When it comes to your retirement, it can be a very stressful time—or it can be a very smooth transition. It really comes down to...Read More
“Next May I can retire with 35 years at the age of 62. I was considering working 10 more months to retire at 63 and get more Social Security. The physical aspects of the job are the disadvantages of staying. Is it a good idea to live off of TSP and postpone getting Social Security until 65, which I think will give me about $600 more a month?” -Marsha
As a Federal Employee under the Federal Employee Retirement System (FERS), your retirement is uniquely composed of three elements: Your pension (OPM calls this your annuity but that word means something different in finance, so we call it what it is here – your pension); social security benefits and your Thrift Savings Plan (TSP).
The question that we receive A LOT from Federal Employees is just like Marsha’s, when should I draw my social security?
This is not only a financial question but one with a lot of emotional weight to it as well. If we strip away the emotions and look at just the finances, more often than not in our experience we find that NOT starting social security at age 62 and waiting until Full Retirement Age (FRA) or age 70 is the most financially beneficial for our clients.
Now comes the second, and no less important part of Marsha’s question that she, like most of our clients ask hesitatingly: if I start my social security at age 62 won’t I receive more money over the course of my life if the government changes or takes away social security?
The “break-even” question – starting early vs waiting until FRA or age 70, is a good question. Most of the time people “break-even” in the early ’80s but this is not a “one size fits all” scenario. It is important to sit down and look at not only the math but your cash flow in retirement. How you’re going to handle cash flow, inflation and taxes is all a critical part of your retirement planning from the Federal Government.
On to that other weighted point, Marsha makes: what happens if the government runs out of money to fund Social Security benefits?
What is the likelihood Social Security will be unfunded? We think very, very little and we don’t build financial plans for Federal Employees thinking that the United States Government is going to allow for Social Security benefits to be taken away from the millions of people who paid into the system as they enter into retirement and depend on drawing those benefits.
What will change is the manner in which benefits are collected from working people, not retirees. Think about when the Government changed from the CSRS to the FERS system, the benefits that changed were for new employees entering the workforce not the ones exiting.
To dive into Marsha’s question – and probably yours too – we need to understand some Social Security timeline basics.
There are a few important dates to keep in mind when it comes to drawing your social security benefits.
Age 62 – You can start receiving your Social Security retirement benefits as early as age 62. However, if you do so you accept a PERMANENTLY reduced amount for drawing your benefits early. We know that when you start Social Security you receive an approximate 6% penalty for having started the benefits early.
Your FRA – Your Full Retirement Age. This age varies depending on the year that you were born.
|Year of Birth||Full (normal) Retirement Age|
|1955||66 and 2 months|
|1956||66 and 4 months|
|1957||66 and 6 months|
|1958||66 and 8 months|
|1959||66 and 10 months|
|1960 and later||67|
Age 70 – the latest time that you can delay taking social security benefits. When you delay to age 70, you also receive an increase in your social security benefits for each year that you wait beyond your FRA to age 70.
For each year that you delay drawing social security beyond your FRA, you receive an approximate 8% increase in your benefits.
Think about the penalty and delay increase as if they were rates of return. If you change how you think about those interest rates it could impact the manner in which you make your decision.
Drawing from the TSP may be a good option, depending on your risk exposure and tax planning, as you delay and put off benefits from the social security benefits office. Before making a distribution from your TSP, please make sure that you ensure the amount and method is applied to your overall financial plan. Too often we see Feds need a little bit of monthly income from their TSP and make a LARGE distribution forgetting that it was most likely taxable income to them in the year they took the draw.
If you worked for the federal government earlier than 1983, there is a good chance that you did not pay Social Security taxes on your earnings. Your Social Security earnings record will not show those earnings when you apply because contributions, during this time were not made.
Contributions weren’t made to the Social Security office because the Civil Service Retirement System (CSRS)—not Social Security—provided retirement benefits for federal workers at the time.
A newer program called the Federal Employees Retirement System (FERS) replaced CSRS. Workers who participate in FERS are eligible for Social Security.
CSRS ended in 1983 but the new system, FERS, wasn’t signed into legislation until June of 1986.
Don’t blame us… this is government math, we don’t explain “why” but we will answer “what and how” things work the way they do within the Federal system.
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Get the most out of your federal retirement benefits by taking advantage of the FERS resources created by Micah Shilanski, CFP®, and the team of independent financial advisors at Shilanski & Associates, Inc. Join the thousands of federal employees who trust us to guide them in their retirement planning journey because of our unique perspective of how your FERS benefits contribute to your comprehensive financial plan.
Year after year I see Federal Employees missing the same critical concepts in their federal retirement planning. That’s why I’ve created an online workshop to help educate Federal Employees on these critical concepts.
7 CLASSIC RETIREMENT MISTAKES Federal Employees Make