision to the arithmetic of respective salaries and benefits, and consider the big picture:
- A Federal employee, by law, has a limited work week. A contractor may be asked to work 100-hour weeks.
- A Federal employee may lose his job, but it's a complex process during which the employee is offered various other employment options. A contractor may lose his job very abruptly and spent a lot of time looking for a new job. If you have several periods of unemployment in your career they may negate any differences in the salary when you work.
- As a Federal employee, you can move to a different area of the U.S. for job availability or a promotion, without disrupting your employment.
- Outside Washington, D.C., there are relatively few Federal jobs, and holding one gives you more job security to stay where you do.
- Federal employees have excellent opportunities for free education. In the D.C. area the workforce is the most educated in the country.
- With a combination of the Federal experience and acquired education, a Federal employee can relatively easily move into contracting. Moving from contracting to Federal employment is much more difficult.

Good luck,
Victoria
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Nestegg_User
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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by Nestegg_User » Mon Mar 27, 2017 10:55 am

I'm going to be a contrarian--
You did notice the higher contribution requirements that FERS now requires (4.4%) and should have noticed the low COLA (if any) that have been given the last few years (just as likely you've had low COLA's as a contractor, as well). With the number you've thrown out, you would be at the top of the step , so no step increases would be available-- unless you're in an agency with special pay bands ( not normal civil service pay rates). The same might not be said for your contractor positions, if indeed they are reliant on such expertise-- so future pay increases more likely with contractor, along with risk (3 year or 5 year contract renewal, etc).
With the differences in pay from contractor versus civil service: both not subject to additional SS withholding, but the CS still subject to the 4.4%, the potential for the contractor position giving better COLA and already having better 401k match, if indeed it is hard to fill and valuable for the contractor and agency, and the ability of the contractor to only have to put in 40 hours versus some agency CS types having to stay until whenever-- the CONTRACTOR position appears better, the contractor can " roll their own " with the additional funds and not be subject to (insert politically off topic phrase here) Further, the OP notes that other companies are interested, so might have sufficient job stability; otherwise, some time later, they can still try getting into government work if they want, as they only need 10 years minimum to qualify for pension and health insurance in retirement. ( so try to examine 15 years at contractor 130-140k versus maxed out CS at 113-115 , which you noted you might not even get, and then the last 7.5 years as fed to get your minimum pension, but at the high-3 (or high-5 if it goes to that) of your latest salary)

Also consider that the spouse wants to go back to teaching, presumably in the same district, so may have some tenure advantage to return as well. (Feds have RIF's as well, not just contractors; and I've seen mandatory relocations as well--"your job is now in West Virginia...is in rural Missouri... is in Indiana " {all true, seen it to MD's, IT types, and other job categories -- it's just not noticeable in DC because they just change buildings for different jobs, not have to move halfway across the country}


Follow up:
Victoria -- I'll have to disagree, there's quite a few federal jobs outside of D.C. (In fact MOST are outside of there) but fewer are the high paid ones , GS 13 and above and SES types. Further, in the hinterlands (ie, "rest of US"/not around D.C. ) where I am familiar, along with sibling that was a GS 14 , contractors were the ones with the max 40 hours while the civil service guys put in the overtime ( and NOT at time and a half) ( That the OP lives in a low cost of living area means NOT DC or Bay Area or NYC)
The appearances in DC don't always mirror those seen in the rest of the country.
Last edited by Nestegg_User on Mon Mar 27, 2017 11:59 am, edited 3 times in total.

Snezz1e
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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by Snezz1e » Mon Mar 27, 2017 10:58 am

Currently a federal employee, I prefer the federal employment in your situation. One thing to keep in mind though is that the FERS pension could change in the future. We've already seen the change from .8% to 4.4% for new hires. There's been discussions in the past to have us contribute up to 50% of the cost which would raise the rate to as high as 7%. They've also discussed phasing it out. The best time to become a federal employee may be now so that you can be grandfathered from possible future changes.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by whomever » Mon Mar 27, 2017 11:09 am

My only comment is that accurately forecasting careers decades into the future is pretty difficult, so I'd game out the options where you decide to change jobs; possibly to a non-fed one, after N years, for various values of N. I haven't clue what the vesting rules are, but you'd hate to be in a position where the job had become a living hell but you couldn't afford to leave because of the pension. I've known people who ended up in that situation.

(In general, I think the feds are a good bet, but do work all the options)

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by gouverneur » Mon Mar 27, 2017 11:16 am

Federal employee here, the pension is really quite valuable. In your situation I would probably opt for federal employment for the following reasons:

I calculate the value of the pension by comparing it to how much I'd have to save to generate that amount of income in the future.

For instance, let's assume you make 100k/year in the government, serve 30 years, you get a $30,000 pension (assuming you get inflation adjustments but no raises above inflation, and get your 1% of top 3 years salary X years of service at the end).

How much does it take to generate $30,000 a year? Somewhere in the $750,000 - $1 million range, depending on your assumption of withdrawal rate (4% vs. 3%, I tend to lean closer to 3 when planning so far out, and also accounting for possibility of needing more than 25-30 years of funds).

How much more do you need to save than the 4.4% (i.e., $4,400 a year) that the basic benefit costs? Depending on your assumption of real return rate (I used 3% real return), you'd need to save about $20,000 a year, or an additional $15-16,000 in savings per year. It would be closer to $10,000 if you assume higher real return.

So can you save an extra $15,000 a year from the higher salary you'd get outside the government, while also stomaching the increased risk you get from relying on market returns rather than a pension (which admittedly is subject to political risk, i.e., legislative changes)?

I think it's fair to treat the pension as being worth about an extra $15,000 in savings in light of all those calculations, and at a 25-28% income tax bracket, that means it's really about $20,000+ in extra salary per year.

Then account for your own psychological proclivities--if you make $20,000 more in salary in the private sector, will you really have the willpower to save all that extra cash?

One thing that's interesting is you have an employer match. I think most private sector employees do not get that anymore, so I'd also add that those thinking of federal employment should consider the percent match federal employees get for their 401ks, which is about 4% of salary.

You're in a somewhat unusual situation in that the work sounds very similar for your private vs. federal life, since you're essentially in the same position (just as a contractor). Most people also need to consider lifestyle change; in my field, law, there is a world of difference between being a government lawyer and in private practice, which further tips the scales in favor of federal employment.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by midareff » Mon Mar 27, 2017 11:17 am

twins2012 wrote:I would take fed job in a heart beat.

A solid state or Federal cola'd pension is gold. Besides the pension I whacked away at max deferred comp for about the last 25 working years, did many years of Roth and lived frugally also building taxable. This Friday I will celebrate the start of my 6th year of retirement. Between standard draw down, pension and SS should be able to take 6 cruises this year. However, we could make it on pension and SS. Portfolio is for trips and toys.

Federal pension and other governmental spiffs, .. you have nothing to think about, jump on it.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by Nestegg_User » Mon Mar 27, 2017 11:23 am

Snezz1e wrote:Currently a federal employee, I prefer the federal employment in your situation. One thing to keep in mind though is that the FERS pension could change in the future. We've already seen the change from .8% to 4.4% for new hires. There's been discussions in the past to have us contribute up to 50% of the cost which would raise the rate to as high as 7%. They've also discussed phasing it out. The best time to become a federal employee may be now so that you can be grandfathered from possible future changes.
And the changes can be retroactive-- back in the day, they changed to FERS and dropped from 2% to 1% per year and put them on SS and forced some into the new system when they had started on CSRS but didn't have sufficient time in to stay into that system-- yep, it happened.

The most likely though is changing to a 401k-only style retirement system (see govexec) like most all of the private sector (if they have a 401k at all). That would further suggest that the contractor route is better-- already better matching in their current position, with higher salary to boot.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by retiredjg » Mon Mar 27, 2017 1:56 pm

doss wrote:....and with an income replacement of 80% in retirement....
80%? FERS retirement is nowhere near that. Even adding SS, which FERS people get, it likely is still a long way from 80%.

You seem pretty smart. Where did you get that 80% number?

The thing I'm really enjoying about being a retired FED these days is continuation of health insurance. I don't have to worry about what the people in Washington are doing. I feel much sympathy for those who are being affected by all this uncertainty.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by doss » Mon Mar 27, 2017 2:44 pm

supertreat wrote:Are you expecting 80% of your salary as a pension? Under FERS you should expect a maximum of about 1/3 of your income as a pension.
80% is the number I put in the retirement income calculator for the following question:

"I’ll need X% of my current income in retirement."

Then, the calculator gives me an idea whether my current salary/investments are on track to give me the ability to hit that number.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by doss » Mon Mar 27, 2017 2:52 pm

VictoriaF wrote:I have retired from a Federal government job where I have interacted with both government employees and contractors. I strongly recommend that you don't reduce your decision to the arithmetic of respective salaries and benefits, and consider the big picture:
- A Federal employee, by law, has a limited work week. A contractor may be asked to work 100-hour weeks.
- A Federal employee may lose his job, but it's a complex process during which the employee is offered various other employment options. A contractor may lose his job very abruptly and spent a lot of time looking for a new job. If you have several periods of unemployment in your career they may negate any differences in the salary when you work.
- As a Federal employee, you can move to a different area of the U.S. for job availability or a promotion, without disrupting your employment.
- Outside Washington, D.C., there are relatively few Federal jobs, and holding one gives you more job security to stay where you do.
- Federal employees have excellent opportunities for free education. In the D.C. area the workforce is the most educated in the country.
- With a combination of the Federal experience and acquired education, a Federal employee can relatively easily move into contracting. Moving from contracting to Federal employment is much more difficult.

Good luck,
Victoria
Thanks for feedback, Victoria. I feel that I have to offer some alternative points to your comments:

1.) "- A Federal employee, by law, has a limited work week. A contractor may be asked to work 100-hour weeks."
I think you have this backwards.....it's always the govies that have to put in the long hours. As a contractor, I can't go past 40hrs a week due to my contract. I do my work and go home which is not the same for the govies that often have to put in extra hours (but they earn comp time, etc). One of the great perks of being a contract is that you don't have to worry about dealing with politics at the office.

2.) "A Federal employee may lose his job, but it's a complex process during which the employee is offered various other employment options. A contractor may lose his job very abruptly and spent a lot of time looking for a new job. "
True, very hard to fire a govie. But, at my agency, it's very rare that a contractor will be unemployed for more than a few months (most just a month). This is due to security clearances. The government is not giving them out as much as they used to (thanks to folks like Snowden, etc).

3.) "As a Federal employee, you can move to a different area of the U.S. for job availability or a promotion, without disrupting your employment."
Even easier as a contractor (sometimes the govie is on probation or their management will try to prevent the transfer if the skillset is needed at the agency)

4.) "Outside Washington, D.C., there are relatively few Federal jobs, and holding one gives you more job security to stay where you do."
DC is the mecca, but it's not as sparse outside DC as you may thing, especially if you have a security clearance.

5.) "Federal employees have excellent opportunities for free education. In the D.C. area the workforce is the most educated in the country."
Most contracting companies offer almost 6k in tuition per year (not including the additional training reimbursement).

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by supertreat » Mon Mar 27, 2017 3:08 pm

Another thing to keep in mind is health insurance costs and also overtime/hourly and weekend/evening differential pay. Running the numbers on those will give you a better comparison.
Assets - Liabilities = Equity + (Income - Expenses)

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by csc-az » Mon Mar 27, 2017 3:20 pm

I'm about your age and also work in the technology industry. On the one hand, I would be extremely surprised if public pensions don't undergo dramatic changes in the two decades before your retirement, making your current calculations inaccurate. On the other hand, there will likely also be dramatic changes in the private industry as well that might affect your retirement adversely, although having a security clearance should help you in that regard (harder to replace you, etc).

I would probably stick with the private industry myself, but a lot of that stems from my preference of defined contribution plans vs defined benefit plans. Better to have something others might try to take away from me than to need something others might decide to not give me.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by dm200 » Mon Mar 27, 2017 3:48 pm

doss wrote:
VictoriaF wrote:I have retired from a Federal government job where I have interacted with both government employees and contractors. I strongly recommend that you don't reduce your decision to the arithmetic of respective salaries and benefits, and consider the big picture:
- A Federal employee, by law, has a limited work week. A contractor may be asked to work 100-hour weeks.
- A Federal employee may lose his job, but it's a complex process during which the employee is offered various other employment options. A contractor may lose his job very abruptly and spent a lot of time looking for a new job. If you have several periods of unemployment in your career they may negate any differences in the salary when you work.
- As a Federal employee, you can move to a different area of the U.S. for job availability or a promotion, without disrupting your employment.
- Outside Washington, D.C., there are relatively few Federal jobs, and holding one gives you more job security to stay where you do.
- Federal employees have excellent opportunities for free education. In the D.C. area the workforce is the most educated in the country.
- With a combination of the Federal experience and acquired education, a Federal employee can relatively easily move into contracting. Moving from contracting to Federal employment is much more difficult.
Good luck,
Victoria
Thanks for feedback, Victoria. I feel that I have to offer some alternative points to your comments:
1.) "- A Federal employee, by law, has a limited work week. A contractor may be asked to work 100-hour weeks."
I think you have this backwards.....it's always the govies that have to put in the long hours. As a contractor, I can't go past 40hrs a week due to my contract. I do my work and go home which is not the same for the govies that often have to put in extra hours (but they earn comp time, etc). One of the great perks of being a contract is that you don't have to worry about dealing with politics at the office.
2.) "A Federal employee may lose his job, but it's a complex process during which the employee is offered various other employment options. A contractor may lose his job very abruptly and spent a lot of time looking for a new job. "
True, very hard to fire a govie. But, at my agency, it's very rare that a contractor will be unemployed for more than a few months (most just a month). This is due to security clearances. The government is not giving them out as much as they used to (thanks to folks like Snowden, etc).
3.) "As a Federal employee, you can move to a different area of the U.S. for job availability or a promotion, without disrupting your employment."
Even easier as a contractor (sometimes the govie is on probation or their management will try to prevent the transfer if the skillset is needed at the agency)
4.) "Outside Washington, D.C., there are relatively few Federal jobs, and holding one gives you more job security to stay where you do."
DC is the mecca, but it's not as sparse outside DC as you may thing, especially if you have a security clearance.
5.) "Federal employees have excellent opportunities for free education. In the D.C. area the workforce is the most educated in the country."
Most contracting companies offer almost 6k in tuition per year (not including the additional training reimbursement).
Some observations, experiences over the last 45 years of federal employees compared with private industry and contractors:

1. One (in my opinion) potential benefit of federal employment is the "threshhold" for being "disabled" and getting such income (for life) is that the "threshhold" is lower for federal employees and the benefits seem to be good.

2. While I am sure there are many federal employees that work hard and put in long hours, there are many (and many jobs) where the work day/week is less than similar contracting and private sector folks.

3. Of course contract employees (workers on government contracts) may have to worry about office politics. I was there. Some contracting companies (I worked for one) where our benefits (the contracting company had a subsidiary) were less than other non-contract workers. Sometimes, I worked a regular 8 hr day/40 hr week on the contract and then (with NO added compensation) worked on the company's responses to an RFP and proposals for new contracts.

4. During one period, I was a technical rep for a private company with many federal agency relationships. I often was in government offices much of the week at different times. One thing I noticed, regularly and in different buildings, was that the elapsed time between the morning arrival "rush" of federal employees and the afternoon "rush" going home was about 8.0 hours. In most of my time working in offices for private companies, the similar elapsed time was about 9.0 hours.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by daveydoo » Mon Mar 27, 2017 3:59 pm

doss wrote:I realize that there is a consensus from this board to secure a federal gov position, but I think my situation may be a little different.
Been reading here for a little while and I did not perceive this consensus. FERS is 1% of high-three per year of service, yes? And you're not getting an early start at 37. Future salary increments are likely to be modest, and top salary is capped, or effectively capped. No bonuses, etc. Whereas the sky's the limit in the private sector. Oh, and your entire cabinet-level department can be gutted by 50% or more at the whim of an incoming Secretary. So not exactly the life-long mindless clock-punching that some envision...
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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by lmbebo » Mon Mar 27, 2017 4:18 pm

Hi

I'll need to go back and read people's responses as I have a similar predicament.

Background. I am a physician currently working for the VA. Right now, I make about 50% of what I could with my old PP job as a partner. I've been in my current position only 6 months now. I pay 4.4% into the FERS annuity/pension (comes out to like $1100 a month). About $330 in health benefits (paid before by my old PP job including them funding a HSA).

I still haven't figured out yet whether its worth while or not. Compared to where I was previously, the salary difference was negligible ... But when you add in the state income tax, FERS, health and higher cost of living (rent/mortgage + school tuition), came out to a much bigger difference than I had anticipated before taking this job. Came out to a $5000 a month difference in take home pay for me with only a $25k loss of salary. Some of which I've made up on the side with moonlighting opportunities.

So, if I had to make choice again I would have stayed in the PP world. I would have made partner, salary would have been double what I make now, etc. I'd be able to save a lot more than I can now. But thats for my situation and I was forced to move by my wife as she was unhappy in our current situation.

In your situation, its tougher because the home variables are the same (no moving, switching job sites, etc). You could still potentially work on the side if you want.

Differences I've seen

1. Hours: I work 80 hours every 2 weeks for the VA. No more, no less. I can use sick time, etc. In PP, I worked about 90-100 hours every 2 weeks, plus the 1 weekend a month while being on call. Frequently on beeper call, higher work load, etc. On the VA side, I work more on the side to make up the lost take home pay (still adjusting to the lower income). Sick call in PP doesn't exist. I call out sick, I pay for it or typically I work while sick. I hate to say it, but I've worked while have a temp of 102+ frequently. You push through it and do the best you can.
2. Benefits: VA: pension (could be anywhere from 80-110k?), depends on what my finaly salary calc is, minus health care (if we still have a priv insurance mix) and spousal benefits. TSP (with 1% auto match and some other match). PP - As a partner, I could maximize my 401k (54k) yearly. Plus invest heavily on side. I felt like the pension would be the equivalent of trying to save up 2.5 million or so with compound growth.
3. Perm status VA: I've learned about this recently since my current position was trying to withhold this from us. Basically makes it harder to be fired. As a contractor with VA I can be fired without cause (i.e. pissed off wrong person or sneezed on someone). Partner - legal issue as well.
4. Paperwork: I've got to TMS and other paperwork to maintain working for the VA.
5. Less perks in terms of covering med edu expenses, etc.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by Good Listener » Mon Mar 27, 2017 4:43 pm

Do not forget to consider non-financial factors. I personally would never consider working for the government in my 35-40 years working for reasons I will not go into. Others, including my best friend, would only work for the government because of the limited hours and relatively stable situation.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by burt » Mon Mar 27, 2017 5:25 pm

dm200 wrote:With 20/20 hindsight (and now over 70) and having worked in that field, often on federal contracts, I now see folks of my age getting very, very nice federal pensions and getting health insurance benefits (for them and spouses) in retirement. An alternate career path of working for 30 years as a federal employee and being able to "retire" at age 56 or 57 now looks very, very good.
The only reason I was able to retire at age 60 was because I was a "direct" employee at mega-corp.
Pension and retiree medical are most important. Yes, those benefits are quickly going away for the younger generations.

Half of the office was contractors. Seems like they only cared about the amount of today's paycheck and placed little value on future benefits.
In general, contractors seemed to be driving better cars, and living pretty high. Most of those working past age 65, seemed to be contractors. Contractors seemed to thrive on overtime where "directs" were salary. Majority of contractors were single.
Just an observation.

burt

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by daveydoo » Mon Mar 27, 2017 7:24 pm

lmbebo wrote:I am a physician currently working for the VA. Right now, I make about 50% of what I could with my old PP job as a partner. tc.
MDs and PhDs work for the VA because they believe in the mission and/or want an academic career with additional opportunities for research funding beyond the NIH (e.g., VA's Merit Review program). It is not an apples-to-apples comparison with private practice. A little like saying "I work for a non-profit helping to find housing for the homeless, and I just learned that I could make a lot more money identifying housing for the super-wealthy in Manhattan!"
"I mean, it's one banana, Michael...what could it cost? Ten dollars?"

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by lmbebo » Mon Mar 27, 2017 9:42 pm

daveydoo wrote:
lmbebo wrote:I am a physician currently working for the VA. Right now, I make about 50% of what I could with my old PP job as a partner. tc.
MDs and PhDs work for the VA because they believe in the mission and/or want an academic career with additional opportunities for research funding beyond the NIH (e.g., VA's Merit Review program). It is not an apples-to-apples comparison with private practice. A little like saying "I work for a non-profit helping to find housing for the homeless, and I just learned that I could make a lot more money identifying housing for the super-wealthy in Manhattan!"
I don't believe that to be accurate at all. Many different reasons people work for the VA. Sometimes its the only opportunity to get a job in a certain competitive market. It could be the thought of a more work-life balance. Could be fear of being sued in PP. Common theme is that VA physicians are lazy and don't want to work as hard as the PP counter parts. Since coming to the VA I've met more than a few who took jobs at the VA solely because there sig others had jobs in that area and had little other choice. Many would switch jobs if they could (and still actively looking). Others love it and couldn't think of working anywhere else.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by gkaplan » Mon Mar 27, 2017 10:01 pm

lmbebo wrote:
daveydoo wrote:
lmbebo wrote:I am a physician currently working for the VA. Right now, I make about 50% of what I could with my old PP job as a partner. tc.
MDs and PhDs work for the VA because they believe in the mission and/or want an academic career with additional opportunities for research funding beyond the NIH (e.g., VA's Merit Review program). It is not an apples-to-apples comparison with private practice. A little like saying "I work for a non-profit helping to find housing for the homeless, and I just learned that I could make a lot more money identifying housing for the super-wealthy in Manhattan!"
I don't believe that to be accurate at all. Many different reasons people work for the VA. Sometimes its the only opportunity to get a job in a certain competitive market. It could be the thought of a more work-life balance. Could be fear of being sued in PP. Common theme is that VA physicians are lazy and don't want to work as hard as the PP counter parts. Since coming to the VA I've met more than a few who took jobs at the VA solely because there sig others had jobs in that area and had little other choice. Many would switch jobs if they could (and still actively looking). Others love it and couldn't think of working anywhere else.
As a vet and one who uses the VA in Portland, the medical staff I've dealt with – doctors, nurses, and so on – seem very competent and very conscientious.
Gordon

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by htdrag11 » Mon Mar 27, 2017 10:26 pm

Our daughter was a fed employee 2 years ago but converted to the "dark side" and never looked back. She was unhappy with the bureaucracy and the "dead woods" around her. She left with $700/month pension after only 8 years. Being single with no family and living in a high rent district, her situation is quite different. She is also in a highly sought after industry. Actually she is jumping ship again and getting another round of sign on bonus. Her salary is more than double from 2015. There is a 5% match in her 401k. Unless she settles down or buys a piece of property (renting now), I see her retiring at 50.

She is happy with her job and works about 50 hours/week, but only 4 weeks of vacation.

However, one of her cousins had his private practice and decided to go back. Now he could go fishing every day in the summer after work. He no longer needs to fish in the weekend.

Another cousin was working in the private industry. He too went to work for the government and loves his time off and benefits. He is having a second child so that he needs his time for his family.

All 3 are happy and successful.

YMMV.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by Scotttheking » Mon Mar 27, 2017 10:27 pm

I wouldn't at that pay differential. But it depends on the specifics of the role.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by wassabi » Tue Mar 28, 2017 4:57 am

Another contrarian view here:

The federal job is nice, but consider that you are taking a large salary cut by trying to pave your career for the next 20+ years. In reality, you have no idea what you'll want to do, or where you'll want to be in 20 years, let alone 5 years. Do whichever job makes you happiest. If you have a skill that is unique and gives you job security, then consider betting on yourself and taking the job that gives you the highest overall package, and the most flexibility to grow your salary and skills. The federal job would be capped out and you could be stuck at zero or 1% raises for years. As a contractor, if you got stuck you could always jump to another company or position and continue the climb up.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by FedGuy » Tue Mar 28, 2017 6:18 am

OP, is the federal salary you quoted the base salary, or is it the base salary plus the locality adjustment?

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by lmbebo » Tue Mar 28, 2017 6:46 am

gkaplan wrote:
lmbebo wrote:
daveydoo wrote:
lmbebo wrote:I am a physician currently working for the VA. Right now, I make about 50% of what I could with my old PP job as a partner. tc.
MDs and PhDs work for the VA because they believe in the mission and/or want an academic career with additional opportunities for research funding beyond the NIH (e.g., VA's Merit Review program). It is not an apples-to-apples comparison with private practice. A little like saying "I work for a non-profit helping to find housing for the homeless, and I just learned that I could make a lot more money identifying housing for the super-wealthy in Manhattan!"
I don't believe that to be accurate at all. Many different reasons people work for the VA. Sometimes its the only opportunity to get a job in a certain competitive market. It could be the thought of a more work-life balance. Could be fear of being sued in PP. Common theme is that VA physicians are lazy and don't want to work as hard as the PP counter parts. Since coming to the VA I've met more than a few who took jobs at the VA solely because there sig others had jobs in that area and had little other choice. Many would switch jobs if they could (and still actively looking). Others love it and couldn't think of working anywhere else.
As a vet and one who uses the VA in Portland, the medical staff I've dealt with – doctors, nurses, and so on – seem very competent and very conscientious.

Not saying everyone isn't competent. A lot of great physicians, nurses, tech, etc work for the VA system just like you have some real awful ones. Some also work in adjacent university medical systems who want to teach but also includes duties within the VA system. Don't always assume it is for an altruistic reason. Its multifactorial. Its a benefit to care for Vets, but I don't think anyone expressly decides to work for the VA because of that. Either way, this is off topic.

Just tried to share my point of view in that it was similar in respects to private sector vs federal employment. I've experienced both now.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by stan1 » Tue Mar 28, 2017 7:33 am

Another point that I don't think has been mentioned yet is that contracts get recompeted if the agency is following federal acquisition regulations properly. Long term sole sources don't take away the risk; eventually a contracting officer, attorney, or leadership will put their foot down and make the case that the incumbent company isn't as unique as everyone thinks they are.

Yes sometimes many of the incumbent company's employees get an offer if a the new company wins a competitive award but sometimes accepting that offer comes with a pay cut. Usually benefits such as vacation time are reset. Competitive pressures force the companies bidding on a solicitation to keep their average hourly labor rate down in order to win the award, even if it is a best value contract that takes technical and cost factors into account. Competitively awarded contracts can't carry many people making $130,000/year on them in a high cost of living area (and you live in a low cost of living area).

There may be exceptions (such as DOE national labs) where this churn happens very infrequently but in most places it happens every 3-5 years if the agency has a well functioning contracting office. It is stressful to go through recompetes for everyone involved.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by dm200 » Tue Mar 28, 2017 9:31 am

FedGuy wrote:OP, is the federal salary you quoted the base salary, or is it the base salary plus the locality adjustment?
In some areas, this locality adjutment is very significant.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by dm200 » Tue Mar 28, 2017 9:36 am

stan1 wrote:Another point that I don't think has been mentioned yet is that contracts get recompeted if the agency is following federal acquisition regulations properly. Long term sole sources don't take away the risk; eventually a contracting officer, attorney, or leadership will put their foot down and make the case that the incumbent company isn't as unique as everyone thinks they are.
Yes sometimes many of the incumbent company's employees get an offer if a the new company wins a competitive award but sometimes accepting that offer comes with a pay cut. Usually benefits such as vacation time are reset. Competitive pressures force the companies bidding on a solicitation to keep their average hourly labor rate down in order to win the award, even if it is a best value contract that takes technical and cost factors into account. Competitively awarded contracts can't carry many people making $130,000/year on them in a high cost of living area (and you live in a low cost of living area).
There may be exceptions (such as DOE national labs) where this churn happens very infrequently but in most places it happens every 3-5 years if the agency has a well functioning contracting office. It is stressful to go through recompetes for everyone involved.
Even if as a contractor for a government agency your contract is awarded to a different company and you move to the new contractor doing the same job as before, things like seniority, annual health deductibes, retirement vesting, etc. will be reset.

And, as I mentioned in an earlier post, in several prior positions, I had to work (at no extra compensation) added hours working on propoals for future contracts, responding to RFPs, etc. In one federal contracting job, the company was worked for had a special subsidiary company for those working on federal government contracts and those of us working on federal contracts received significantly fewer benefits, such as vacation time, retirement benefits and health insurance benefits.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by dm200 » Tue Mar 28, 2017 9:38 am

Good Listener wrote:Do not forget to consider non-financial factors. I personally would never consider working for the government in my 35-40 years working for reasons I will not go into. Others, including my best friend, would only work for the government because of the limited hours and relatively stable situation.
Yes - I see the point.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by THY4373 » Tue Mar 28, 2017 3:51 pm

dm200 wrote:With 20/20 hindsight (and now over 70) and having worked in that field, often on federal contracts, I now see folks of my age getting very, very nice federal pensions and getting health insurance benefits (for them and spouses) in retirement. An alternate career path of working for 30 years as a federal employee and being able to "retire" at age 56 or 57 now looks very, very good.
Folks who are 70+ today likely retired under more generous plans than are available today or will likely be available in the future. So I would be a little careful in extrapolating that into the future. My dad is 80 and retired under the old Foreign Service retirement system which I believe was very similar to CSRS (the old Civil Service retirement system). He gets a very generous pension but nobody today will get anything like that.

There is also a warning in my father's experience. He joined the Department of State in 1962. By around 1980 or so they were getting rid of the old Foreign Service retirement system and forcing people to convert to the new system. My Dad by that time had been working there around 18 years. He was going to be forced to convert to the new less generous system. Luckily for him another Foreign Service Officer found a loophole in the regulations that would allow folks to retire with 20 years of tenure (it got around the age restriction). A number of FSOs got together and sued State including my father and won so he was able to retire in 1982 at the age of 45 (and yes he has been collection his federal pension since 1982). He then went to work for the UN where he got a second pension and additional retiree health benefits working until he was 62 but that is another story.

Anyway this is all to say that one today's retirees will likely have it better than tomorrow's and two don't assume government pension benefits cannot be changed on you even after you are in service. Yes the odds are a lot less but they are not 0 as my father's experience shows (even if he really did luck out in the end).

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by THY4373 » Tue Mar 28, 2017 3:58 pm

My first real job out of grad school was in the government. I left after a few years because it just wasn't for me. While I am not a workaholic by any means there was just too much dead weight where I worked and I was afraid of what 30+ years in that environment would do to me. I really wanted to be a public servant like my dad but it wasn't to be. I have never looked back since leaving the government. That said YMMV in both the private and public sector.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by dm200 » Tue Mar 28, 2017 4:05 pm

THY4373 wrote:
dm200 wrote:With 20/20 hindsight (and now over 70) and having worked in that field, often on federal contracts, I now see folks of my age getting very, very nice federal pensions and getting health insurance benefits (for them and spouses) in retirement. An alternate career path of working for 30 years as a federal employee and being able to "retire" at age 56 or 57 now looks very, very good.
Folks who are 70+ today likely retired under more generous plans than are available today or will likely be available in the future. So I would be a little careful in extrapolating that into the future. My dad is 80 and retired under the old Foreign Service retirement system which I believe was very similar to CSRS (the old Civil Service retirement system). He gets a very generous pension but nobody today will get anything like that.
There is also a warning in my father's experience. He joined the Department of State in 1962. By around 1980 or so they were getting rid of the old Foreign Service retirement system and forcing people to convert to the new system. My Dad by that time had been working there around 18 years. He was going to be forced to convert to the new less generous system. Luckily for him another Foreign Service Officer found a loophole in the regulations that would allow folks to retire with 20 years of tenure (it got around the age restriction). A number of FSOs got together and sued State including my father and won so he was able to retire in 1982 at the age of 45 (and yes he has been collection his federal pension since 1982). He then went to work for the UN where he got a second pension and additional retiree health benefits working until he was 62 but that is another story.
Anyway this is all to say that one today's retirees will likely have it better than tomorrow's and two don't assume government pension benefits cannot be changed on you even after you are in service. Yes the odds are a lot less but they are not 0 as my father's experience shows (even if he really did luck out in the end).
Yes - you cannot count on no changes. BUT - changes happen in both the private sector and federal employment.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by pmelon » Tue Mar 28, 2017 4:15 pm

I'm a later in life new federal employee. I transitioned after 35+ years in the private sector riding high with a nice compensation package. My pay now is significantly lower, but my medical plan blows away anything I had in the private sector. Also, they contribute 1% automatically into my TSP, plus matches 100% up to 4%. So 5% free money with funds that are low cost and you vest after 3 years.

Also note, the 4.4% FERs rate can be cashed out (plus 3% accrued interest) if you leave federal service. However, the caveat for cashing out is, if you want to be reinstated back into FERs (where you were balance wise and service dates) if you go back into federal service you must pay the money back.

Also good luck in negotiating your salary steps (been there). There needs to be a compelling reason - meaning your job is so distinct and people in with your skill set are difficult to find. You can try - make sure you submit your pay stubs and present your case to the hiring manager and HR. Also, the hiring freeze and "reshaping the federal workforce" plan will make this extra challenging.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by tinscale » Tue Mar 28, 2017 5:24 pm

Retired CSRS fed here. Don't have a recommendation either way, except to consider that nothing is set in stone.

Jan 17, 2017. Proposed Retirement Changes for Federal Employees

https://www.fedsmith.com/2017/01/22/pro ... employees/

These have been on the table for a while and keep getting dusted off.
Last edited by tinscale on Wed Mar 29, 2017 7:17 am, edited 1 time in total.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by tigermilk » Tue Mar 28, 2017 6:18 pm

supertreat wrote:Are you expecting 80% of your salary as a pension? Under FERS you should expect a maximum of about 1/3 of your income as a pension.
OP wouldn't even get that. If wanting to retire at 60 and is 37 now, that's 23% for the pension. Take the survivor benefit and it's 20.7%.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by delamer » Tue Mar 28, 2017 7:20 pm

tigermilk wrote:
supertreat wrote:Are you expecting 80% of your salary as a pension? Under FERS you should expect a maximum of about 1/3 of your income as a pension.
OP wouldn't even get that. If wanting to retire at 60 and is 37 now, that's 23% for the pension. Take the survivor benefit and it's 20.7%.
Let's not ignore that FERS retirees also get Social Security and a TSP match (5% match if you contribute 5%). For most retirees, this will not be quite as generous as CSRS (with no TSP match) but it still is a solid retirement package. The survivor's benefit impacts both CSRS and FERS. And health insurance at the same cost as active employees is outstanding.

As others have noted, the big factor for the OP is that the future of both federal and any private sector retirement benefits is unknown.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by DCChak » Wed Aug 30, 2017 1:35 pm

Not sure where to place this, but I figured to add this here.

Was just perusing the new study from the CBO on potential changes to FERS TSP and pension. Five options were outlined:
1. Increase ALL employee contributions to 4.4% (hits pre-2013 hires hardest).
2. Decrease ALL employee contributions to the 0.8% paid in by pre-2013 hires (helps post-2012 hires the most).
3. Change Pension formula from high 3 to high 5 (bad for all).
4. Eliminate pension for new federal employees. Increase automatic contribution to 7%, and matching to 8%, for a possible employer contribution of 15% (increase in current pay, decrease in certainty of retirement income).
5. Eliminate pension for new federal employees. Increase automatic contribution to 10%, and eliminate matching (increase in current pay, decrease in certainty of retirement income).

The study also includes cost information for all options. As a Fed with nearly 20 years of service, I'm curious whether there would be any option for me to trade some pension years for the potential additional matching in Options 4 or 5. Didn't see specific mention of that.

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Re: Federal pension beats high salary and savings rate? (fed vs contractor for employment)

Post by dm200 » Wed Aug 30, 2017 3:02 pm

DCChak wrote:
Wed Aug 30, 2017 1:35 pm
Not sure where to place this, but I figured to add this here.
Was just perusing the new study from the CBO on potential changes to FERS TSP and pension. Five options were outlined:
1. Increase ALL employee contributions to 4.4% (hits pre-2013 hires hardest).
2. Decrease ALL employee contributions to the 0.8% paid in by pre-2013 hires (helps post-2012 hires the most).
3. Change Pension formula from high 3 to high 5 (bad for all).
4. Eliminate pension for new federal employees. Increase automatic contribution to 7%, and matching to 8%, for a possible employer contribution of 15% (increase in current pay, decrease in certainty of retirement income).
5. Eliminate pension for new federal employees. Increase automatic contribution to 10%, and eliminate matching (increase in current pay, decrease in certainty of retirement income).
The study also includes cost information for all options. As a Fed with nearly 20 years of service, I'm curious whether there would be any option for me to trade some pension years for the potential additional matching in Options 4 or 5. Didn't see specific mention of that.
A VERY long way from a proposal to adoption. Well beyond the scope of this forum.

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