Go Ahead, Retire Early. But It'll Cost You

According to a National Public Radio report, a new study estimates that life expectancy in the United States decreased by nearly two years between 2018 and 2020, largely due to the Covid-19 pandemic. Maybe this is why I’m getting so many emails from people wanting to retire sooner rather than later. Perhaps they’re thinking about getting the most out of the years they have left.

I’ve received more than a few inquiries from employees wanting to know about loopholes or ways around the minimum age and service requirements. Take this one, for example:

I am a 50-year old FERS employee with 32 years of service. I understand that it is most beneficial for me to wait until my [minimum retirement age] where I will not get hit by any reductions and receive a full retirement with all benefits. I seem to be stuck unless there is a [voluntary early retirement authority/voluntary separation incentive payment] offered at some point. After reading one of your articles, if I understand correctly, if I were to leave federal service and postpone my retirement I would be eligible to receive my annuity at my MRA of 57 but not able to receive a supplement or add sick leave balances to my years of service. Seeing that I have over 30 years of service, are there any loopholes that would allow me to retire with the same benefits? It does not make sense that an employee at their MRA can retire with as little as 10 years service and not an employee with 32 years. If I stay until I am 62, that will give me 42 years with at least another year once my sick leave is added in. I have been maxed out at my grade level for five years with no option for a promotion.

Here’s my basic response: There aren’t any loopholes, but there are choices. You just might not like them. Here are three options:

Option 1: Resign with 32 years of service and collect a deferred, but unreduced lifetime FERS retirement of 32 percent of your current high-three average salary at your MRA of 57. You can leave your investments in the Thrift Savings Plan, move them to an individual retirement account or start spending down your balance. (Be careful: In most cases there are tax penalties if you begin taking distributions at your age of 50.)  You also have paid Social Security taxes for 32 years, which makes you eligible for benefits as early as age 62. If you are looking for a second career or you have other income, this could be a viable option for you. Despite the recent announcement of the drop in average life expectancy, keep in mind, you could live to 100. Are you sure you can afford to retire now if your retirement were to last 50 years? 

Option 2: Continue to work to age 57. What's another seven years? You've already worked 32! This is your first eligibility for an unreduced FERS retirement benefit. This is one of the benefits of a full career of federal service. You’ll earn a retirement benefit worth 39 percent of your high-three average salary, plus a FERS retirement supplement equal to 39/40 of your age 62 Social Security benefit. You’ll also get credit for unused sick leave that will increase your benefit, and lifetime coverage for health, life and other forms of insurance. You’ll likely be able to create a lifetime stream of income from your TSP account and not need to worry about the 10% early withdrawal tax penalty.

Option 3: Continue to work past age 57 until you are mentally and financially ready for a secure retirement. Many employees work beyond their eligibility to retire because they find their work fulfilling. The incentive to work to age 62 is an increase in the FERS retirement formula to 1.1% instead of the 1.0 percent factor used when you retire earlier. This also requires at least 20 years of service. In addition, generally, FERS retirement benefits are not going to be adjusted for inflation by annual COLA increases until after you turn 62.

With respect to your argument about the fairness of someone with 10 years of service being eligible to retire at age 57 before someone like you who is 50 with 32 years of service, it’s important to look at the big picture. The person who retires at 57 with 10 years of service will receive only 10% of their high-three average salary. Their benefit will be reduced by 25%, since they don’t meet the requirement of 30 years of service to qualify for an immediate, unreduced retirement. Also, they wouldn’t receive a FERS supplement. This is hardly a retirement package that someone could live on, which is why it was designed for people who come into government in mid-career. 

You can retire early. But when it comes to your benefits, it’ll cost you.