Federal Employee Retirement and the “62 Factor”

The Federal Employees Retirement System (FERS) provides a stable pension for federal workers, offering a strong foundation for retirement. While this is a significant benefit, it has many variables, leaving many of our Feds struggling to decide when they should retire.

One key variable to consider is the “62 Factor,” a provision that increases the pension multiplier by 0.1% for those who work until at least age 62. While this may not seem like much, over time, it can make a major difference in your retirement income. Let's take a closer look.

Understanding the FERS Pension Multiplier

Under FERS, your pension is calculated using the average of your highest three earning years, known as the high-3 average salary. This is combined with the total number of years you've worked under an FERS-covered position, also known as your years of service.

The pension multiplier is applied to the formula to calculate your annual pension, as follows:

Annual Pension = High-3 Average Salary × Pension Multiplier × Years of Service

The longer you work, the more years of service you add, and the greater your pension will be. However, the pension multiplier also impacts your income. If you retire before age 62, the FERS pension multiplier is 1.0%. However, if you wait to retire until age 62 and have at least 20 years of service, the multiplier increases to 1.1%.

Calculating the Difference: Early Retirement vs. Age 62

Let’s look at how the FERS pension calculation works in practice by comparing retiring early versus waiting until age 62.

If you're 60 years old, your high-3 average salary is $100,000, and you have 20 years of service, your pension is $20,000 per year.

$100,000 × 1.0% multiplier × 20 years = $20,000 per year

Retiring at age 62 increases the multiplier to 1.1% and also adds two additional years of service, increasing your annual pension to $24,200.

$100,000 × 1.1% multiplier × 22 years = $24,200 per year

In this example, waiting two additional years would increase your annual pension by $4,200. Over a 10-year period, the total difference in pension income would be $42,000, assuming you earned no interest on the additional funds.

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Why Waiting Until Age 62 Matters

Depending on when you were born, the minimum Federal employee retirement age ranges from 55 to 57. However, for many Feds, waiting until age 62 or later is a smart move. That extra 0.1% sounds like a minor difference, but it adds up in several ways.

Not only will you start with a higher pension, but any future cost-of-living adjustments (COLA) will be applied to a larger base amount. So, over time, you’ll see larger increases in your pension, which can help you keep up with inflation and rising expenses.

Additionally, if your earnings increase during those additional years, they could raise your average indexed monthly earnings (AIME), resulting in higher Social Security benefits when you retire.

Planning Your Retirement Strategy

Incorporating the 62 Factor into your retirement strategy can help you maximize your financial security. As you plan for retirement, consider these steps:

Factor in your health and lifestyle: While waiting for the 1.1% multiplier is financially advantageous, it’s important to consider your health and personal circumstances. For some, retiring earlier might make more sense, due to health issues or personal goals.
Maximize your final pre-retirement earnings: If you decide to wait until age 62, look for ways to ensure your final working years are your highest earning years. This may require taking on additional responsibilities, seeking promotions, or taking high-paying opportunities within your agency.
Consult a CERTIFIED FINANCIAL PLANNER™ practitioner: Every Fed’s situation is different, and a CFP® can help you evaluate the best retirement age based on your goals and needs. They can also help you make the most of the 62 Factor by balancing other income sources like Social Security and TSP withdrawals.

Weighing the Impact of the 62 Factor

Waiting until age 62 to retire may lead to significant financial benefits. Not only does it increase your pension multiplier to 1.1%, but it also helps your income grow over time with larger cost-of-living adjustments. By taking steps to maximize your earnings in your final years of service, you may be able to further boost your high-3 average salary, resulting in an even higher pension benefit.

To learn more about how the 62 Factor impacts your FERS benefits, register for our upcoming FERS webinar on October 1, 2024. Sign up here to reserve your spot.

If you’re uncertain about how to incorporate the 62 Factor into your retirement strategy, we’re here to help. Reach out to the team at Serving Those Who Serve at [email protected] for personalized guidance.

Written by Thomas Lee CFP®. The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Katelyn Murray and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. 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.

The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Serving Those Who Serve writers and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. 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. **