Key differences for federal employees retiring before immediate eligibility
FERS (Federal Employee Retirement System) federal employees who do not reach their magical MRA (Minimum Retirement Age) with at least 30 years of service (age 60 with 20 years or 62 with at least 5 years) and who are considering an early retirement may have to choose between pension deferral, pension postponement and MRA+10.
While there are several factors that can contribute to an early retirement, such as change in management and changes in one’s health or opportunities in the private sector, it is imperative to know what choosing one of these options will look like in retirement.
A deferred pension is an option for a federal employee who is not eligible for immediate retirement but has at least 5 years of creditable civilian service and who is under the age of 62.
An employee is allowed to defer their pension until age 62 (or age 60 if they have 20 years of service) and have not withdrawn their FERS contributions at time of separation.
One of the main drawbacks to doing a deferred pension is losing your FEHB (Federal Employee Health Benefits) health insurance. Finding comparable outside health insurance coverage may prove costly, as the government pays roughly 70% of the premiums for the employee while they are working and also in retirement.
The other drawback is the inability to qualify for the FERS supplement. If a FERS federal employee has 30 years of service and has reached their MRA (or if age 60 with at least 20 years of service), they qualify for the special supplement. The FERS supplement gives you a percentage of what your Social Security would be at age 62 based on how many years of service you have. For a lot of employees, this is a nice bridge from their date of separation to social security eligibility age at 62.
For employees who have reached their MRA and have at least ten years of creditable service, they are able to postpone taking their pension until age 62 with less than 20 years of creditable service (or age 60 with at least 20 years of creditable service) to avoid a reduction to their pension. Like pension deferral, they have to keep their retirement contributions in the FERS system.
The main advantage to pension postponement over deferral is that you get to keep your FEHB if you were a participant for at least 5 years immediately preceding retirement. During the postponement period (the time between separation and the start of your pension), your benefits are suspended. Once you start taking your pension at age 60 with 20 years of creditable service, or at age 62, your health benefits start back up. An employee who postpones their pension also does not qualify for the FERS supplement.
MRA + 10
Retiring under MRA + 10 allows a FERS employee to retire at their minimum retirement age with at least 10 years of creditable service with a reduction to their pension.
Under MRA + 10, for every year you are under the age of 62, at separation there is a 5% penalty to your pension that will last the rest of your life.
For example: Eric is retiring at age 57 with 12 years of creditable service. His pension would be reduced by 25% (5 years under the age of 62 x 5% penalty for each year). MRA + 10 also does not receive the FERS supplement, but federal employees do keep their FEHB as long as they have been participating in their plan for at least 5 years immediately preceding retirement.
What to do?
Retiring early can be a scary proposition, and hopefully this information provides more clarity on your options and if they will work for you.
If you are in a position to choose whether to retire early or keep fighting the good fight, it helps to look at what your pension would be retiring now vs. what it would look like unreduced and see if you can live with the difference.
Look at your health benefits and weigh outside policies with what you have. You might have the option of being added onto a spouse’s plan or perhaps there is a job you would like to do in the private sector which could also provide some benefits.
Although the thought of an early retirement might seem ideal, there are consequences to consider. From losing health benefits and life insurance to a possible reduced pension, it may make more sense to stick it out and work those extra years to ensure a financially solid retirement.
Steven Puckett has been passionately helping federal employees secure their retirement for the past seven years. He does webinars, seminars and one on one appointments with federal employees all across the country and has thousands of social media followers he keeps up to date on their benefits.