“Is there a way, I can find out how much I will receive at retirement and when I can collect? I worked 24 years, but I don’t know my high three. I’m currently 53, and am not sure if I can stop collecting at 60, or 62. Or if I should wait until I fully retire. Thanks.” – David.
Doesn’t it just seem like retirement is never going to get here? Do you even know when you’re eligible to retire or how that benefit is calculated under the FERS Retirement System? Well, if that is something that has been on your mind, please stay with me as we explore this next FERS Federal Fact Check.
Today’s question comes from David. David wants to know, is there a way that I can find out how much I will receive at retirement when I’m eligible to collect? I worked for 24 years, but I don’t know my high-3. I’m currently 53 years old, and I’m not sure if I can start collecting at 60 or 62 or if I should wait until I fully retire, thanks.
Well, David, that’s a question I think that is probably on a lot of federal employees minds, so I want to work through with you some of your options for retirement eligibility, but it’s all going to boil down to when are you financially ready and mentally prepared for this big transition in your life. Hopefully this will help you think about when that will be.
One important question I want to answer first before we get into eligibility rules and the calculation of your benefit is ‘what is high-3 average salary’?
It is going to be the average of any three consecutive year period of your career, and for most people it is probably your last three years. It’s generally going to be a little under, maybe a little over 5% difference from your current salary rate, so in other words if you were going to retire today and your salary rate right now is, let’s say it’s $90,000, we will take 95% of that and figure that is pretty darn close to what your high-3 average is going to look like.
Now, if we start having more significant pay adjustments due to all the high inflation we have been having, then it might be a little farther because, remember, we are going back three years and averaging all those pay rates that were in effect. There are probably at least three or four different salary rates in effect during any three-year segment of your career, so keep in mind we are going back a little bit in time but not to far, so the high-3 is not a bad way to calculate your benefit. In fact, your human resource office or your HR office may have either a do-it-yourself software program sometimes called GRB Platform where you can find your high-3 listed there, or you might be able to request a retirement estimate, especially if you’re getting close to retirement or if you are thinking about leaving federal service any time soon.
The calculation of a FERS basic retirement benefit is really pretty simple. Once you understand your high-3 average salary and once you know exactly how much federal service is going to be credited towards retirement, which is all of your service covered by FERS deductions, military service you may have paid a FERS deposit for and maybe even things like refunded federal service where you had a break in service and took a refund. If you are not sure if service that you have performed is creditable you might want to talk to your HR specialist with specific questions about the types of service you’ve performed and how that is going to be used towards calculating your benefit, because that is going to be really important in this calculation.
Your benefit is going to be either 1% or 1.1% of your high-3 average salary x those years and months of creditable service, and don’t forget that in many cases your unused sick leave hours are converted to additional service credit, so that can increase the dollars in your retirement check. That calculation is going to result in what we call your unreduced FERS retirement benefit. Now, this is in addition to Social Security retirement and the money that you’ve saved in your Thrift Savings Plan that can also be converted to a monthly payment stream.
David, let’s start with where you are right now. You are 53 years old, you’ve got 24 years of service and let’s say that you just decided let’s call it a day today and walk out the door as a resignation, because at age 53 you are not currently eligible for an immediate retirement benefit. In fact, you would have to wait until you are at least 57 or your MRA in order to receive even a reduced FERS retirement benefit. Now you could leave today and postpone that application until age 60, because at age 60 a minimum of 20 years of federal service is required for an unreduced deferred retirement benefit under FERS, and you have more than 20 years right now, so you can do either a reduced benefit at 57 or an unreduced benefit at 60. In just a minute or two I will show you those calculations so you get a better idea of how much money this might be.
Now keep in mind, on a deferred retirement when you are not eligible to retire, as soon as you leave you are going to only have temporary continuation of coverage of your health benefits. You won’t get to maintain any of your other federal insurance benefits into retirement. Plus, of course, you are going to have to wait for the first check, so hopefully you have another source of income or you’re going back to work someplace else.
Your first eligibility for an immediate retirement benefit is when you reach your minimum retirement age, which like I said before, if you were born in 1970 or later that would be at your age of 57; that is your MRA or minimum retirement age. Now along with that you have to have at least 10 years of Federal service, which of course you already have 24 years, so if you work another four years until you reach age 57 you will have 28 years of service and still not enough for an unreduced benefit. Because to retire with an unreduced benefit at your MRA you need 30 years and you will only have 28, so you would still have to suffer an age penalty, but at this point you are now eligible to maintain insurance.
That is a big deal when it comes to retirement from federal service and, in addition to that, you can start receiving your benefits right away, you won’t have to wait years, let alone months for that first benefit to come. At this point, age 60, when you are going to have 31 years of service if you hang around that long.
This is really when it starts looking like you can afford to retire, because now we are talking 31 years of service; you’re going to pick up a FERS supplement which is a bridge payment, a temporary payment that is going to bridge the time between your retirement at age 60 and age 62 when you become eligible for Social Security. You are also going to be eligible to start taking withdrawals from your TSP account and maybe be able to take out enough to supplement both your FERS benefit and the supplement in order to retire comfortably without necessarily having to work a second career. It is all going to come out in the numbers when you run those estimates. If you ran the numbers at age 60 and you said well, I’m still not going to have enough there to take that cruise or to remodel my kitchen or to buy that new car when I’m ready to, I really want to be a little bit more financially comfortable, then working until age 62 might be the key. This is really the age where I think congress designed FERS employees to retire.
At this point, you qualify for a bonus calculation of a 10% higher formula; that is going to help. In addition to that, this is the age when FERS retirees first start receiving cost of living adjustments. In times of high inflation like we seem to be entering right now, retiring with no cost of living adjustment is going to erode the buying power of your retirement over time, and in addition to that at age 62 if you want to draw Social Security retirement based on your whole lifetime of benefits you can start that plan now or you can postpone it to get a higher benefit at a later age. Remember the full retirement age for Social Security isn’t until age 67, but you could start receiving a reduced amount as early as age 62.
Let’s run some numbers based on a high-3 average of $80,000. You didn’t tell me about your salary, so I’m just going to use $80,000 to run this example.
At age 53, as you are right now, and I said you could collect that benefit at your MRA if you are willing to take a reduction, you are already eligible for 24% of your high-3. You just have to wait until you are age 60 to claim it. If you took it at your minimum retirement age or at age 57 you would only get $14,400 a year, something to show for what you’ve done but probably not enough for a comfortable retirement. Now if you wait until you have 28 years at age 57 to leave federal service you are still going to take a reduced benefit if you claim it immediately, but you could postpone that benefit until age 60 and get the unreduced amount, so it is either going to be $16,800 at 57 or $22,400 if you postpone the application until 60, so this still isn’t looking ideal for a comfortable financial retirement.
Now remember, I said at age 60, that is really your first eligibility for an unreduced immediate benefit, collect it right away, no age reduction, keep your insurance and get a FERS supplement to bridge that time until you’re 62. The FERS benefit alone is going to provide $24,800 a year based on the high-3 of $80,000. That is in addition to a FERS supplement which is going to be worth about three fourths or 75% of your age 62 Social Security benefit. Now we are talking a little bit more comfortable level in your financial planning.
Finally, the last one is the one I like the best. Hey, 62 is not old, I’m 64, so let’s talk about staying a few more extra years and at age 62 get that bonus calculation of 1.1% in addition to qualifying for the real Social Security benefit as well as keeping your insurance at the same time. Now we have a FERS basic benefit getting closer to $30,000 a year, plus another check coming from Social Security and be able to safely take some money out of your TSP account, hopefully without running out of money before you run out of life, so I kind of like the age 62, but you might not agree with me and want to still leave a little bit earlier. Before you get too excited, remember that that amount of money I was just showing you was before any reductions or withholdings. Now, I did illustrate the age reduction, that 5% penalty if you take advantage of retiring a little early, but I didn’t show you the reduction for a spousal survivor benefit; maybe a former spouse who might have some entitlement to your retirement or if you ever worked part time, the proration of that part time service. Those are some things to consider if they apply to you.
In addition, just like your paycheck you are going to have withholdings for taxes.
In this case it is federal income tax for sure and possibly state income tax depending on where you live in retirement. Health benefits, life insurance, dental and vision supplement and even long-term care insurance premiums can also be withheld from your monthly FERS check.
David, when you are ready to apply or when you are ready to leave federal service you want to get an estimate of your retirement from your HR office and start to fill out the forms. If you are applying for the deferred or postponed FERS benefit that is a retirement and insurance form 9219, and if you are applying for an immediate retirement benefit at your MRA or H60 or 62, then that is going to be the application for immediate retirement under FERS or Standard Form 3107. That will get you started. I would encourage you to attend a full preretirement planning seminar, get some additional help from someone who understands these things maybe a little better than you do at this point so that you can make sure that you’ve got a clear path to a smooth transition to retirement.
I hope you listen to the podcast that Micah and I do. That’s going to also give you some insight to some of the tips to avoid delays and to have that smooth clear path forge your life after retirement.
Until next time this is Tammy Flanagan with your FERS Federal Fact Check.