Ed dives deep into why waiting until 62 to retire might be the best option for FERS retirement

Federal employees who are covered by the Federal Employees Retirement System (FERS) and who retire before age 62 under the immediate FERS retirement rules (including early retirement but not “MRA+10” or “MRA+20” “reduced” retirement) receive a monthly FERS annuity and the Special Retirement Supplement (SRS) annuity. Both the FERS annuity and the SRS annuity are paid starting one to two months after the FERS employee retires. The FERS annuity is a “guaranteed pension” in the sense that it will continue throughout the retired FERS employee’s life. Annual cost-of-living adjustments (COLAs) increase the amount of the FERS gross annuity, starting the year after the retired FERS employee (the FERS annuitant) becomes age 62. The SRS annuity ceases the month the FERS annuitant becomes age 62 with no COLAs.

This column discusses why FERS employees who will have more than 20 years of service when they retire from federal service are highly encouraged to retire at age 62 or older and thereby forgo the FERS SRS annuity. One reason for a FERS employee to delay retirement until at least age 62 is for the retired employee to then be immediately eligible for COLAs. Given the high inflation that has existed over the last two years and expected to endure for the future, COLAs are important for federal annuitants.

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The other reason FERS employees who will have more than 20 years of service when they retire are encouraged to retire at age 62 or older is because they will receive an “enhanced” FERS annuity in the form of a permanent 10 percent increase.

Before discussing this enhancement to the FERS annuity, it is important to first discuss which FERS employees are eligible for the SRS annuity and the SRS annuity computation.

Who is Eligible for the SRS Annuity and How is the SRS Annuity Computed?

Social Security is one of the three components of the FERS retirement. The other two are the FERS annuity and the Thrift Savings Plan (TSP). When a FERS employee retires between his or her Minimum Retirement Age (MRA) (age 55 to age 57, depending in which year the FERS employee was born), the FERS retiree will receive the FERS annuity and has the options of immediately making penalty-free withdrawals from his or her traditional TSP account. But the earliest age a retired FERS employee can receive his or her Social Security monthly retirement benefit is age 62.Since many FERS employees retire before age 62, the Office of Personal Management (OPM) automatically pays an annuity supplement – the SRS annuity - to FERS employees who retire before age 62. To be eligible for the SRS annuity, a FERS employee must retire under an immediate (non-disability) retirement, meeting one of the following age and service requirements:

Early retirement (VERA or VSIP) – age 50 with 20 years of service or any age with 25 years or more of service
Special Provision Employees who retire as such – law enforcement officials, firefighters, air traffic controllers, and customs and border protection officers.
Have reached their MRA and have at least 30 years of FERS service, or
Age 60 with at least 20 years of FERS service

The retiring FERS employee will receive his or her FERS annuity and will automatically receive the SRS annuity unless the retiring employee notifies OPM’s Retirement Office not to send the SRS annuity. The reason the FERS annuitant would not want the SRS annuity is that the FERS annuitant returns to work. The SRS annuity is subject to an “earnings test.” With an the “earnings test,” OPM could take back some, or all, of the FERS annuitant’s SRS annuity if the FERS annuitant is working and earns more than the annual salary limit.

OPM calculates the SRS annuity by estimating the amount of a FERS employee’s Social Security monthly retirement benefit at age 62 attributed to the employee’s years of FERS service. The formula for the SRS annuity calculation is:

[(estimated employee’s Social Security at age 62) times (employee’s years of FERS service)]/40.

The following example illustrates:

Example 1. June, a FERS employee with 25 years of FERS service retired on December 31,2022 at age 60. Her Social Security benefit at age 62 is according to her Social Security statement is $12,000/year.

June’s SRS annuity = [$12,000 x 25]/40 = $7,500 per year

What Happens When a FERS Employee With At Least 20 Years of Service Retires at Age 62 or Older?

A FERS employee is eligible to retire under the immediate retirement rules with at least five years of federal service under FERS and reaching his or her 62^nd birthday. The retired employee would immediately receive the FERS annuity, can make withdrawals from the traditional TSP and/or Roth TSP, and can elect to start receiving his or her Social Security retirement benefit. However, the retired employee would not receive the SRS annuity because the employee retired at age 62 or older. Those FERS employees who retire before age 62 and receive the SRS annuity will no longer receive the SRS annuity, starting the month after the month the FERS annuitant becomes age 62.

A FERS employee who retires at age 62 or older with between five and 20 years of FERS service will have his or her FERS annuity calculated as follows:

Years of service (including unused sick leave hours) times high-3 average salary times 1% (accrual factor

A FERS employee who retires at age 62 or older with at least 20 years of FERS service will have his or her FERS annuity calculated as follows:

Years of service (including unused sick leave hours) times high-3 average salary times 1.1% (accrual factor)

Note that the FERS employee who retires at age 62 or older with at least 20 years of federal service is getting a permanent 10 percent bonus (1.1. percent versus 1 percent) in their FERS annuity.

A FERS annuitant is not eligible for his or her first COLA to his or her FERS annuity until the year after the FERS annuitant becomes age 62.

The following table summarizes the eligibility rules for the SRS annuity and first FERS COLA and the FERS annuity computation rules depending on when a FERS employee retires - before age 62 or at age 62 or older with a minimum 20 years of FERS service.

	Retires Before Age 62	Retires at Age 62 or Older
Eligible for SRS Annuity?	Yes	No
Computation of FERS Annuity	Using 1 percent accrual factor	Using 1.1 percent accrual factor
Eligible for FERS COLA?	Not until January 1 after the year they become age 62	Immediately – the January 1 after they retire

To illustrate the advantages of a FERS employee with 20 or more years of service working until at least age 62, consider the following two examples:

Example 1. Allan, a FERS employee with 25 years of service has the option of retiring at age 60, receiving a FERS annuity and an SRS annuity equal to $7,500 per year. Assume Allan’s high-three average salary is $100,000. Allan’s starting FERS annuity (not including any unused sick leave hours used in the FERS annuity calculations) is equal to:

25 years times 1%/year times $100,000 equals $25,000.

By the time Allan reaches age 62 he would have received a total $50,000 of the FERS annuity (2 years each year $25,000) and $15,000 of the SRS annuity (2 years, each year $7,500).

Suppose Allan decides to retire at age 62, working an additional two years. With an additional two years of FERS service and assuming an increase in his high-3 salary of 4 percent to $104,000. Allan’s starting FERS annuity, without unused sick leave, is equal to:

27 years times 1.1%/year times $104,000 equals $30,888.

By retiring at age 62, Allan is receiving an additional $30,888 less $25,000, or $5,888 more per year in his FERS annuity. Allan also has two additional years to contribute to his TSP. Allan will also be eligible to have his first FERS annuity COLA the year after he retires at age 62.

Allan will not, however, receive the SRS annuity of $7,500 because he retired at age 62. The question becomes: How long will Allan have to live after he retires at age 62 to “recover” the $15,000 of the SRS annuity he did not receive because he retired at age 62 rather than at age 60? The answer:

$15,000/$5,888 per year additional FERS annuity equals 2.55 years

If Allan retires at age 62 rather than at age 60 and lives after he retires to at least age 64 and 7 months, he will “recover” the $15,000 he did not receive of the SRS annuity. If Allan’s FERS annuity receives a COLA each year starting the year after he retires at age 62, the “payback” period will be shorter.

Example 2. Diane is eligible to retire at her minimum retirement age (MRA) of age 56 with 30 years of service, or Diane could work an additional six years and then retire at age 62 with 36 years of service. Assume Diane’s SRS annuity if she retires at age 56 is $12,000 per year and her high-three average salary is $125,000. Not including any unused sick leave, Diane’s FERS annuity when she retires at age 56 is then equal to:

30 years times 1%/year times $125,000 equals $37,500.

Between age 56 and age 62, Diane will receive a FERS annuity of $37,500 (with no COLA) and an SRS annuity of $12,000 per year for 6 years of a total of $72,000.

Suppose Diane decides to retire at age 62, working an additional 6 years. With an additional 6 years of FERS service and assuming an increase in her high-three average of 20 percent to $132,500, Diane’s starting FERS annuity (not including any unused sick leave hours) is equal to:

36 years times 1.1%/year times $132,500 equals $52,470.

By retiring at age 62, Diane is receiving an additional $52,470 less $37,500, or $14,970 per year. Diane also has 6 additional years to contribute to her TSP. She will be eligible for her first COLA the year after she retires. Diane will not, however, receive her SRS annuity of $12,000 per year because she is retiring at age 62, a total of $72,000. The question is therefore: How long will Diane have to live after she retires at age 62 to “recover” the $72,000 of the SRS annuity she did not receive because she retired at age 62 rather than at age 56? The answer is:

$72,000/$14,970 per year additional FERS annuity equals 4.81 years.

If Diane retires at age 62, rather than at age 56, and lives after she retires to at least age 66 years and 10 months, she will “recover” the $72,000 she did not receive of the SRS annuity. If Diane’s FERS annuity receives a COLA each year starting the year after she retires at age 62, the “payback” period will be shorter.

Note the following from both examples: (1) The maximum number of years a FERS employee who retires at age 62 rather than before age 62 would have to live to recover the amount of the SRS annuity the employee would have received had the employee retired before age 62, would be shortened if the employee’s high-3 average salary is larger than it was before age 62. This high-3 average salary increase is a result of step increases, promotions and government-wide pay increases, and additional unused sick leave hours used in the computation of the employee’s FERS annuity; and (2) If the FERS employee elects to give a survivor annuity (typically to a spouse), then the “recovery period” is based on the lives of two individuals and therefore takes fewer years to “recover” the amount of the SRS annuity not received.

Since most FERS employees who retire from federal service are expected to live on average until at least their mid- to late- 70’s, it is therefore advantageous for a FERS employee who has a minimum 20 years of service to postpone retirement until age 62 or later and to forgo the SRS annuity. Working longer also means the opportunity to contribute more to the TSP and to receive a larger monthly Social Security retirement benefit.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.