Financing Your Future

(From Eighth Note, the employee magazine of the Federal Reserve Bank of St. Louis, September/October 2004, Volume 38, Number 5.)

The Fed’s Thrift Plan offers employees the opportunity to save extra money for their retirement.  But it’s up to you to take control of your future — and it’s never too late to get started.

By Alice C. Dames

Fran Sibley, who recently retired from the Bank, is preparing to build her dream home in a quiet section of the Lake of the Ozarks.  Once her move is complete, Sibley will spend her days dipping her toes into the lake — which is conveniently adjacent to her new lot — as well as fishing with her friends and doing anything else she wishes.  Says Sibley, “I was able to make my retirement dreams come true because I actively planned and saved for my retirement.”

If you’re a new employee or haven’t been in the work force for very long, you may ask, “How can I even think of saving for my retirement?”  You may be overwhelmed by thoughts of putting your kids through college or paying off your own school loans.  Or maybe you’re saving for a down payment on a house or have other pressing bills.

But in order to maintain your lifestyle during retirement, which may last one-third of your life, most financial experts say that you’ll need to save 10 times your final year’s salary.  Planning that far ahead and saving that much money may seem overwhelming, but once you decide to pay yourself first, the goal becomes more attainable. 

The Bank encourages all employees to begin planning for their retirement when they begin their careers.  Employee Benefits Manager Carrie Keen says, “Money grows over time.  The sooner you begin saving for your retirement, the more likely it will be that you can retire comfortably.”

St. Louis Fed employees have at least three primary sources of income to help finance their retirement and meet their financial goals:

·         Social Security, a government-sponsored program funded by employment taxes that both employers and employees pay.

·         The Federal Reserve retirement plan, which is funded entirely by the Fed; and

·         The Thrift Plan, a 401(k) savings plan that is funded through employee contributions, a Bank matching program and investment earnings.

Employees do not need to take any action to receive Social Security and the Fed’s retirement plan — they’re automatic benefits.  The Thrift Plan, however, is the one source of retirement income in which employees do have choices and can take direct control of saving for their retirement years. “We urge employees not to rely on their pension and Social Security alone,” says HR Vice President Todd Purdy. “The Thrift Plan is an essential part of saving for retirement.”

The Thrift Plan

Participating in the Fed’s Thrift Plan offers several advantages for employees.  For starters, the plan is very competitive compared with other companies’ plans, many of which do not allow their employees to contribute to their 401(k)s until they have completed one year of employment.  Fed employees can begin making contributions to the Thrift Plan right away, up to a maximum of $13,000 of their pre-tax income in 2005.  Employees over 50 can contribute up to $16,000 of their pre-tax income.  (More information about tax contributions and IRS limits can be found on pages 28-29 of the 2002 Smart Benefits handbook or on the Smart Benefits web site,

The biggest reason to participate in the Thrift Plan, though, can be summed up in two words: free money.  During the first five years of service, the Bank matches your contribution80 cents for every $1 contributed, up to the first 6 percent of your salary (4.8 percent).  After five years of service, the Bank’s match is 100 percent: $1 for every $1 you contribute (6 percent).  Employees also earn 20 percent of the Bank’s matching contribution for every year of service, becoming fully vested after five years.

Keen says, “It’s such a smart way to invest because you’re always vested in the contributions you make, along with the earning your contributions receive.”

Here’s an example.  Freddie Frugal begins his career at the Bank making $30,000 a year, and he invests 6 percent of his salary every year for the next 30 years.  Factoring in the Bank’s match, a 3 percent merit increase every year and a 7 percent investment result, Freddie will have saved $469,180.24 in today’s dollars for his retirement through his participation in the Thrift Plan. 

But even if you’re a late bloomer when it comes to participating, it’s never too late to get on the Thrift Plan bandwagon.  Mike Steffan of Central Operations just celebrated his 25th anniversary with the Bank, and he learned that lesson first-hand.  “I was reluctant to participate in the Thrift Plan — for no particular reason,” he says.  “But once I started making contributions to the plan, I saw my retirement savings grow.”

Once you get online with Benefits Express, enrolling in the Thrift Plan is straightforward.  You can choose to invest your retirement money in seven diversified investment funds, with various levels of investment return and risk.

“And the plan is flexible,” Keen says, noting that employees can choose to invest in one or any combination of these seven funds. Employees who do not make a selection will have their contributions in the Government Securities Fund, by default.

The Federal Reserve Retirement Plan

                The Bank’s retirement plan is funded by the Fed and includes two components: a pension and portable cash option (PCO).  The actual benefit that retirees receive is based on the value of their PCO account or pension benefit, whichever is greater.

The Fed’s Pension Plan

                Under the Bank’s retirement plan, you become vested in your pension account after five years of employment with the Bank.  If you leave before completing five years of service, you are not entitled to any pension benefits.  Normal retirement age is 65; however, you can retire as early as 50 if you have completed five years of service.

                The Fed’s pension plan is based on a number of factors, including your age, final average salary and years of creditable service. (For more information on how the Bank defines creditable service, see the Smart Benefits web site.)  Your final pay includes your base pay as well as any shift differential, overtime and most forms of variable pay (such as cash awards) that you received.

                Once you have retired from the Fed, you can receive your pension either as an annuity (a monthly payment), a  lump sum up to the value of your PCO or a combination of the two.

The Portable Cash Option (PCO)

                Years ago, most employees expected to spend their entire career at a single firm; however, worker’s in today’s economy expect to change jobs frequently.  Reacting to this trend, the Federal Reserve System created a new feature of the retirement plan in 2002 called the Portable Cash Option (PCO).

                Here’s how it works.  During the first five years of service, employees receive deposit credits in their PCO accounts that equal 5 percent of their pay, doubling to 10 percent during years six through 10.

                If you are vested in the Retirement Plan, and decide to retire or leave the Bank after five years of service, you may choose the total value of your PCO in a lump-sum payment.  You have the choice of having the funds paid directly to you or rolling the PCO into either another employer-based retirement plan, an Individual Retirement Account (IRA) or the Bank’s Thrift Plan.

                If you decide to receive a lump sum, your pension benefit will be reduced, lowering the payment you receive on your monthly annuity. If, when you leave the Bank, your PCO balance is larger than your Retirement Plan benefit, the lump-sum PCO distribution may be the only retirement benefit you receive. If you don’t select a lump-sum distribution, your monthly annuity will not be reduced, and you can begin receiving the annuity when you retire.  All PCO distributions that are paid to you directly are subject to any mandatory tax withholdings and penalties, if applicable.

Social Security

                When you become eligible for Social Security retirement benefits, your monthly benefits will be based on the earnings you averaged over most of your lifetime.  Today, many people are able to receive full Social Security retirement benefits at age 65; however, the age for receiving full benefits is gradually increasing.  For instance, those born after 1959 are scheduled to receive their full retirement benefits at age 67½. 

How the Fed Rates

                In a 2002 benefits study by Mercer Human Resources Consulting, the Fed ranked near the top of 21 companies in its peer group (including Bank of America, Citigroup, General Electric, Wells Fargo, Xerox, among others) based on the value of the total benefit program offered to employees.  But the primary driver for the high ranking was the benefit Fed employees receive from the Bank’s retirement programs — specifically, the retirement plan, retirement medical insurance and the Thrift Plan, Keen says.

                “While most of the employers in the Fed’s peer groups are reducing overall benefit programs, the Fed is maintaining its benefits,” Keen says.

                Al Stamborski, a senior editor in Public Affairs, says, “One of the attractions for coming to work for  the Fed three years ago was its 401(k) program.  I had been with my previous employer 16 years, and it contributed just $50 a month to every worker’s 401(k).  The Fed contributes significantly more, even though I haven’t been here long enough to get the $1 for $1 match.”


Side Bar #1: How Money Grows Over Time


                Here’s a simple illustration about how a little bit of money can go a long way when it’s invested.


Penny Practical begins saving $25 a week, $100 a month, at age 25, Penny’s retirement savings account will be worth over $260,000 when she reaches age 65.


Connie Consumer, on the other hand, waits until 35 to begin saving for her retirement.  She saves $150 a month. Connie’s retirement savings account will be worth about $190,000 when she reaches age 65.


Paul Procrastinator has the hardest time of all. He doesn’t get on the retirement savings bandwagon until age 45.  Paul saves $200 a month, twice as much as Penny.  But Paul’s retirement savings account is only worth about $102,000 when he reaches age 65. 


Even though Penny and Paul invested the same amount in their respective retirement accounts, Paul’s balance is only about 40 percent of Penny’s — providing that money, and the interest it earns, truly does grow when invested in a savings account.




Side Bar #2: Retirement Resources


                The Fed and other agencies offer several tools and resources to aid you in planning for your retirement — and to help you calculate whether you have saved enough money to retire.


·         The 2002 edition of the Smart Benefits Handbook offers information about the Thrift Plan,

(pages 21-46), the Retirement Plan (page 51) and your Portable Cash Option (page 57).  You can also view this information on the Smart Benefits web site,


·         Helpful resources on the Smart Benefits web site include:

o   The Investment Options Guide,

o   The Quarterly Investment Reports,

o   FAQs about the Retirement Plan, and

o   Retirement Plan-related issues of Smart Benefits news.


·         Online tools that can help you calculate your savings so far include the:

o   Office of Employee Benefits’ “Projecting Your Retirement Income,”, and

o   Your Total Rewards,

You must have an active personal identification number (PIN) to use these tools.


·         The Social Security Administration has a web site,