The Perils and Pitfalls of Retiring Really Early

Last week, we explored the possibility of joining the FIRE (financial independence/retire early) movement as a federal employee. It involves aggressively saving and investing in the hope of retiring as early as age 45.

There are some specific issues that federal employees would need to carefully consider before pursuing such a strategy. Let’s look at a few of them.

A deferred retirement benefit under the Federal Employees Retirement System is payable as early as your minimum retirement age (55 to 57, depending on when you were born) if you have a minimum of 10 years of federal service when you leave. But if you retired early, you’d have to rely completely on your savings to get you to your MRA for your FERS basic retirement benefit to be payable. Then you’d have to wait until you turned 62 for your first eligibility for Social Security retirement benefits.

Also, without entitlement to a FERS basic annuity benefit, you would forfeit lifetime continuation of federal health insurance under the Federal Employees Health Benefits program. To continue your health and life insurance benefits, you must be eligible for an immediate retirement and be covered for the last five years of your career. Employees who resign from federal service before their MRA are not eligible for an immediate retirement even if they have more than 30 years of service.

The only exceptions are if:

• You were offered an early retirement under Voluntary Early Retirement Authority.
• You qualify for a disability annuity under FERS or the Office of Worker’s Compensation.
• You’re covered under special provisions of federal retirement law, such as those affecting law enforcement officers, firefighters, or air traffic controllers.

In addition to Social Security retirement not being payable until at least age 62, the FERS annuity supplement, which is meant to bridge the time between retirement and qualifying for Social Security, would not be payable. The supplement is only available when a FERS employee retires younger than age 62 with an immediate, unreduced retirement — unless you’re disabled or are retiring under special provisions.

Those who separate before they are eligible for an immediate FERS retirement also risk incurring a 10 percent tax penalty for early withdrawals from the Thrift Savings Plan before age 59 ½. There are exceptions to this penalty, such as choosing  a monthly life expectancy payment schedule, separating in the year you turn 55, or under the special provisions for public safety officers. These exceptions can be found in this publication.

If you’d like to figure out how much your retirement income from FERS, the TSP and Social Security would be worth over the next 10, 20 or 30 years, you can get estimates using various online calculators. Here are some examples:

• The TSP website has a Planning and Tools section, which features calculators that will project your future account balance and the monthly payments you might receive. These include a ballpark estimate calculator designed to show how much you need to save each year until retirement based on your estimates of the retirement income you need and your existing savings.
• Social Security’s online benefit calculator allows you to estimate your retirement benefit if you stop working before you turn 62. To use it, you’ll need your earnings history, which can be found on your Social Security personal benefits statement.
• To calculate an estimate of your FERS basic benefit, you’ll need to have an idea of how much creditable service you’ll have at the time you leave federal service, along with the average of your highest three years of basic salary.

Once you’ve completed your calculations, don’t forget that most of your retirement income will be subject to taxes at the federal level — and often at the state level, too. In addition, you may need to allow for other withholdings to be deducted if you’re eligible and choose to continue your insurance coverage.

Most of us won’t be able to retire until well past our 50th birthday. But if you’re FIREd up — and fully prepared — you just might be able to make it happen sooner.

Photo: Flickr user Bex Walton