Assessing the feasibility and attractiveness of early retirement can be complex. For some who receive the offer, it’s easy – they’re either anxious to get out and quickly say yes, or they are certain they want to stay and say no, sometimes with little formal analysis. For others, the decision will depend on a careful balance of financial and other unique factors.
The priority is to determine whether an early retirement offer is feasible financially and, if so, at what cost. Early retirement is possible for employees covered by either the Federal Employees Retirement System or the Civil Service Retirement System who receive an offer and are at least age 50 with 20 years of service, or any age with 25 years of service. The annuity calculation and retirement benefits provisions are the same as if a normal optional retirement were being taken subject to the usual age and service requirements, except that no annuity reduction is imposed for retirement before age 62 for FERS retirees.
If you don’t plan to work in the private sector following early retirement, then the decision can be fairly straightforward – at least, if you are otherwise prepared to develop and manage a retirement plan. You’ll maintain eligibility for certain benefits in retirement, including health insurance, if you meet the five-year qualification rule or have it waived. You can continue any life and long-term care insurance benefits and should carefully review the premiums and factor them into your spending needs. You’ll need an estimate of your annuity benefits and your spending needs to conduct the analysis.
FERS employees can also expect to be eligible for the special retirement supplement, or SRS, from the time they reach their minimum retirement age until they reach age 62 and become eligible for Social Security benefits. So, your retirement income from federal employment might include your annuity payment, the SRS and Social Security. All of these are typically estimated pretax, so don’t forget to adjust for income taxes when comparing with your expected spending needs.
It is also important to recognize that the FERS annuity’s cost-of-living adjustment will not likely keep pace with inflation. For FERS employees who delay retirement, each year of additional federal employment means an increase in their future annuity and Social Security payments that is likely greater than the rate of inflation for the year they are working. Taking early retirement trades that increase for a lower amount.
If you plan to earn additional income after you retire early, your analysis becomes more difficult. The SRS and any Social Security you may be entitled to are subject to an earnings test until you reach your Social Security full retirement age. This means that the income you earn after leaving government may reduce or eliminate these expected streams of income. In this case, you may be essentially choosing between one set of benefits and another. You’ll need to figure out whether your early-retirement compensation and benefits will be enough to replace the loss of your federal compensation and benefits in their ability to
support your retirement spending needs down the road.
If you’re willing to live within the after-tax means provided by your guaranteed streams of retirement income – annuity and Social Security, for example – then the problem reduces to simple arithmetic in most cases. Figure out how much you’ll have to spend each year, after taxes, and work out a budget that fits.
But, if you’d like to make the most income safely possible out of your savings, investments and other spendable assets, you’ll need more complex analysis and investment skills. Either do your homework or find someone to help who has done theirs.
Written by Mike Miles
For the Federal Times
Publication December 3, 2007