Phased Retirement: The Bottom Line

Last week, we looked at the proposed rules governing the new phased retirement option in government, under which an employee could choose to work part time while receiving a partial retirement benefit. This week, let’s look at how a pair of partial retirement scenarios would play out under the government’s two main retirement systems.

Civil Service Retirement System

Suppose Pat, a 55-year old CSRS employee with 32 years of service and a salary of $100,000, wanted to shift to half-time employment. If Pat retired completely, her annuity would be $60,000. Under phased retirement, if Pat went to half-time service, the annuity would be computed as if Pat were fully retiring. However, she would be paid half of it, or $30,000 per year, plus $50,000 per year in salary, for a total income of $80,000.

Let’s assume Pat found this a desirable arrangement, and continued it for five years before deciding to fully retire. During this time, suppose Pat’s annuity increased through cost of living allowances to $36,000 per year, and her salary went up to $120,000.

Pat would then have an annuity computation made as if she had been working full time for the five years of phased retirement, which would yield a benefit of $84,000. However, at that time Pat would be paid half that amount ($42,000), plus the original annuity (increased by COLAs) of $36,000, for a total of $78,000 per year.

Federal Employees Retirement System

Suppose John, a 56 year-old FERS employee with 32 years of service and a salary of $100,000, wanted to take the phased retirement option and go to half-time employment. If he retired completely, his  annuity would be $32,000 and he would be entitled to a FERS supplement of $15,360, for a total of $47,360. Under phased retirement, if John went to half-time service, the annuity would be computed as if John were fully retiring, but under the proposed rules, he would not receive the supplement. He would just be paid half of the annuity, or $16,000 per year, for a total income of $66,000.  And he would not be able to take withdrawals from his Thrift Savings Plan, since he is still considered an employee.

Let’s assume John still found this acceptable, and continued the arrangement for five years before fully retiring. And let’s figure that during this time, his annuity increased through COLAs to $19,200 per year, and his salary went up to $120,000. John’s annuity would be computed as though he had been working full time during the five years, and would add up to $44,400. However, at that time he would be paid half of that amount, $22,200, plus the original annuity (increased by COLAs) of $19,200, for a total of $41,400. Since John would be fully retired before turning 62, he would not be eligible for Social Security retirement benefits yet.

CSRS vs. FERS

It’s clear in these two examples that Pat would receive a higher benefit than John even though they are in a similar situation as far as their salary and service. This is due to the fact that John is not eligible for the FERS supplement and he is not eligible to make monthly withdrawals from his TSP funds.

John’s only remedy would be to reduce the contributions he makes to the TSP during his period of phased retirement if he needs additional income. His TSP balance would (hopefully) continue to grow. By reducing his TSP contributions to only the amount matched by his agency, he might be able to get an income similar to Pat’s.