Deferred, Postponed Retirements, & The Cost of 2 Years
Once a Federal employee under FERS has reached 5 years of service, assuming they’re not eligible for disability, they can leave their job and still anticipate a pension check down the road. Even if they’re not at their minimum retirement age (MRA), they can do what is called a deferred retirement. Basically, at age 62 (or 60 with twenty years of creditable service), you can start receiving an annual dollar amount equal to
“the high-3 salary” x years of service x 1%.
If the employee has reached their MRA (somewhere between 55 & 57) and has accumulated 10 years of service time or more, the postponed retirement becomes a viable option. Instead of taking a reduced pension, a federal retiree could wait until age 62 and receive the dollar amount calculated by the above equation. The biggest difference between deferring and postponing has to do with the alternative options and health insurance. If you don’t defer, you can take the contributions that you’ve been paying into FERS and not receive a pension. You have two choices, and you will not be able to regain FEHB (Federal Employee Health Benefits) coverage. When eligible for postponement, the alternatives include taking the contributions directly or receiving an immediate although reduced pension check (minus 5% per year between current age and 62). Plus, upon receiving the pension, the retiree could be eligible for FEHB coverage again. Both deferred and postponed retirements use that 1% factor, though.
While the above section covers how eligibility for FERS retirement works for those who are younger than 60, the tougher decisions arise for those who are at ages 60 and 61 and have worked at least 2 decades as a fed. What’s the cost of an extra two years of work? Or two extra years of retirement? Assuming that as a worker under FERS, you are eligible for a full retirement benefit at age 60 so long as you have racked up 20 years of service. After your retirement claims get processed, your immediate pension begins using the same calculation as underlined above. So if your “high-3 salary” equates to $100,000 and you have 20 years of service, the 1% multiple would give you $20,000 per year for the rest of your life (approximately $1,660/month, gross). What happens if they hold off on retiring until the magic age of 62? Well, first let’s assume that their salary for these two years is part of their highest 3 so that $100,000 gets a small lift to $101,000. Also, if our example’s employee had 20 years at age 60, they’d naturally have 22 credible years at 62. The biggest thing to consider, though, is that the 1% multiple gets a boost to 1.1%, which may seem small at first. Let’s take a look though:
*60 years old: $100,000 x 20 x 1% = $20,000/year (approx. $1,660/mo.)
*62 years old: $101,000 x 22 x 1.1% = $24,442/year (approx. $2,035/mo.)
Obviously, when making such a high-impact decision as this, there are a lot of outside variants to consider. One of the most important being health. So, for this example, let’s make a bold assumption and assert that this FERS retiree will die at age 90. If he or she retired at 60, the total earned from their Government pension adds up to $600,000 after 30 years. On the other hand, retiring at 62 would’ve meant a total dollar amount of $684,376 after 28 years. While $375 dollars a month, or $4,442 dollars a year, may not seem like enough to persuade someone away from retiring at age 60, the cost of two years is something to deeply consider when examining your retirement strategy under FERS.
Until Next Time,
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**Written by Benjamin Derge, Financial Planner. The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Benjamin Derge and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Expressions of opinion are as of this date and are subject to change without notice. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors.
FERS things First – Retire at 60 ?