The Best Time to Retire

This column isn’t about the perennially popular topic among federal employees of the best date to retire in any given calendar year. Rather, it’s about a decision that involves much more than the potential loss of a partial month of salary or retirement benefits. The choice you make about what point in your career you leave federal service could make a big difference in your financial security.

There are many reasons to think about moving on into a new phase of your life. No one, for example, wants to stay in a career that has run its course. But sometimes hanging in there and making the best of a less-than-ideal situation will pay off in the end.

Here are a few things to consider before cutting ties with your federal career:

Have you worked long enough to qualify to maintain your health insurance in retirement? If you leave before your minimum retirement age or before meeting the minimum requirements for an immediate retirement benefit, you might be leaving your federal health insurance benefit behind—a decision you may come to regret. 

Have you considered alternative retirement scenarios? There is usually a good, better and best when it comes to timing your retirement. It is good to have met the minimum age and service requirements to retire, but it’s better if you can retire without an age reduction under the MRA+10 provisions of the Federal Employees Retirement System. And it’s best if you’re able to work long enough that your retirement income replaces your salary.

Consider your net income while working and your net income when retired. How far apart are the amounts? Are you taking into consideration survivor elections, taxes, insurance, and any other reductions or withholdings that might apply to your situation?

If you plan to leave your federal career early to work in the private sector, have you computed the additional salary you will need to earn to make up for not having a pension? For example, let’s say you plan to work to age 66 and you’re contemplating leaving federal service at 56 to spend the last 10 years of your career in the private sector. Those last 10 years of federal service might have added 10% or more of your high-three average salary to your FERS retirement.

A private company might offer a 401(k) retirement savings plan, but these days probably doesn’t offer a pension to make up for the loss of future federal retirement benefits. How much would you need to save to create a stream of income equal to 10% of $100,000, for example? Maybe around $300,000 to $400,000 in additional savings?

A second career might require a much higher salary than your federal job due to the lack of a pension and also the possibility of not having health insurance. Those are two very important and expensive considerations.

Are you planning to retire before you turn 62? If so, FERS has a few quirks you should be aware of: 

• Unless you’re in a special category such as a law enforcement officer or firefighter, there are no cost of living adjustments payable to a FERS retiree until after they turn 62. This includes the FERS retirement supplement, which is also subject to an earnings limit that can reduce the benefit or cause it to be eliminated. 
• The FERS retirement benefit formula increases by 10 percent once you’re 62 with at least 20 years of creditable service. 
• If you retire at the minimum retirement age with more than 10 but less than 30 years of service, your retirement will be subject to a permanent reduction of 5 percent for every year you’re under 62, unless you choose to postpone receiving the benefit. 
• You’ll have the same problem if you retire at age 60 or 61 with more than 10 but less than 20 years of service. 
• If you’re 62 or older at retirement, you’re eligible for Social Security retirement benefits, which get immediate cost of living adjustments and are more tax-friendly than the FERS supplement. Most states don’t tax Social Security retirement benefits and a portion of your Social Security benefit is also tax-free on the federal level. 

As you can see, the decision about when to retire involves a lot more than eyeing the calendar and picking a good date.