Pay and Benefits Watch: How and when to take an early out

Following President Clinton's signing of the fiscal 2000 Treasury-Postal appropriations bill at the end of last month, early outs have become a permanent option in federal agencies' downsizing tool kits.

Agencies must request early out authority from the Office of Personnel Management. To get approval, agencies must prove they need the authority to help them reduce their staff during downsizing or reorganizations. Many agencies offered early outs during fiscal 1999. At the Social Security Administration, for example, 1,163 employees were offered and accepted early outs in fiscal 1999.

Early retirement under the Civil Service Retirement System (CSRS) is fairly straightforward. Once an agency offers its employees early outs, CSRS employees need only check to make sure that they have at least 25 years of service, or that they are at least 50 years old if they have 20 years of service. Then they're eligible for an immediate pension, reduced by two percent for each year they are under age 55.

For employees under the Federal Employees Retirement System (FERS), it's a bit more complicated, primarily because FERS offers a retirement option that looks and smells like an early out, but is not an early out.

A real early out under FERS-the kind that must be offered by the agency-follows the same basic eligibility rule as the CSRS early out: An employee must have at least 25 years of service, or be at least 50 years old if they have 20 years of service. With an early out, a FERS employee's pension is not reduced at all (Remember that Social Security and Thrift Savings Plan investments are a substantial portion of the FERS retirement benefit).

The other FERS retirement option that often gets confused with real early outs is called "MRA + 10."

MRA stands for Minimum Retirement Age. For people born before 1948, the MRA is 55. The MRA slides up depending on when you were born, so the MRA is 57 for people born after 1970. (Click here for the MRA scale.)

The "10" part of MRA + 10 stands for 10 years of minimum service-that's how long you have to work for the government to qualify for this retirement option. When you take an MRA + 10 retirement, your annuity is reduce by 5 percent for every year you are under age 62.

For a full pension without an early out, an employee under FERS must be 62 with five years of service, 60 with 20 years of service, or of minimum retirement age (see that MRA scale) with 30 years of service. For employees who want to leave the government before they meet the normal requirements and who don't have the early out option, the MRA + 10 option is available.

For Whom the Early Out Tolls

If your agency offers you an early out, should you take it?

Here's an example of someone who's perfect for an early out, provided by Tammy Flanagan, a federal employees' benefits specialist with the National Institute of Transition Planning:

"Josie takes an early retirement when offered because she has found another job that pays the same salary as her federal job. She is then able to invest her retirement income for later when she stops working. The private sector job is a welcome change of pace and offers new challenges and is an easier commute from her home. The new job has a generous 401(k) plan and potential for a higher salary later on. What a wonderful opportunity for Josie!"

Flanagan warns, however, that people can almost never actually fully retire-that is, stop working entirely-with an early retirement.

"For many employees, early retirement comes at a time when we are still putting children through school and paying down our mortgages, [so] we usually can't afford to stop working," Flanagan said.

Pay and Benefits Watch will be delving into more early retirement issues in future columns. Stay tuned.