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Leaving Federal Service Early: Should You Take a Lump Sum of Your Retirement Contributions?

If you leave federal service before you are eligible to retire immediately, should you take a lump sum payment or wait for a pension?

Many federal employees do a full 30 year career but many decide on a different career path with much less time clocked. 

If you do leave the government before you are eligible to retire immediately, one of the biggest decisions that you need to make is whether or not to take a lump sum of your retirement contributions. 

Here are the things that you should definitely consider. 

Let’s Get The Basics

Before we get too deep, let’s start with the basics. 

With every paycheck, FERS employees pay a percentage of their salary into the FERS retirement system. This system is what will fund your FERS pension in retirement.

Once you hit one of the following, you would be eligible to start your pension right when you stop working. 

  • Age 62 with at least 5 Years of Service
  • Age 60 with at least 20 Years of Service
  • MRA (Minimum Retirement Age) with at least 30 Years of Service
  • MRA with at least 10 Years of Service (but your pension will be reduced)

Leaving Early

When people leave federal service before hitting any of these ages and associated years of service, they then have two options:

  1. Take a lump sum of the amount you have paid into the pension system.
  2. Keep your payments in the system and wait for a deferred retirement. You need at least 5 years of service for this option. 

If you choose to keep your payments in the system and wait for the deferred retirement, your pension will start at the following ages.

  • Age 62 with at least 5 Years of Service
  • Age 60 with at least 20 Years of Service
  • MRA (Minimum Retirement Age) with at least 30 Years of Service

For example, let’s say you work as a federal employee from age 35 to 45 and then leave for a different job. If you keep your payments in the system, you’d be able to start a deferred pension at 62 because you have at least 5 years of service. 

Or you could decide to take the lump sum of all your contributions plus interest.

Should You Take The Lump Sum?

For some, waiting for the deferred retirement is a no-brainer, but for others, it can be a much harder decision. 

The first thing to know is how much you are actually putting into the system. 

  • Employees hired before 2013 contribute .8% of their salary
  • Employees hired in  2013 contribute 3.1% of their salary
  • Employees hired after 2013 contribute 4.4% of their salary

As you can see, there is a substantial difference for newer employees.

This is what it would look like if 3 employees all had a salary of $80,000 and all worked for 5 years but were hired in the following years:

Hired in 2012

Contributed: $80,000 x .8% x 5 years =  $3,200

Hired in 2013

Contributed: $80,000 x 3.1% x 5 years =  $12,400

Hired in 2014

Contributed: $80,000 x 4.4% x 5 years =  $17,600

Even though these employees all worked 5 years at the same salary, the decision to wait for a deferred retirement or take the lump sum will be very different for each of them.

Since they all worked 5 years, they’ll have to wait until age 62 to start their deferred retirement if they choose to keep their contributions in the system. 

Their gross annual pension would look like this: 

$80,000 x 5 x 1%  = $4,000

So in a nutshell, these employees will have to decide if they want a one time lump sum or $4,000 every year starting at age 62.

Other Considerations

Another thing to think about is how long you are going to have to wait before you can start your deferred retirement. 

Leaving your payments in the system might be a no brainer if you just have to wait a few years before you will start getting payments. However, if you have to wait 25 years, that may be a different question. 

For example, if the employee from above who contributed $17,600 was only 25 years old when he got a different job, he’d have to wait 37 years before his pension turned on at 62. He may be better off investing the lump sum over those years on his own.

Conclusion

If I had to guess, I’d say that in most circumstances it makes sense just to wait for the deferred retirement. Guaranteed retirement income for the rest of your life can be hard to beat. That being said, it is definitely worth running the numbers on your situation to see what makes sense. 

About the Author

Dallen Haws is a Financial Advisor who is dedicated to helping federal employees live their best life and plan an incredible retirement. He hosts a podcast and YouTube channel all about federal benefits and retirement. You can learn more about him at PlanYourFederalBenefits.com.