Question: When is a 2% per year reduction in your “early out” annuity better than no reduction at all?
Answer: When you are a CSRS retiree.
The casual observer might think that CSRS employees who retire on an early out and receive a 2% per year (1/6% of 1% per month) reduction for being under age 55 are worse off than are similarly situated FERS early retirees. Well, in most cases that casual observer would be wrong due to differences in how cost-of-living adjustments (COLAs) are calculated and paid for CSRS and FERS retirees.
A CSRS retiree, of any age, immediately begins earning a COLA (cost of living adjustment) the minute they retire. On the other hand, a FERS retiree (whether retiring on a early out or on regular retirement) must wait until age 62 before becoming eligible for a COLA. Over the last decade the Consumer Price Index (CPI), on which COLAs are based, grew less than 2% in only two years.
If you retired on an early out at age 50, would you rather have a 10% reduction in your annuity, or not receive a COLA for 12 years? Even if the CPI went up only 1% per year, the CSRS retiree would have the better deal.
COLAs are based on the change in the Consumer Price Index for Urban Wage Earners between October 1st and the following September 30th. The COLA is paid in the December annuity payment, which is received in January. The most recent rise in the CPI was 3.3%, and all CSRS retirees who had been retired for the period covered by the COLA received that amount.
FERS retirees who had been retired for the period covered by the COLA received 2.3%, due to the fact that a FERS retiree gets the full CPI increase only when the CPI grows less than 2%. They receive 2% if the CPI increases by an amount that is between 2% and 3%, and they receive 1% less than the CPI increase if the CPI increases by more than 3%.
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