Ed dives deep into why waiting until 62 to retire might be the best option for FERS retirement
Ed hosts a Federal Retirement Webinar for FERS Employees -
Who is Eligible for the SRS Annuity and How is the SRS Annuity Computed?
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 62nd 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?
|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.
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.