Reconsidering a reduced retirement

I recently received the following email:

I would like to request an article for those individuals who started federal work much later in life and will have only 10-15 years of service by their minimum retirement age. Also, their annual income is only between $50,000 to $55,000.

This made me think it might be a good time to update two columns that I wrote in in July 2021: Leaving Government Now and Retiring Later and Leaving as Soon as You Can. 

The type of retirement for an employee who came into federal service later in life or who reaches retirement age with a smaller amount of federal employment is called MRA+10. It provides the option to retire at your minimum retirement age—which is 57 if you were born in 1970 or later—if you have 10 or more years of creditable service. 

To get a standard benefit under the Federal Employees Retirement System, you must be at least 57 (or at your MRA) and have 30 years of service. At least five years of service must be civilian federal employment (the rest can be military service). But even if you don’t have that much service, you have several options.

Option1

Employees can retire at their MRA with at least 10 years of service if they’re willing to take a reduction to their benefit of 5% for every year they’re under age 62. 

So, for example, if Mary is 57 with 12 years of service, and her highest three years of average salary is $52,000 per year, her benefit would be approximately:

12 years of service x $52,000 x 1% = $6,240 per year, reduced by 25% for being five years under age 62. That would add up to $4,680 a year.

Option 2

Mary could resign at 57 and postpone applying for her retirement benefit. This would decrease or eliminate the age reduction. Since she has less than 20 years of service, to avoid all of the age reduction she would need to file for a postponed retirement about 60 days before turning 62 and choose to begin her retirement the first day of the month before her 62nd birthday. 

Note that most federal employee insurance benefits, such as health and life insurance, end when an employee leaves without applying for immediate retirement benefits. But people who leave federal service after reaching their MRA with at least 10 years of service can re-enroll in health and life insurance programs as long as they participated in the benefits for the five years of service immediately before their separation date. 

Option 3 

Just because Mary is eligible to retire, she doesn’t have to. If she continued working until age 62, then she would be eligible for an unreduced, immediate retirement. At that time, her retirement would be computed as:

17 x $52,000 x 1% = $8,840 per year

Option 4

Mary could keep working even longer, completing 20 years of service. Then her retirement would be computed using a factor of 1.1% instead of 1%:

20 x 1.1% x $52,000 = $11,440 per year

Additional benefits of working longer include:

• More time to invest and save in the Thrift Savings Plan, building up a bigger nest egg to supplement the FERS benefit and Social Security retirement.
• At age 62, Social Security retirement benefits are paid at only 70% of the full benefit amount if an employee was born in 1960 or later. At age 65, this increases to almost 87 percent of the full benefit amount.
• Cost of living adjustments on FERS retirement benefits begin when a retiree is over age 62.

To sum up, the MRA+10 option is a reduced retirement, not the standard full FERS benefit. To avoid the substantial reduction for age when leaving federal service under 62, many employees will resign at their MRA, but postpone receiving their benefit.