What’s the Difference Between Postponed vs. Deferred Retirement?
by Micah Shilanski, CFP |
Are you thinking about leaving federal service before you are eligible for an immediate FERS retirement?
Then you need to know the difference between a postponed and a deferred retirement. They sound similar, but there are big differences.
Immediate FERS Retirement Basics
Before we get into the difference between postponed and deferred retirement, let’s look at the basic requirements for immediate FERS retirement. We’ll be referring back to these rules quite a bit, so let’s take a quick look…
In order to qualify for an immediate retirement – you must have a certain number of years of creditable service, and have reached a specific age.
There are three combinations of service and age, and they are…
- 30 years in service & MRA (Minimum Retirement Age – varies between 55 and 57)
- 20 years in service & age 60
- 5 years in service & age 62
If you can meet any one of these three combinations, you are eligible for a regular immediate FERS retirement. You get your full pension, based on your service, and it starts soon after you retire.
But what if you’re ready to leave federal service, before you meet these qualifications?
What is Deferred Retirement?
If you have 5 or more years of creditable service when you leave the government, you can leave your contributions in the retirement system.
Then, when you reach a certain age, you can start drawing a pension. Let’s say you had 6 years of creditable service. You leave federal service, and you leave your FERS retirement contributions in the system. In this case, once you reach age 62, you could file paperwork and begin receiving your pension.
You’ll have to wait until 62, because that’s the first time you meet the immediate retirement rules. You would be age 62, with 5 or more years in service.
Some Drawbacks of Deferred Retirement
While you’ll be able to draw a pension, keep in mind that it’s based on your High-3 Salary and your years in service. So if you don’t have many years in service, your pension will reflect that.
Going back to our example, let’s say you had 6 years of creditable service. For easy numbers, let’s say your High-3 salary was $100,000. When you draw your deferred pension, you’d be receiving about $6,000 a year, or $500 a month. But the biggest drawback, in my opinion, is when you take a deferred retirement, you can *not* keep FEHB in retirement.
Even with these drawbacks, it’s almost always better to leave your retirement contributions in the system and draw a pension later than to take a refund of your contributions.
So how is postponed retirement different?
Important Difference: Postponed Retirement
If you meet certain qualifications, you may be eligible for a postponed retirement instead. And a postponed retirement has a huge advantage over a deferred retirement. With a postponed retirement, you *can* keep your FEHB in retirement.
So how do you qualify for a postponed retirement?
When you separate from service, you must be *eligible* for MRA+10 retirement; but instead of actually retiring MRA+10 and starting your pension, you wait to file your paperwork later. (Also see Future Retirees: Do You Know Your MRA?)
What is MRA+10 Retirement?
FERS employees have a special option to retire before you meet the regular immediate retirement rules. Once you have reached your Minimum Retirement Age (between 55 to 57) and have at least 10 years of creditable service, you can start drawing a pension.
What’s the catch? A big reduction in your pension.
When you retire with MRA+10 rules, your pension will be reduced by 5% for each year you are younger than age 62.
Let’s say your MRA is 56, and you left service at age 56 with 10 years in service… if you actually retired under MRA+10 rules, your pension would be PERMANENTLY reduced by 30% (5% x 6 years). If you were expecting a pension of $1,000 a month, after your MRA+10 reduction, you would be receiving $700 a month. There’s more to know about MRA+10 retirement. Check out our page on Early FERS Retirement for more information.
What if You Don’t Want the Reduction?
Let’s say you qualify for MRA+10 retirement, but you don’t want to take the permanent reduction to your pension.
You can choose to separate from service and leave your FERS contributions in the system. When you reach the age where you qualify for immediate retirement, you can file paperwork and begin receiving an unreduced pension at that point.
And what about FEHB? If you had been enrolled in FEHB for the 5 years prior to your separation, you can elect to start FEHB coverage again and keep it in retirement. That’s a tremendous benefit. It is important to remember that you will likely have a gap in coverage with your health insurance.
When you separate from service, you can choose to continue FEHB for a limited time on COBRA, but COBRA won’t last forever. So you may need to look into other options for health insurance to cover you until you pick up your postponed retirement and turn FEHB back on.
Quick Summary: Postponed vs. Deferred
Here’s a quick summary of the major differences between a postponed and deferred federal retirement…
Ever Wish There Was a Checklist for Planning Your FERS Retirement?
The difference between a Postponed and Deferred FERS retirement is just another example where understanding the nuances of federal retirement rules can make a big difference in your retirement. The key part: You have to understand the differences before you retire.
If you’ve ever wished for a ‘checklist’ for FERS retirement, you’ll want to learn more about our step-by-step program called, FERS Route to Retirement. I have turned the same process I use with my new clients into a do-it-yourself program to help FERS federal employees learn about their retirement benefits and create their own financial plan. Find out more at FERS Route to Retirement.
© 2013 Plan-Your-Federal-Retirement.com. Plan Your Federal Retirement is a dba of Shilanski & Associates, Inc., an Alaska Registered Investment Advisor, with securities offered through Summit Brokerage Services, Inc., Member FINRA/SIPC.
by Micah Shilanski, CFP |