Deferred vs. Postponed

Based on the response I received to last week's column, there appears to be a need for clarification about the difference between deferred and postponed retirement.

I have written on this before, in my column Leaving Early (May 19, 2006). After reading that over again, I thought I might add a few thoughts and a couple of examples. Deferred Retirement Defined

A deferred retirement is payable to an employee who left federal service with at least five years of creditable civilian service and before being eligible for immediate retirement. The former employee must not have applied for a refund of Civil Service Retirement System or Federal Employees Retirement System contributions.

According to the Office of Personnel Management, about 3,000 deferred applications are processed annually.

In CSRS, if you have been covered under the retirement system for at least one of the last two years of your federal service, you are eligible to apply to the Office of Personnel Management for a deferred annuity at age 62 as long as you have at least five years of creditable civilian service. Regardless of how much service you have when you resign, a deferred retirement is not payable until age 62. (Click here for the application for a deferred CSRS annuity.)

Under FERS, you are eligible for a deferred basic retirement benefit at age 62 if you have more than five and less than 10 years of creditable civilian service. If you have more than 10 years of service, you can apply for a reduced benefit at your FERS minimum retirement age (55 to 57, depending on your year of birth). If you have at least 20 years, you're eligible at age 60 for an unreduced benefit. With 30 or more years, you would receive an unreduced benefit at your minimum retirement age. (Click here for the application for a deferred FERS annuity, along with a publication providing detailed information.)

Postponed Retirement Defined

Postponed retirement is only available to employees under FERS. If you have at least 10 years of creditable service and already are at the minimum retirement age, you can get an immediate, but reduced, basic retirement benefit. These benefits are reduced by 5 percent for each year the individual is under age 62.

Employees may choose to postpone receiving this benefit in order to avoid some or all of the reduction. If the employee is eligible to maintain his or her federal health insurance and life insurance, these benefits will eligible for reinstatement upon receiving the postponed benefit. The application is the same as the application for a deferred FERS annuity.

TSP and Social Security

The terms "deferred" or "postponed" do not apply to Thrift Savings Plan benefits. Your contributions to the government's 401(k)-style investment plan are yours. If you have at least three years of creditable service, the entire TSP account belongs to you, including the agency automatic 1 percent matching contribution.

You can transfer your TSP funds to an Individual Retirement Account or keep the money in the TSP for future growth. If you leave before the year you turn 55, you may incur an early withdrawal penalty of 10 percent if you receive any of the money in your TSP account as a cash payment.

Remember, the money in TSP accounts has never been taxed, so any cash withdrawals will be subject to income tax in the year they are taken out. In most cases, employees can transfer the funds to their new employer's 401(k) plan without penalty or tax.

If you're in CSRS, you also should remember that since you have been exempt from paying Social Security taxes during your federal career, you may find that leaving government for the private sector will have an adverse effect on your future Social Security benefits. Social Security computes benefits on the highest 35 years of Social Security taxed wages. Having less than 35 years of Social Security covered wages will bring the average down by including years with no earnings.

Deferred CSRS Retirement: An Example

Suppose Georgia has 32 years of creditable service under CSRS. Her current salary is $80,000 and her high-three average salary is $76,000. If she resigns at age 52, she will be eligible for a deferred CSRS retirement benefit of $45,790 per year at age 62. CSRS benefits are paid for life with an annual cost of living adjustment.

The cost of this decision for Georgia is steep. If she waits until age 55 to retire, she will be entitled to an immediate retirement of about $50,350, based on 35 years of service. Receiving this benefit seven years longer would result in $352,450 more retirement income, not counting future cost of living adjustments or salary increases.

In addition, Georgia will not be entitled to reinstate her health insurance, life insurance or receive any credit for unused sick leave on her deferred retirement benefit. There would be no cost of living adjustments until after her benefit begins at age 62 and the high-three used in the computation is the same high-three as when she left at age 52.

If Georgia begins a second career in the private sector, she will have a 32-year "hole" in her Social Security record for the years she worked under CSRS where she was exempt from Social Security taxes. If she applies for a deferred CSRS retirement benefit, her Social Security benefit will be computed under a modified formula due to the Windfall Elimination Provision.

Deferred FERS Retirement: An Example

Suppose Bryan was born in 1955, has 25 years of service under FERS and is resigning at age 52. His salary is $80,000 and his high-three average is $76,000. He will be eligible for a deferred annuity at age 60 that will be worth 25 percent of $76,000, or $19,000 per year (payable for life with an annual cost of living adjustment). If he chooses to apply when he reaches his minimum retirement age (56, in his case) the benefit would be reduced by 30 percent (5 percent for each year under age 62).

Let's assume Bryan has $300,000 invested in his TSP. He can leave it there or transfer it to a new employer's 401(k) plan. He will continue to pay into Social Security at his next job. The cost of leaving federal service early for Bryan is the consideration that his next employer may not offer retiree health insurance or a defined benefit pension.

Postponed FERS Retirement: An Example

Suppose Anne has 25 years of service under FERS and is resigning at age 56. Her salary is $80,000 and her high-three average is $76,000. She is eligible for an immediate annuity worth 25 percent of $76,000, or $19,000 per year, but taking this benefit at age 56 would cause it to be reduced to $13,300. If she postpones receiving the benefit until age 60, she would receive the benefit unreduced at $19,000 per year (payable for life with an annual cost of living adjustment that begins at age 62). When she applies for the postponed benefit, she may elect to reinstate her health and life insurance benefits, as long as she was covered during the last five years of her federal service.

Anne may leave her TSP investments in the plan or begin an immediate withdrawal. There is no early withdrawal penalty if she is at least 55 the year she leaves federal service.

Things to Consider

Before deciding to leave your federal career early, consider the following:

• Since 1978, the number of defined-benefit plans plummeted from 128,041, covering 41 percent of private-sector workers, to only 26,000 today, according to the Employee Benefit Research Institute. The Bureau of Labor Statistics reports that just 21 percent of workers in the private sector have defined benefit pensions.
• Courtney Coile, an assistant professor of economics at Wellesley College and a research associate of the Center for Retirement Research at Boston College, says the number of companies with 200 or more workers that offer retiree health insurance fell from 66 percent in 1988 to 33 percent in 2005.
• If you leave federal service early, you may have to save more in your employer sponsored savings plan to make up for the fact that many employers do not offer a basic pension benefit. Did you know that if you want $200,000 to last 35 years, you can only withdraw $767 per month (assuming you get a 6 percent rate of return, and allowing for a 3 percent inflation adjustment). To compute your own scenario, try using this calculator.

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.