If you were eligible to retire from the Federal Government as a FERS Employee and receive a FERS Supplement, then you are probably aware that the supplement will cease when you turn age 62.
The reason that the FERS Supplement stops at age 62 is that that is the first time that you are eligible to begin drawing on your social security benefit.
Social security is a retirement system that throughout your working years, you have paid into and your employer has as well. The benefit is designed for you to be able to draw a monthly income contingent on the contributions that you have made over your working history.
Every year that you worked and paid into social security you received up to 4 credits. Each quarter of a calendar year representing 1 credit. For example,
- 1 Quarter Earnings = 1 Credit
- 1 Year Earnings = 4 Credits
- 10 Years Earnings = 40 Credits
When it comes to drawing social security, there are three critical age defined turning points. Here is what they are:
- Age 62: eligible to draw a permanently reduced benefit.
- Full Retirement Age (FRA): the age you can draw your full, unreduced benefit.
- Age 70: the age in which you can draw the maximum, increased benefit.
There are two major “groups” of thought on when you should draw your social security benefit:
- Emotional and,
The emotional side might bring to light feelings of “scarcity” as your monthly income is reduced because your FERS Supplement goes away. Most often, this feeling is what causes people to start their social security benefits as early as age 62 even though it means doing so with a permanently reduced benefit. The biggest myth aiding to this response is that when you do so, you will draw more money out of your social security benefits because it started earlier.
Mathematically, we can and should make a different argument regarding whether or not you should start your social security benefit at age 62 when your FERS Supplement stops.
Retirement Income Timeline
One of the most important concepts to understand in your retirement is your retirement income timeline.
By definition, we mean exactly that: In your retirement, what fixed income will you be receiving from the age/year that you retire all of the way until your financial plan terminates (at death).
Example: you retire as a FERS at age 57 when you have achieved your Minimum Retirement Age (MRA) and 20 years of Creditable Service. You were eligible at retirement for the FERS Supplement.
When you retired, you received your FERS Pension as well as your FERS Supplement until age 62. For 5 years, you had two sources of fixed income: your FERS Pension and the Supplement. But once you turned age 62 and were eligible to draw on social security, your FERS Supplement ceased.
Remember, the FERS Supplement was a bridge to help you in your retirement planning – it was not intended to be a permanent income source.
Now you have three choices,
- Start Social Security at age 62 when your FERS Supplement stops. Doing so means accepting a permanently reduced social security benefit which is almost 6% a year for every year before your FRA you started social security.
- Wait until you reach your Full Retirement Age (FRA) and begin social security for an unreduced benefit.
- Wait until you reach age 70 to start social security benefits, allowing that monthly benefit to potentially increase by just under 8% a year.
To start social security early or, delay until age 70?
When you start your social security benefits earlier than your FRA, you are choosing to do so at a permanently reduced rate. The reduction in your social security benefits is nearly 6% for every year you started social security before your FRA.
If you delay your social security benefits beyond your FRA, you are choosing to receive a nearly 8% per year increased benefit for every year that you delay until you reach age 70.
That is mathematically a substantial difference!
How could an increase in your social security benefits by 32+% change your retirement lifestyle (example, FRA at 66 but delaying until age 70)?
How do you fill the gap when your FERS Supplement stops at age 62?
If you elect to delay starting your social security benefits until you reach your FRA or later, how do you fill the cash flow gap in retirement when your FERS Supplement stops?
- Part-time employment or,
- Distributions from your retirement savings account(s).
One source that you may think about utilizing to fill that monthly retirement gap when your FERS Supplement stops, is your Thrift Savings Plan.
Remember, delaying your social security benefits means that you are going to receive a guaranteed by the United States Government, increase in your benefits. With your TSP, there are no guarantees outside of the “G” fund and even within the “G” fund, you are not going to receive a guaranteed increase in benefits between 6% and 8%.
If you are married, remember that your spouse receives either 100% of their own social security benefit or 50% of your social security benefit. When determining when to start social security for your household, make sure that you are keeping survivor benefits top of mind. If you continue to delay your social security benefits until age 70, your spouse can receive 50% of your social security benefit or 100% of their own.
If you turn your social security on early, for a permanently reduced benefit, you have also reduced the survivor benefit for your spouse.
Understanding when is most appropriate to draw your social security benefit, once your FERS Supplement stops is critical to the financial success of your retirement. Always try and make a mathematical instead of an emotional decision.