A FERS employee with 20 or more years service can retire any time after his 60th birthday. Let’s say he retires at 61, with 21 years service. Twenty one years would provide 1.0% of his high-three for each year, or using a high-three of $80,000, an annuity of $16,800 annually, $1,400 monthly.
He also qualifies for the annuity supplement, based on a hypothetical, age-reduced Social Security benefit. With a high-three of $80,000 and FERS years of 21, his career FERS earnings (deemed and earned), indexed for inflation, would be on the order of $2.7 million. This would generate a supplement of approximately $935 per month, for the months till he becomes 62.
So, to ensure an annuity supplement of about $935, he would need to retire before his 62nd birthday. For a full year at this $935 rate, ending at age 62, he would get $11,220, in addition to his annuity. Sounds good. However…
If the employee waits to retire until age 62, he will not receive the supplement, but his annuity will be calculated 10% higher; that is, he will get 1.1% of high-three for each full year of service, instead of 1.0%.
How much will the gain of the higher annuity at 62 offset the loss of the annuity supplement at 61?
Twenty two years at 1.1 percent provides 24.2% rather than the 21.0% for age 61 retirement with 21 years. Applying this to the $80,000 high-three yields an annuity of $19,360 yearly, or $1,613 monthly, in lieu of the $1,400 annuity he would get for age 61 retirement. (Annual difference = 213 * 12, or $2,556.)
If he lives 19 more years, retiring at 62 will generate (19 * 19,360), or $367,840, while 19 years at the lower annuity will be (19 * 16,800), or $319,200. This is a gross difference of (367,840 – 319,200), or $48,640. Subtract the $11,220 sacrificed supplement and the net gain from waiting to retire at 62 is still on the order of $37,420
Long term, for a 61-year-old, the net gain from waiting to retire at age 62 will more than offset the short term, one year “loss” of the annuity supplement. Older FERS employees might want to take a close look at this before making a decision.