Age Reduction Penalties and the Difference between “Delayed” &“Deferred” Annuities
If you’re younger than 60, have accrued 10 or more years of service in FERS, but less than 30, retiring and starting your pension immediately can have undesirable consequences. While you could retire and start your annuity payments at your minimum retirement age (MRA), there would be a considerable reduction penalty for age. People between 60 and 62 years old with 20 years of service can avoid this decrease, but otherwise, you’ll be hit with a 5% cut for each year under 62, down to the month. For illustrative purposes, let’s assume a FERS employee retires on his or her 58th birthday with 11 years of service. Their FERS pension would pay out 20% less than the amount it would’ve been if they were 4 years older. Each of those 4 years under age 62 took 5% off. In this scenario, someone’s hypothetical monthly retirement check of $1,000 gets slashed to $800, equating to a $2,400 loss every year.
If waiting until 60 or 62 to retire seems like an unappealing prospect, the best way to avoid the age reduction penalty is to defer or delay retirement until you are one of those ages. No matter what age a FERS employee is when he or she leaves the federal government, as long as they served for at least a decade, they can postpone their pension until they reach their MRA (either reduced or with 30 years), 60 (with at least 20 years), or 62. When they start receiving retirement money, they can re-enroll in FEHB and FEGLI. For those who vacate without working for at least 10 years (but have 5 or more) they can at least defer their annuity until they are eligible, but cannot rejoin the health or life insurance programs. The inability to get back in those plans accentuates the most significant difference between a “deferred” retirement and the confusingly similar “delayed” (or “postponed”) retirement in FERS. It should also be noted that age and service requirements for retirement eligibility are lowered when retiring through an “Early Out” retirement, which is when an agency is affected by involuntary and voluntary separation cases.
Until Next Time,
**Written by Benjamin Derge, Financial Planner. 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 Benjamin Derge and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Expressions of opinion are as of this date and are subject to change without notice. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors.
Age Reduction Penalties