Deferred Retirement

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What is a Deferred Retirement under FERS?

There are several types of retirement options for federal employees found under FERS.  The first is Immediate Retirement, which is what qualifies a federal employee for an immediate pension when they retire.  This is because they have satisfied the age and years of service requirements.  The other more common retirement options are the Deferred and Postponed Retirements, which allow a federal employee to retire without having met the years of service or age requirements found under the Immediate Retirement.  Let’s take a closer look at Deferred Retirement.

A Deferred Retirement under FERS is an alternative option for a federal employee to retire and still receive a pension, rather than having to qualify for the traditional Immediate Retirement under FERS.  Under a Deferred Retirement, the employee chooses to (and in some cases, has to) defer their pension to a later date, either to their Minimum Retirement Age (MRA) or older. Now we will take a closer look at what makes someone eligible for a Deferred Retirement and what are the pros and cons.

 

Who is eligible for a Deferred Retirement?

The Deferred Retirement uses the same qualifications found under a normal Immediate Retirement under FERS, except either the age or the years of service requirements have not been met.  

The qualifications for an Immediate Retirement are:

  • retiring at your MRA or older with at least 30 years of service; or 
  • retiring at 60 or older with at least 20 years of service; or 
  • retiring at 62 or older with at least 5 years of service.

 

Here are the 2 categories of being eligible for a Deferred Retirement: 

  1. Retiring younger than 62 with at least 5 years but less than 10 years of creditable service; or,
  2. Retiring younger than 62 with 10 or more years of creditable service.

 

In the case of Option 1, where you do not have at least 10 years of service and retire before 62, you are required to wait until 62 to start your pension.   

Example:  Bob retires at the age of 60 with 19 years of service.  If he chooses to defer his pension, he would have to defer it for 2 years until he’s 62.  At 62 he could start receiving his pension. 

 

Under the rules for Option 2, you can either defer your pension until MRA (if retired before then) or chooses to defer it for longer.  This begs the question, why would you choose to defer your pension to a later date rather than as soon as it’s available at MRA?  The answer is because of the penalty associated with taking your pension sooner than 62.

Example:  Sue retires at her age 58 with 20 years of service.  Because she has at least 20 years of service, she can defer her pension until she’s 60.  At 60 is when she can start receiving her pension.

 

Penalty For Deferred Retirement Under FERS

The penalty for Deferred Retirement is actually a reduction based on age.  Every year younger than 62, your pension is reduced by a 5% permanent penalty.  Every month is reduced by 5/12 of 1 percent, about 0.42%.  An exception to this rule, which ties into the Immediate Retirement rules, is if you retire with 20 or more years of service and defer your pension to age 60.  In this case, there would be no penalty.

 

Less than 20 Years of Service:

Age at Retirement # of Years Deferring Pension Penalty
61 1 5%
60 2 10%
59 3 15%
58 4 20%
57 5 25%
And so on…. And so on…. +5% every year

 

20 or More Years of Service:

Age at Retirement # of Years Deferring Pension Penalty
61 0 0%
60 0 0%
59 1 5%
58 2 10%
57 3 15%
And so on…. And so on…. +5% every year

 

The longer that you defer your pension, the smaller the penalty.  This is why some people choose to defer their pension later than their MRA, so that their penalty is smaller.  If your pension is deferred to age 62, there is no penalty for turning it on.

 

Let’s look at a couple of examples:

Example 1:  Bob retires at his age 52 as a Federal Employee and has 22 years of service.   He could choose to defer his pension to his MRA or older and have a 5% penalty for every year younger than 62.  Instead, he could defer his pension to his age 60 and not have any penalty on his pension, because he’ll meet the exception of being 60 years old with at least 20 years of service.

Example 2:  Sue retires as a Federal Employee at her age 59 with 8 years of creditable service.  She would have to defer her pension to her age 62 because she has less than 10 years of service; however, her pension would not be reduced since she is 62.

 

What are the Advantages of a Deferred Retirement?

The main advantage of Deferred Retirement is that it gives federal employees options.  If they don’t quite have the years of service or the age requirements to meet the qualifications under an Immediate Retirement, then Deferred Retirement is an option for them should they retire before becoming eligible for Immediate Retirement.  It’s always good to have options.

Additionally, sometimes people work for many years in the private sector and make the switch to the federal government later in their careers.   Others might be younger and work for 5+ years as a federal employee, and decide to pursue a career somewhere else.  Another advantage of Deferred Retirement is simply the fact the federal employee is indeed entitled to a lifetime pension. Even if the amount is small, it’s nice to know that you are vested after working for the federal government for 5 years. 

Another benefit would be that there are survivor benefits, just like there are with Immediate Retirement pensions.  

 

What are the Disadvantages of a Deferred Retirement?

One disadvantage of the Deferred Retirement that was previously mentioned is the age reduction, AKA the penalty for turning on the pension earlier than 62.  Having a permanent penalty on your pension can be quite significant over your lifetime.

Besides the penalty, the even bigger downside is the fact that you no longer can continue Federal Employee Health Benefits (FEHB) coverage into retirement.  As you probably already know since you are reading this, this is huge because FEHB provides some amazing health insurance.  This is especially true when combined with Medicare.  Similarly, you cannot continue any Federal Employee Group Life Insurance (FEGLI) into retirement.

 

Is Deferred Retirement right for me?

When we work with our federal employee clients, our goal is to give them information to help them make an educated and informed decision on any of the areas in their financial lives.  The same is true here with answering whether a Deferred Retirement is a right choice.  For the most part, we really like to see our clients continue their FEHB coverage into retirement.  There are exceptions just like with anything else, but we would much rather see our clients who do not qualify for an Immediate Retirement to retire under a Postponed Retirement as opposed to a Deferred Retirement.  A Postponed Retirement still allows the federal retiree to maintain their FEHB when they turn on their pension.  We cover the Postponed Retirement more in-depth in another discussion, but in order to retire under a Postponed Retirement, you have to have at least 10 years of service and have reached your MRA.  Because of this requirement, sometimes this doesn’t always work out for everyone’s goals, and therefore the Deferred Retirement would be their only option.

 

Sources

 

https://www.opm.gov/retirement-services/fers-information/types-of-retirement/#url=Deferred-Retirement

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