Early retirement is an enticing option for some federal employees, promising a chance to explore new opportunities or enjoy leisure time sooner. However, it’s not as simple as raising your hand and walking out the door; it must be offered by your agency, as it sometimes is during workforce reductions.
Understanding the specifics is crucial in making your decision about retiring early if it’s offered to you. (Also crucial is making sure you will have enough income to last throughout your retirement—be sure to speak with a financial advisor about that.) Below are some of the general federal rules related to early retirement.
The federal service includes two systems, the Civil Service Retirement System (CSRS) and the Federal Employees Retirement System. The Civil Service Retirement Act of 1920 was replaced by the Federal Employees Retirement System (FERS) for federal employees who first entered covered service on and after January 1, 1987.
CSRS offers the same retirement annuity for all retirees who retire at 55 or later, while FERS reduces retirement annuity for those retiring before the age of 62. Under CSRS, the annual retirement annuity is calculated by multiplying the high-three average by a percentage factor, which changes depending on the employee’s length of service. The percentage factor is 1.5% for the first five years of service, 1.75% for the next five years, and 2.0% for each year of service after 10 years.
In contrast, under FERS, retirement pay is composed of three parts: a basic benefit, a Social Security benefit, and a Thrift Savings Plan (TSP) benefit. To qualify for the basic annuity benefit under the Federal Employees Retirement System (FERS), you need to be at least 50 years old with 20 years of service or any age with at least 25 years of service. In general, your FERS basic annuity benefit is 1% of your “high-3” average salary multiplied by your years and months of service. If retiring early, the Office of Personnel Management (OPM) will calculate your Federal Employee Retirement System (FERS) annuity and reduce the benefit by 5% per year that you retire under the age of 62.
In addition to the basic annuity benefit, some early retirees may be eligible for the FERS Special Retirement Supplement (SRS), which is a separate annuity which approximates the Social Security benefit earned during your federal service. But keep in mind that this is not available to every early retiree, you must meet certain criteria. And this supplement ends at age 62 when Social Security becomes available.
Another consideration is insurance. If you want to keep your insurance, continuous enrollment in the Federal Employees Health Benefits (FEHB) and/or Federal Employees’ Group Life Insurance (FEGLI) programs for the five years preceding retirement is required to maintain coverage into retirement. (NOTE: There are exceptions to this five-year rule if you are subject to a reduction-in-force notice rather than choosing to retire early.)
Despite the benefits available, there could be downsides to early retirement. Basic annuities under FERS don’t offer annual cost-of-living adjustments until you reach age 62. And Civil Service Retirement System (CSRS) employees face a reduction in their annuity if they retire before age 55.
Understanding all the rules and complexities is essential for federal employees considering early retirement because of its many potential impacts on your long-term financial security. And it can be difficult to get advice or clarity from the U.S. Office of Personnel Management (OPM)—be sure to reach out to an advisor who understands federal benefits and can help you understand yours.
Want to explore when the best timing for your retirement might be? Let’s talk about your situation. At Government Employee Wealth Advisors, we can help you ensure that you’re ready to retire at the right time and with the proper documentation. If you have any questions about the process of retiring as a federal worker, please visit Government Employee Wealth Advisors online. You can also set up a meeting with us by clicking here.
Sources:
https://www.fedweek.com/experts-view/is-early-retirement-for-you-check-the-rules/
https://www.nalc.org/news/the-postal-record/2019/september-2019/document/DRM.pdf
https://fedemploymentattorneys.com/legal-blog/csrs-vs-fers/
This article is provided for general informational purposes only, it is not to be construed as financial advice. It is recommended that you work with a financial advisor, tax professional and/or attorney when making any important financial decisions.
