What We Know So Far About Phased Retirement

Phased Retirement may finally be a reality for eligible federal employees desiring to phase into retirement, however, some agencies have said they will not allow employees to submit applications until 2015. The author offers considerations and practical examples for federal employees who may be considering utilizing the new phased retirement option.

Phased Retirement may finally be a reality for eligible federal employees desiring to phase into retirement, however, some agencies have said they will not allow employees to submit applications until 2015.   This is frustrating for many employees who have been waiting for the Office of Personnel Management (OPM) to issue final rules for more than two years, since Congress passed the law.

Finally, this August, OPM issued final rules on partial retirement and said eligible federal employees can submit applications starting on Nov. 6, 2014.  Since individual agencies have to devise their own plans for implementing phased retirement, easing into retirement may not be available to those seeking it just yet, but hopefully in the very near future.

Let’s focus on the eligibility rules for phased retirement along with the guidelines.  First of all participation is voluntary and requires the mutual consent of both the employee and employing agency.  CSRS employees will be eligible for phased retirement at age 55 with 30 years of service, or age 60 with 20 years of service.  FERS employees will be eligible with 30 years of service and their MRA, or age 60 with 20 years of service.

Employees must work full-time three years before retirement and must have accumulated enough years of service to qualify for retirement.  They need to spend 20 percent of their time mentoring younger employees. If approved by their agency, they will enter into a 50 percent working schedule and receive 50 percent of their annuity (not including credit for sick leave). They will also continue to receive full government contribution toward FEHB and FEGLI, which will be based on their full-time salary.

Annuity payments will be calculated at “partial retirement” without electing a survivor annuity (If the phased retiree dies prior to full retirement, survivor benefits will be those applicable for an employee who died in service).  At “full retirement” the individual will receive a “composite retirement annuity”, which will consist of the phased retirement annuity, plus one-half of the annuity at full retirement.

Let’s walk through an example:

Laura has 30 years of service under FERS and is age 56, which is her MRA.  Her salary is $80,000.  She qualifies for phased retirement and if offered by her agency, during phased retirement she would receive:

 FERS annuity $12,000 year (30 X 1% X $80,000/2), plus$40,000 year (half of her salary).

Now let’s say Laura works 5 years in Phased Retirement.  She will now receive a “composite retirement annuity”.  She will continue to receive $12,000 of the phased retirement annuity, plus one-half of the annuity that would have been payable at full retirement (if she did not elect phased retirement and was employed full-time).

$14,000 year (35 X 1% X $80,000/2)

Total annuity $26,000

What about TSP?  Pretty much it continues the same as when fully employed.  In phased retirement employees are still eligible to contribute to the TSP and are subject to the normal restrictions regarding TSP loans, financial hardship withdrawals, and age-based in-service withdrawals. Phased retirees are not eligible for post-employment withdrawals and are not be subject to required minimum distributions or the TSP withdrawal deadline.  All sources of contributions (employee contributions, Agency Automatic Contributions, and Agency Matching Contributions) to phased retirees’ TSP accounts will be calculated on basic pay received each pay period and will not take into account the annuity payment from OPM.

Should your agency offer an early out, phased retirees will not be eligible for voluntary separation incentive payments (VSIP) or voluntary early retirement (VERA).

OPM will be issuing separate guidance to assist agencies and employees with administrative and procedural matters that may have not yet been addressed.  This may cause a delay for some agencies, which means that the November 6th date may not be applicable to you.

If you are eligible for phased retirement and your agency consents, make sure you do a thorough evaluation to determine if it makes financial sense.  The best place to start is to determine your “ideal” monthly net income. Don’t focus on what your annuity will be or how much you are going to withdrawal from TSP.  Just give serious thought to your ideal monthly net income (What you need each month to pay your fixed expenses along with your wants).

Don’t feel guilty about your wants.  Retirement should be an exciting phase of your life. Give thought to what you would like to do and what this will cost you.  For example, will you finally have the time to travel?  Budget what this will cost each year and divide by twelve.  What are your wants?  Here are some ideas my eleven year old son and I came up with:  sailing, golf, reading, dancing, art, history, volunteering, exploration, antique shopping, dining out, cooking, focusing on family fun, concerts, hunting, knitting, wine tasting, fantasy leagues, auctioning, fishing,  helping grandchildren with college, gardening, car shows,  yoga, tennis, weight lifting, molding, sculpting, education, refurbish furniture, home renovations, or finally watching the TV series you have not had the time for. Okay, we may have gotten a little carried away, but you get the point.

Once the above exercise is done, then you will need to crunch the numbers.  Now you get to look at you annuity, Social Security, any other pensions you or your partner may have, plus your assets that you have accumulated for retirement.  I like to estimate a rate of return on the conservative side, possibly 3%, and then of course consider inflation.  The biggest unknown threat is taxes.  What will future taxes be and have you insulated your assets to protect you from this unknown threat? Hopefully you have also made plans doe the possibility of future long-term healthcare expenses.  If not, then I would strongly recommend doing so.

With so much to consider please realize that I am not trying to scare you into thinking that retirement may never be an option, which is certainly not my intent.  I am simply trying to stress the importance of evaluating, planning and doing some very serious number crunching before you make a life event decision.  You may soon have a fabulous opportunity to take advantage of a phased retirement.  While waiting for OPM as well as your agency to do some fine tuning, please take this time to do some fine tuning of your own.

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.