The Early Way Out

What to consider if you’re thinking about early retirement.

May 26, 2006

Retirement Planning

Retirement Counseling and Training www.retirefederal.com

Agencies are using early outs to reshape their workforces. Employees are using them to reshape their careers. The Civil Service Retirement System and the Federal Employees Retirement System have the same eligibility requirements for early retirement benefits, but different ways of computing them. Here's how the two systems compare: The retirement benefit is computed as follows: Years of service x 1% x high-three average salary. There is no age reduction on the FERS early retirement benefit. A FERS supplement is payable at the minimum retirement age, which is 55 to 57, depending on the year of birth. For employees who transferred from CSRS to FERS, the supplement is computed using only the service after the transfer to FERS. Here's an example: The FERS supplement is subject to a limit on earned income. In 2006, the earnings limit is $12,480 per year. For retirees exceeding this amount, $1 in supplement benefits would be withheld for every $2 earned above the limit. Also, you will receive a lump-sum payment for any unused annual leave when you separate from federal service.

In last week's column, we looked at benefits for employees who resign before being eligible to retire. This week's topic is early retirement.

Voluntary early retirement goes by various names. Informally, it's called taking an "early out." Officially, it's sometimes called VERA (Voluntary Early Retirement Authority), often coupled with VSIP (Voluntary Separation Incentive Payment).

In March, the Government Accountability Office reported (GAO-06-324) that agencies are increasingly using such authorities. The study found that:

28 non-Defense agencies offered early outs in 2003.
51 offered early outs in 2005 (about half of all executive branch agencies).
From 2003 to 2005, at least 22,600 non-Defense employees retired under early out authority.
75 percent of early out offers include a buyout of up to $25,000.

Do You Qualify?

If you find yourself with an early out opportunity (your agency must make the offer and accept your application), you will be eligible for immediate retirement benefits if:

You are 50 years old with 20 years of creditable service.
You are any age with 25 years of creditable service.

CSRS: (Years of service - 2) x 2 + 0.25 = ____%. Then multiply this percentage by your high-three average salary to get your retirement benefit. (Note: Unused sick leave is converted to service credit and will increase the length of service used in the computation.) The benefit is reduced by 2 percent per year if you are under 55. Let's look at an example:

Years of service: 25 years, 6 months
High-three average salary: $65,000
Age: 52 (3 x 2% = 6% reduction for age)
(25.5 - 2) x 2 + .25 = 47.25% x $65,000 = $30,712 / year
$30,712 x 6% = $1,842
$30,712 - $1,842 = $28,870/year or $2,405/month

FERS:

To compute the supplement:

Estimate your Social Security benefits as if you were 62, using all Social Security wages (including those gained under FERS and other nonfederal wages).
Calculate civilian service creditable under FERS, rounded to the nearest full year.
Divide the years of FERS service by 40 to obtain a decimal.
Multiply the Social Security benefit by the decimal determined in the previous step.

Length of service: 25 years, 6 months
High-three average salary: $65,000
Age: 52
FERS retirement benefit: 25.5 x 1% x $65,000 = $16,575/year or $1,381/month
Social Security at age 62: $1,200
25 years of service/40 = .625
$1,200 x .625 = $750/month or $9,000 / year
At your minimum retirement age, the benefit would be: $16,575 + $9,000 = $25,575/year

Thrift Savings Plan

You have several options about what to do with your Thrift Savings Plan benefits if you choose to take an early out:

If you are going to work after you retire from government, you may decide to postpone your TSP withdrawal. You may also choose to transfer some or all of your TSP balance to an Individual Retirement Arrangement or your new employer's 401(k) plan.
If you retire and are younger than 55, your TSP withdrawal may be subject to a 10 percent early withdrawal penalty for those you receive prior to age 59½. To avoid this penalty, you may postpone your withdrawal or choose to receive monthly payments based on life expectancy or a life annuity.
If you are 55 or older in the year you retire, you may withdraw TSP funds without incurring the 10 percent penalty. If you transfer your TSP to an IRA, you will incur the penalty on withdrawals until you are 59½.
To keep your TSP invested but available for periodic withdrawals, you will need to transfer some or all of it to an IRA. The TSP allows only one partial withdrawal. If you elect monthly payments, you cannot start and stop the payments. You may only change the dollar amount of the monthly payment once a year.

Health and Life Insurance

If you are eligible for early retirement, you may be eligible for continuing your Federal Employees Health Benefits Program coverage. You must have been continuously enrolled (or covered as a family member) in any FEHBP plan (not necessarily the same plan) for the five years of service immediately preceding retirement, or if less than five years, for all of your service since your first opportunity to enroll.

You also can continue coverage under Federal Employees Group Life Insurance if:

You have been insured for the five years of service immediately before the date your annuity starts, or for the full period of service during which you were eligible to be insured if less than five years.
You have not converted your life insurance coverage to an individual policy -- or if you have already converted the coverage, you cancel the converted policy.

Things to Remember

Here are some of the things you should consider when weighing an offer to retire early:

How much do you enjoy your work?
How much time have you spent planning for retirement, financially and psychologically?
Can you afford to retire?
Are there opportunities for you to use your skills in the private sector or state or local government?
By retiring earlier than you had planned, you will receive your retirement benefit longer.
If you have a basic retirement income and you continue your FEHBP and FEGLI into retirement, you won't need as much salary or benefits from a second career. With health insurance included in your retirement, you may consider self-employment as a possible second career.
Accepting a buyout with early retirement is a commitment to retire. You can't change your mind once you apply. Be sure this is what you want to do.
A $25,000 buyout may only add up to $16,000 after taxes.
The difference between accepting an early out offer compared to working until you had originally planned to retire may be the difference between needing a second career and being able to retire from work.

Resources

To Do

At Home: Consider your decision to accept an early out if available. Would it make a difference if it included a buyout?
Human Resources: Request a retirement estimate for your first eligibility date. Consider how an early retirement offer would change this estimate.
Internet: Research the job market for a possible post-retirement career.

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.

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