I Got Offered an Early Out! Now What?

You finally got your wish and are being offered a financial incentive to retire early! Before you take it and run, you should logically think it through to determine if it makes sense looking at the Big Picture.

You finally got your wish and are being offered a financial incentive to retire early!  Before you take it and run, you should logically think it through to determine if it makes sense looking at the Big Picture.

Some things to consider as you are making this decision…

First from a non-financial perspective:

You are 52 years old and are suddenly retired.  Wow, everyone’s dream.  What about your friends and colleagues?  They may not be as fortunate as you and are still grinding the 9-5 all week. So what are you going to do with yourself?  You are probably thinking all the things that you have not had time to do in the past 30 years.  Well after a month or so, you may find yourself lonely when you get tired of being home alone cleaning out your closets with no social interaction. Your kids no longer need you to make play dates or drive them to their activities.  I’m not suggesting this is what is going to happen to you, but just consider the consequences if you find yourself in that situation.

Well maybe you will finally have the time to be the cook that you always wanted to be.  Or perhaps get your lawn and house in shape to be able to compete with the irritating neighbors. You may find that you truly enjoy having the time to do the things that you finally have the time to do.  Just do some soul searching first to determine that yes; this is what you want to do with your free time which can be great as long as you are prepared financially.  Now let’s examine that more closely…

Now from a financial perspective:

If you are under FERS, your annuity will not receive any COLA until age 62.  If you are under CSRS, there will be a reduction to your annuity of 1/6 of 1% for each month you retire prior to age 55 (2% per year).

Choosing the right Social Security election can significantly impact the amount of benefits you receive over your lifetime.  Many people stand to gain or lose more than $100,000 in benefits by making the right or wrong claiming elections.  Maximizing Social Security election strategies in light of your other assets, income streams and goals to identify potential opportunities may not be as rewarding if the earliest Social Security election is made.

If you were thinking about taking withdrawals from your TSP account to supplement your income needs, keep in mind that a 10% early withdrawal penalty will apply unless you separate service at age 55 or older.  Otherwise the 10% early withdrawal penalty will apply until you reach age 59 1/2.

Once you retire, you are no longer eligible to make contributions to the Thrift Savings Plan.

Do you feel confident that you will have sufficient income for life?  Have you really thought this through, or more importantly had a professional financial plan done to make sure that you were in a position to generate your ideal income over your lifetime.

After two decades of assisting people with their retirement planning, I am still surprised at the response to the question:  “How much monthly net income in today’s dollars do you desire in retirement?”  I usually hear:  “Well that is something that I never really gave any thought to.”  Even if someone has completed their retirement paperwork, it still baffles my mind that you make the decision to retire if you don’t know if you have enough retirement income or assets to support you income need in this next phase of your life called retirement!  Just because you qualify for an unreduced annuity or early retirement, doesn’t meant that it is right.  It may turn out that it is really good, or it may not, so it is critical to do this exercise.

Many times I hear, especially with people getting an early out or others eligible to retire at an early age, that they will work in the private sector, to make ends meet.  While that sounds like a wonderful idea, and you may be very qualified to do so,  that does not necessarily mean that you will find that perfect part-time job that is going to pay enough to supplement your income.  It may be wise to look into alternative employment opportunities before you retire.

The last thing to consider is that while you may feel this is a great opportunity to move on in your personal life, or career, your position is something that many people are not as fortunate to have a career with the federal government.  Even with sequester, furloughs, and RIFS, do not take all the benefits you have working for the federal government lightly.

If you have individual questions please contact Natalie@franklinplanning.com to schedule a phone call with Carol Schmidlin.

About the Author

Carol Schmidlin, Certified Financial Fiduciary®, MRFC® is the President of Franklin Planning and has been advising clients on how to grow and preserve their wealth for 25 years. In addition to her financial planning practice, she is the founder of FedSavvy® Educational Solutions, which provides Financial and Retirement Literacy Programs for Federal Employees. She is passionate about helping families with all phases of Wealth Management and is a member of Ed Slott’s Master Elite IRA Advisor Group. Her practice maintains a home office in Sewell, NJ along with a satellite office in Washington, DC. Carol can be reached at (856) 401-1101.