Is the FERS pension actuarially neutral?

[Stang70]

Requesting BH assistance in evaluating FERS (federal employee retirement) pension choices to extract maximum utility.

I’ve heard, but not verified, that the FERS pension is designed similar to social security to be actuarially neutral……..you get the same expected lifetime payout regardless of when you start taking it.

Specifically, I’m trying to understand if there is a diminishing relative value for working past my minimum retirement age (MRA) of 57 until “full” retirement age of 62?

My employment info:
a. Current age: 55
b. Current years of service: 30
c. Salary: $165,000 (“topped out”….no more “pay raises”…..only COLA from here out)
d. I will be eligible to retire at MRA of 57.

Some quick information on the FERS retirement:
-At MRA (with 30 or more years of service): 1 percent of your high-3 average salary for each year of service
-Age 62 or Older (With 20 or More Years of Service): 1.1 percent of your high-3 average salary for each year of service

The FERS pension calculation is: “High-3 salary” x “Years of Service” x “(1 or 1.1) multiplier” = pension

So, for my possible retirement at MRA of 57:
-High-3: $165,000
-Years of Service: 32
-Age at Retirement: 57 (MRA uses 1x multiplier)
$165,000 x 32 x 1 = $52,800 gross annual salary

-Retirement at MRA of 57 also provides a “retirement supplement” to replicate social security payments until 62……in my situation, this retirement supplement will be approximately $17,000 per year (until it ends at 62).

So, from age 57 to 62, my payments would be $52800 + $17,000 = $69,800 (There is no COLA until 62.)

Now, for sake of comparison, consider if I was instead retiring at 62 (with the same 32 years of service):
-High-3: $165,000
-Years of Service: 32
-Age at Retirement: 62 (uses a 1.1x multiplier)
$165,000 x 32 x 1.1 = $58,080 gross annual salary

Now, comparing these “lifetime” payouts until the age of 87, yields:
-Age 57 retirement (30 year span): ($69,800 x 5 years) + ($52,800 x 25 years) = $1,669,000
-Age 62 retirement (25 year span): ($58,080 x 25 years) = $1,452,000
In this case, the payout appears to favor starting at 57.

For another comparison, this time adding a 3% inflation factor to the age 57 retirement:
-Adding 3% inflation for 5 years (age 57 to 62) to the base $52,800 pension:
$61,209 x 1.1 (at age 62) x 25 years = $1,683,247
In this case, the pension payout is nearly identical!

To make this actionable, if I am otherwise prepared for retirement at 57, is there any clear financial incentive from the FERS pension to work past 57 until 62? (Other than the obvious things such as adding to TSP (401k), Roth, savings, increasing pension amount through additional years of service, etc.)

I’ll likely do a separate “Can I retire” post to BH with lots of detail sometime in the future, but for now, looking to better understand the FERS pension so that I can maximize its utilization.

Thank you all for your assistance and sharing your knowledge!

[chinchin]

So, for my possible retirement at MRA of 57:
-Years of Service: 32

Now, for sake of comparison, consider if I was instead retiring at 62 (with the same 32 years of service):

Why are you calculating the years of service as the same when you actually worked 5 more years from 57-62?

I also don't get why you added inflation to your payouts from MRA, but you didn't add schedule increases to your high-3 from working until 62?

[TimeRunner]

What's your plan for health insurance if you retire before 62? That may swing your decision.

EDIT: Health Ins not an issue since OP has 30 years service and would be eligible for an immediate, unreduced pension upon retirement.

[stan1]

The big issue is FERS pensions don't get a COLA until age 62.

You get FERS Supplement from MRA until 62, but no pension COLA. Federal COLAs weren't that big for most of the last decade; in 2023 and propsed for 2024 they are larger.

OTOH, you quickly lose FERS Supplement if you have a job that pays decently between 57 and 62.

You have to make some assumptions to navigate that, or just take it as a wash.

Health insurance probably is not a consideration. FERS employees who retire at MRA get FEHB retiree benefits.

Personally I think it is somewhat of a wash and impossible to predict without making assumptions about inflation or rates of return that could be wrong, unless you are planning to get a job from 57 to 62 (or 65) that pays $150K plus per year. Some people do that. If you are planning to get a good paying job after retirement for 5 or even 10 years after MRA of course that's a plus.

[Stang70]

Why are you calculating the years of service as the same when you actually worked 5 more years from 57-62?

Trying to make the comparison to a retirement age of 62 where the multiplier increases to 1.1x. The idea here is to compare benefit level at different ages without actually working the five additional years.

I also don't get why you added inflation to your payouts from MRA, but you didn't add schedule increases to your high-3 from working until 62?

Here the idea is to compare how the pension might have otherwise increased from 57 to 62 since there is no COLA for the 57 year old retiree.

[Stang70]

What's your plan for health insurance if you retire before 62? That may swing your decision.

I'll be eligible for FEHB, which will provide coverage.

[petulant]

Are you trying to figure out whether to delay FERS or take it when retiring at age 57, or are you figuring out how much pension value you gain working from 57 to 62 so that you can see how much the extra comp is?

[Stang70]

OTOH, you quickly lose FERS Supplement if you have a job that pays decently between 57 and 62.

You are correct that the FERS supplement is means-tested (earned income) so the examples here are with no plans to work for income again.

Personally I think it is somewhat of a wash and impossible to predict without making assumptions about inflation or rates of return that could be wrong, unless you are planning to get a job from 57 to 62 (or 65) that pays $150K plus per year. Some people do that. If you are planning to get a good paying job after retirement for 5 or even 10 years after MRA of course that's a plus.

Not looking for total income replacement, instead investigating here the concept of whether the FERS pension system is setup to be actuarially neutral.

[petulant]

OTOH, you quickly lose FERS Supplement if you have a job that pays decently between 57 and 62.

You are correct that the FERS supplement is means-tested (earned income) so the examples here are with no plans to work for income again.

Personally I think it is somewhat of a wash and impossible to predict without making assumptions about inflation or rates of return that could be wrong, unless you are planning to get a job from 57 to 62 (or 65) that pays $150K plus per year. Some people do that. If you are planning to get a good paying job after retirement for 5 or even 10 years after MRA of course that's a plus.

Not looking for total income replacement, instead investigating here the concept of whether the FERS pension system is setup to be actuarially neutral.

Can you specify what you mean by actuarially neutral in this context?

[Stang70]

Are you trying to figure out whether to delay FERS or take it when retiring at age 57, or are you figuring out how much pension value you gain working from 57 to 62 so that you can see how much the extra comp is?

The FERS would be immediate with no delay at 57. The examples are for someone who would not work from 57-62, but rather retiring at 57.

Parts of the examples are likely misleading.....Trying to determine a yardstick of sorts to measure if the pension package at 57 (pension +supplement) for someone eligible (30 or more years) is roughly similar to a value had they retired at a later date (but without adding in the value added by working the additional years).

[Stang70]

Can you specify what you mean by actuarially neutral in this context?

Having the same expected lifetime payout regardless of when you start taking it. Kinda like how social security is supposedly designed to pay roughly similar total payout for someone who lives to the average life expectancy.

[petulant]

Are you trying to figure out whether to delay FERS or take it when retiring at age 57, or are you figuring out how much pension value you gain working from 57 to 62 so that you can see how much the extra comp is?

The FERS would be immediate with no delay at 57. The examples are for someone who would not work from 57-62, but rather retiring at 57.

Parts of the examples are likely misleading.....Trying to determine a yardstick of sorts to measure if the pension package at 57 (pension +supplement) for someone eligible (30 or more years) is roughly similar to a value had they retired at a later date (but without adding in the value added by working the additional years).

The analytical result you're trying to reach is the same thing as asking whether immediate FERS at 57 is better than separating at 57 and deferring to 62. The math is interrelated. It's vested pension at 57 + extra benefits accruing for working - loss of early rights (foregone payments and supplement) = working pension at 62. Further, vested pension at 57 - loss of early rights = deferred pension at 62. Hence, deferred pension at 62 + extra benefits accruing for working = working pension at 62.

Note that the 1.1 multiplier and COLA bumps should be included as benefits accruing for working from 57 to 62. Getting the mini-bump in COLA is an early annuity benefit.

There are multiple ways to do the math, but the result is that before hitting 30 years, taking early FERS plus the supplement is roughly actuarially neutral to delaying FERS to 62 after early separation. That's because early benefits have a 5% reduction per year (similar to SS reduction before 67). However, once you hit 30 years, there is no age reduction. At that point, taking FERS at 57 is strictly better than separating and deferring. It is not better per se than continuing to work. While it will vary based on the analysis, the benefits that accrue from working, including COLAs, the 1.1 multiplier, and years of service, would make the working 62 FERS roughly neutral with retiring at 57. (In normal circumstances, the age reduction before 62 makes it so that the value accrual is positive so that continuing to work results in extra comp in the form of higher FERS payouts).

So the answer is, no, it's not actuarially neutral if you're at 57 and have 30 years. It is leaving money on the table to keep working. However, that money left on the table is roughly similar to the additional benefits that would accrue working from 57 to 62. Hence, if separating at 57, no deferral should happen (unless there is another job with complicated reductions). If the choice is to keep working or retire at 57, the question is just whether the salary + TSP match is sufficient motivation.

[Stang70]

Can you specify what you mean by actuarially neutral in this context?

Part of the question might be, does the pension+supplement for each year from 57-62 have a similar lifetime value for someone who instead choses to forgo it by working an additional year (and will instead receive their slightly larger pension but later and fewer)?

[petulant]

Can you specify what you mean by actuarially neutral in this context?

Part of the question might be, does the pension+supplement for each year from 57-62 have a similar lifetime value for someone who instead choses to forgo it by working an additional year (and will instead receive their slightly larger pension but later and fewer)?

As above, the early FERS option after reaching 30 years of service is superior, but one who keeps working to 62 accrues additional benefits that offset the lost value. If measured year by year, early FERS would look better until the 1.1 multiplier applies at age 62.

[delamer]

Are you married and planning on providing a survivor benefit to your spouse?

[Stang70]

Are you married and planning on providing a survivor benefit to your spouse?

Yes, married and planning the 50% survivor benefit (10% pension payment cost).

[Weathering]

I'm interested in this thread because I'm in a similar situation, only a few years younger. Thank you for posting the question.
I've racked my brain over when to retire because I love my job, but I can't see myself continuing to work until age 62. Therefore, I'll retire once I turn 57 (possibly at the end of that calendar year).

OP,
I think the annuity's actuarial neutrality fails if retiring between 57 and 62 (e.g., 58, 59, 60, 61). This is because there are fewer years of retirement than someone who retires at 57, yet the annuity percentage is still 1.0% - not gradually increased from 1.0 to 1.1%.

I think if you take the supplement out of the equation, then age 57 retirement and 62 will be equal in total dollar amounts. The supplement seems to have been created separately from the annuity - possibly to encourage people to retire before age 62.

[Stang70]

Petulant, your following post is a soundbite lots of fed employees can easily digest and hopefully understand:

As above, the early FERS option after reaching 30 years of service is superior, but one who keeps working to 62 accrues additional benefits that offset the lost value. If measured year by year, early FERS would look better until the 1.1 multiplier applies at age 62.

[delamer]

Are you married and planning on providing a survivor benefit to your spouse?

Yes, married and planning the 50% survivor benefit (10% pension payment cost).

Then that should be factored into your decision.

Also, while maximizing your FERS utilization makes sense superficially, you really need to make your choice in the context of your overall financial situation.

I retired in the “no man’s land” period between ages 57 and 62 because the extra few thousand a year just didn’t matter in terms of our total finances. And my office was moving to a much less desirable location.

[tj]

Why are you calculating the years of service as the same when you actually worked 5 more years from 57-62?

Trying to make the comparison to a retirement age of 62 where the multiplier increases to 1.1x. The idea here is to compare benefit level at different ages without actually working the five additional years.

Why? It's not possible for you to obtain the age 62 benefit without working the five additional years.

[Stang70]

I think the annuity's actuarial neutrality fails if retiring between 57 and 62 (e.g., 58, 59, 60, 61). This is because there are fewer years of retirement than someone who retires at 57, yet the annuity percentage is still 1.0% - not gradually increased from 1.0 to 1.1%.

I think if you take the supplement out of the equation, then age 57 retirement and 62 will be equal in total dollar amounts. The supplement seems to have been created separately from the annuity - possibly to encourage people to retire before age 62.

Weathering, thank you for the response. I feel the same as you....enjoy my job....but not necessarily until 62.

Your post regarding the failure of neutrality failing between 57-62 makes sense....Thanks for the rationale.

I agree that the supplement does appear to encourage retirement prior to 62 for those eligible, for the reasons you stated.

Appreciate your input. It will be helpful to me and others in similar situations.

[Jovby]

I’ve heard, but not verified, that the FERS pension is designed similar to social security to be actuarially neutral……..you get the same expected lifetime payout regardless of when you start taking it.

It can be, based on when you claim but is not actuarially neutral throughout all claiming years. Actuarial neutrality requires that the present value of accrued pension benefits for working an additional year is the same as in the year before (benefits increase only by the additional entitlement earned in that year).

FERS gains 10% for working to age 62, and loses the social security supplement at age 62, so it is not actuarially neutral exactly. Those two can balance each other, and the timing of the claim changes the present value of the pension and dictates which comes out ahead. Comparing age 57 to 62, the age 57 comes out ahead. Comparing age 61 to 62, the age 62 comes out ahead.

As to actionable recommendations, you will (almost) always have more money, and will always have less years of retirement by working longer. Only you can say if giving up retirement years for more money is worth it. You might consider what those “lost” years will cost you (perhaps you love your job and don't have any plans for the extra time so they won’t cost you much), also consider what you will do with the extra money (charity, estate?).

[Stang70]

Are you married and planning on providing a survivor benefit to your spouse?

Yes, married and planning the 50% survivor benefit (10% pension payment cost).

Then that should be factored into your decision.

Also, while maximizing your FERS utilization makes sense superficially, you really need to make your choice in the context of your overall financial situation.

I retired in the “no man’s land” period between ages 57 and 62 because the extra few thousand a year just didn’t matter in terms of our total finances. And my office was moving to a much less desirable location.

You are right in that the pension is but only one, albeit an important one, in an overall financial plan. Important to do due diligence on many factors.

I may very well end up in the "no man's land" period too. Nothing (yet) is forcing me out. Been a BH lurker for years and now things are starting to get real.

[MDfan]

What's your plan for health insurance if you retire before 62? That may swing your decision.

EDIT: Health Ins not an issue since OP has 30 years service and would be eligible for an immediate, unreduced pension upon retirement.

I think you can keep your health insurance even if you just worked 5 years as long as you reach your MRA. I don't think 30 has anything to do with it. I'm retiring this year with 24 years and will maintain my full health insurance.

[tj]

What's your plan for health insurance if you retire before 62? That may swing your decision.

EDIT: Health Ins not an issue since OP has 30 years service and would be eligible for an immediate, unreduced pension upon retirement.

I think you can keep your health insurance even if you just worked 5 years as long as you reach your MRA. I don't think 30 has anything to di=o with it. I'm retiring this year with 24 years and will maintain my full health insurance.

You'll take a 25% reduction on your FERS pension if you go at 57 with 24 years.

[MDfan]

What's your plan for health insurance if you retire before 62? That may swing your decision.

EDIT: Health Ins not an issue since OP has 30 years service and would be eligible for an immediate, unreduced pension upon retirement.

I think you can keep your health insurance even if you just worked 5 years as long as you reach your MRA. I don't think 30 has anything to di=o with it. I'm retiring this year with 24 years and will maintain my full health insurance.

You'll take a 25% reduction on your FERS pension if you go at 57 with 24 years.

I was talking about health insurance eligibility. I may have misunderstood. I'll be 62 w/24 years so mine will not be reduced.

[Stang70]

It can be, based on when you claim but is not actuarially neutral throughout all claiming years. Actuarial neutrality requires that the present value of accrued pension benefits for working an additional year is the same as in the year before (benefits increase only by the additional entitlement earned in that year).

FERS gains 10% for working to age 62, and loses the social security supplement at age 62, so it is not actuarially neutral exactly. Those two can balance each other, and the timing of the claim changes the present value of the pension and dictates which comes out ahead. Comparing age 57 to 62, the age 57 comes out ahead. Comparing age 61 to 62, the age 62 comes out ahead.

As to actionable recommendations, you will (almost) always have more money, and will always have less years of retirement by working longer. Only you can say if giving up retirement years for more money is worth it. You might consider what those “lost” years will cost you (perhaps you love your job and don't have any plans for the extra time so they won’t cost you much), also consider what you will do with the extra money (charity, estate?).

Thanks, Jovby. your explanation helps describe why some of the different age retirement benefits seem equivalent while others may have a slight advantage.

As you pointed out, while this information is interesting and helpful, other important retirement decision triggers are also difficult to discern.

[tj]

What's your plan for health insurance if you retire before 62? That may swing your decision.

EDIT: Health Ins not an issue since OP has 30 years service and would be eligible for an immediate, unreduced pension upon retirement.

I think you can keep your health insurance even if you just worked 5 years as long as you reach your MRA. I don't think 30 has anything to di=o with it. I'm retiring this year with 24 years and will maintain my full health insurance.

You'll take a 25% reduction on your FERS pension if you go at 57 with 24 years.

I was talking about health insurance eligibility. I may have misunderstood. I'll be 62 w/24 years so mine will not be reduced.

30 at MRA means you don't get the 25% reduction. So it does have something to do with it

[Kal1981]

Are you trying to figure out whether to delay FERS or take it when retiring at age 57, or are you figuring out how much pension value you gain working from 57 to 62 so that you can see how much the extra comp is?

The FERS would be immediate with no delay at 57. The examples are for someone who would not work from 57-62, but rather retiring at 57.

Parts of the examples are likely misleading.....Trying to determine a yardstick of sorts to measure if the pension package at 57 (pension +supplement) for someone eligible (30 or more years) is roughly similar to a value had they retired at a later date (but without adding in the value added by working the additional years).

The analytical result you're trying to reach is the same thing as asking whether immediate FERS at 57 is better than separating at 57 and deferring to 62. The math is interrelated. It's vested pension at 57 + extra benefits accruing for working - loss of early rights (foregone payments and supplement) = working pension at 62. Further, vested pension at 57 - loss of early rights = deferred pension at 62. Hence, deferred pension at 62 + extra benefits accruing for working = working pension at 62.

Note that the 1.1 multiplier and COLA bumps should be included as benefits accruing for working from 57 to 62. Getting the mini-bump in COLA is an early annuity benefit.

There are multiple ways to do the math, but the result is that before hitting 30 years, taking early FERS plus the supplement is roughly actuarially neutral to delaying FERS to 62 after early separation. That's because early benefits have a 5% reduction per year (similar to SS reduction before 67). However, once you hit 30 years, there is no age reduction. At that point, taking FERS at 57 is strictly better than separating and deferring. It is not better per se than continuing to work. While it will vary based on the analysis, the benefits that accrue from working, including COLAs, the 1.1 multiplier, and years of service, would make the working 62 FERS roughly neutral with retiring at 57. (In normal circumstances, the age reduction before 62 makes it so that the value accrual is positive so that continuing to work results in extra comp in the form of higher FERS payouts).

So the answer is, no, it's not actuarially neutral if you're at 57 and have 30 years. It is leaving money on the table to keep working. However, that money left on the table is roughly similar to the additional benefits that would accrue working from 57 to 62. Hence, if separating at 57, no deferral should happen (unless there is another job with complicated reductions). If the choice is to keep working or retire at 57, the question is just whether the salary + TSP match is sufficient motivation.

I’ve kept it simple by using this calculator: https://www.calculator.net/social-secur ... lator.html

Instead of using it for SSA I inputted retiring at 57 and 62 and I didn’t even include the FERS supplement. Even so, it’s better to take the pension at 57 rather than 62 as long as I didn’t live past age 103.

[Stang70]

I’ve kept it simple by using this calculator: https://www.calculator.net/social-secur ... lator.html

Instead of using it for SSA I inputted retiring at 57 and 62 and I didn’t even include the FERS supplement. Even so, it’s better to take the pension at 57 rather than 62 as long as I didn’t live past age 103.

Thanks for the link. The pension calculator functions on the site will be another helpful aid in running different scenarios.

[Valuethinker]

It can be, based on when you claim but is not actuarially neutral throughout all claiming years. Actuarial neutrality requires that the present value of accrued pension benefits for working an additional year is the same as in the year before (benefits increase only by the additional entitlement earned in that year).

FERS gains 10% for working to age 62, and loses the social security supplement at age 62, so it is not actuarially neutral exactly. Those two can balance each other, and the timing of the claim changes the present value of the pension and dictates which comes out ahead. Comparing age 57 to 62, the age 57 comes out ahead. Comparing age 61 to 62, the age 62 comes out ahead.

As to actionable recommendations, you will (almost) always have more money, and will always have less years of retirement by working longer. Only you can say if giving up retirement years for more money is worth it. You might consider what those “lost” years will cost you (perhaps you love your job and don't have any plans for the extra time so they won’t cost you much), also consider what you will do with the extra money (charity, estate?).

Thanks, Jovby. your explanation helps describe why some of the different age retirement benefits seem equivalent while others may have a slight advantage.

As you pointed out, while this information is interesting and helpful, other important retirement decision triggers are also difficult to discern.

The "time to do" thing is all-important. You only have a certain number of healthy years left. Some people are lucky and have 30, some people are not and have negative or zero.

Many people come back as consultants, but is that likely/ possible in your case?

Actuarially neutral, as per above, means present value (using regulatorily approved discount rates which should be disclosed somewhere) is identical. You only "beat" that by having a different life expectancy &/or discount rate than the actuarial assumption. Say for example you have a huge portfolio, so time is much more valuable to you than the discount rate discounts. As ever, there are only probabilities on these things, not definite numbers.

Inflation protection is the big thing- -from what is said in this thread (I am not US based) about your scheme and the importance of age=62. The more CPI-indexed income you can start with, the better your inflation protection. As we have seen in the past 18 months, unexpected inflation is a very big risk. Unless your entire portfolio is 100% short term TIPS or ibonds, then you really don't have much protection.

[learner75]

Do not have an answer to your question. If your agency grants access to GRB, you can use it to get an estimate that will include supplement. You can manually computed high 3 average for the expected salary if you plan to work beyond MRA. I have heard that GRB is pretty accurate. Remember that SL balance also convert to additional time in service. As always, there are none financial factors that may influence your decision.

https://platform.grbinc.com/identity-pr ... T&license=

[LadyGeek]

Welcome! FYI - That link is asking for a login.

[MnD]

With delaying FERS and 30-something years of service you gain roughly 3% per year for each incremental year, the COLA to your high-3 is arbitrary and unknown (set by POTUS and congress) and you are wasting the FERS supplement, offset somewhat by the 1.1% kicker but only if you go till 62.

With delaying social security you are gaining 8% per year by delaying and you get a COLA based on US wage growth. And with no requirement to be working while you delay.

I went out at the top of the GS pay grid at 56 with 36 years including SL credits. Bottom line if you are financially prepared to retire and want to retire go for it. There are no outsized credits for delaying and you are wasting the healthiest and most active years of your retirement.

All the many feds I know that are delaying to 62 or later aren't financially prepared to retire earlier. The 1.1X deal makes them feel better but bottom line earlier just isn't an option because they didn't contribute enough to the TSP and/or mismanaged their investment choices in the plan and/or didn't pay down their debts.

[learner75]

If agency grants access, new user can create account and then login.

[Stang70]

The "time to do" thing is all-important. You only have a certain number of healthy years left. Some people are lucky and have 30, some people are not and have negative or zero.

Valuethinker, thank you for your valuable input. I totally agree and need to keep that thought also in the forefront.

Many people come back as consultants, but is that likely/ possible in your case?

Not likely in my case since the 57-62 supplement is means-tested (starts quickly phasing out at a low $20k level).

Actuarially neutral, as per above, means present value (using regulatorily approved discount rates which should be disclosed somewhere) is identical. You only "beat" that by having a different life expectancy &/or discount rate than the actuarial assumption. Say for example you have a huge portfolio, so time is much more valuable to you than the discount rate discounts. As ever, there are only probabilities on these things, not definite numbers.

Appreciate that statement...."only probabilities....not definite numbers".....seems I sometimes try to rely on hard numbers when too many other fuzzy variables are also present.

Inflation protection is the big thing- -from what is said in this thread (I am not US based) about your scheme and the importance of age=62. The more CPI-indexed income you can start with, the better your inflation protection. As we have seen in the past 18 months, unexpected inflation is a very big risk. Unless your entire portfolio is 100% short term TIPS or ibonds, then you really don't have much protection.

Yes, the inflation factor is one that has piqued my interest. The five-year gap without a COLA can reek havoc especially in early retirement (I understand the concern many face without COLA'd pension/annuity).

Also, as you mention, I need to consider how the pension fits with the whole portfolio. I plan to post a detailed "can I retire" to BH sometime in the future. I know the kind, helpful, knowledgeable folks on this forum will help to guide me.

[Stang70]

If agency grants access, new user can create account and then login.

Thanks for posting the link. Unfortunately, my agency is not a user of GRB.

[MnD]

Yes, the inflation factor is one that has piqued my interest. The five-year gap without a COLA can reek havoc especially in early retirement (I understand the concern many face without COLA'd pension/annuity).

Your Social Security PIA is still increasing (by a wage growth index) even if you aren't working and delaying claiming and your portfolio has growth potential. And the hit is limited to 6 years. Most non-COLA'd pensions or annuities are looking at decades of no adjustment.

The real return from portfolio will likely (sooner or later) take care of age 57-62 inflation erosion from FERS.

Since I retired 4-year compounded inflation has been 15% and my total retirement income from portfolio and FERS is up 17% with no COLA.
And I have only 17 more months of non-COLA exposure. I'm taking portfolio income as a % of portfolio balance so there was no assurance of this but that's the way it worked out.

[Weathering]

I went out at the top of the GS pay grid at 56 with 36 years including SL credits.

Quick question: by going out at age 56 did you lose access to FEHB?
I will only have about 6 months of SL at age 57 (with 35 years service) because of using several months in the past as maternity leave. But, if SL counts toward reaching MRA, then I could retire at the end of the calendar year before my 57th birthday. I doubt I’ll do this but it would be good to know.

[Stang70]

With delaying FERS and 30-something years of service you gain roughly 3% per year for each incremental year, the COLA to your high-3 is arbitrary and unknown (set by POTUS and congress) and you are wasting the FERS supplement, offset somewhat by the 1.1% kicker but only if you go till 62.

With delaying social security you are gaining 8% per year by delaying and you get a COLA based on US wage growth. And with no requirement to be working while you delay.

I went out at the top of the GS pay grid at 56 with 36 years including SL credits. Bottom line if you are financially prepared to retire and want to retire go for it. There are no outsized credits for delaying and you are wasting the healthiest and most active years of your retirement.

All the many feds I know that are delaying to 62 or later aren't financially prepared to retire earlier. The 1.1X deal makes them feel better but bottom line earlier just isn't an option because they didn't contribute enough to the TSP and/or mismanaged their investment choices in the plan and/or didn't pay down their debts.

MnD, thank you very much for this post. Explains very well in a nutshell many of my concerns and how they can be mitigated to some extent. Also is very helpful to hear from others who have been in similar situations, especially with regard to the FERS, and what was their thought process. As you mentioned, in talking with similar aged co-workers, I hear a myriad of reasons (mostly financial) why they can't retire at MRA......while I am beginning to feel more confident.....I think the BH approach is the key difference (contribute more to TSP, Roth, save, live below means, etc.).

[Stang70]

Yes, the inflation factor is one that has piqued my interest. The five-year gap without a COLA can reek havoc especially in early retirement (I understand the concern many face without COLA'd pension/annuity).

Your Social Security PIA is still increasing (by a wage growth index) even if you aren't working and delaying claiming and your portfolio has growth potential. And the hit is limited to 6 years. Most non-COLA'd pensions or annuities are looking at decades of no adjustment.

The real return from portfolio will likely (sooner or later) take care of age 57-62 inflation erosion from FERS.

Since I retired 4-year compounded inflation has been 15% and my total retirement income from portfolio and FERS is up 17% with no COLA.
And I have only 17 more months of non-COLA exposure. I'm taking portfolio income as a % of portfolio balance so there was no assurance of this but that's the way it worked out.

Thanks again, MnD, for this insightful post. I do intend to delay SS so it is good to understand that move will help offset some of the inflation effects on FERS. Thanks for relating how your portfolio income has also come into play. I wish you great continued success.

[delamer]

With delaying FERS and 30-something years of service you gain roughly 3% per year for each incremental year, the COLA to your high-3 is arbitrary and unknown (set by POTUS and congress) and you are wasting the FERS supplement, offset somewhat by the 1.1% kicker but only if you go till 62.

With delaying social security you are gaining 8% per year by delaying and you get a COLA based on US wage growth. And with no requirement to be working while you delay.

I went out at the top of the GS pay grid at 56 with 36 years including SL credits. Bottom line if you are financially prepared to retire and want to retire go for it. There are no outsized credits for delaying and you are wasting the healthiest and most active years of your retirement.

All the many feds I know that are delaying to 62 or later aren't financially prepared to retire earlier. The 1.1X deal makes them feel better but bottom line earlier just isn't an option because they didn't contribute enough to the TSP and/or mismanaged their investment choices in the plan and/or didn't pay down their debts.

MnD, thank you very much for this post. Explains very well in a nutshell many of my concerns and how they can be mitigated to some extent. Also is very helpful to hear from others who have been in similar situations, especially with regard to the FERS, and what was their thought process. As you mentioned, in talking with similar aged co-workers, I hear a myriad of reasons (mostly financial) why they can't retire at MRA......while I am beginning to feel more confident.....I think the BH approach is the key difference (contribute more to TSP, Roth, save, live below means, etc.).

I had a number of colleagues who took advantage of TSP — contributing enough to get the full match equals 10% of gross salary saved if a worker is under FERS. That 10% plus SS plus the pension can yield a pretty comfortable retirement for a career worker.

But a lot of those same colleagues were not engaged/informed about their TSP. They kept too much in the G Fund, sold stocks “low” during the Great Recession out of fear, etc.

So their retirement was delayed and/or less robust then it could have been.

[Nestegg_User]

I went out at the top of the GS pay grid at 56 with 36 years including SL credits.

Quick question: by going out at age 56 did you lose access to FEHB?
I will only have about 6 months of SL at age 57 (with 35 years service) because of using several months in the past as maternity leave. But, if SL counts toward reaching MRA, then I could retire at the end of the calendar year before my 57th birthday. I doubt I’ll do this but it would be good to know.

Unfortunately, SL does NOT count towards age of eligibility (ie, if you are six months short then you can't use the SL to get you there) ... but if you actually ARE sick and are still employed, ie you actually are eligible for use of SL, then you could qualify, but you may also be required to return to service for some period before you retire (it could be as short as a single day) {same goes for AL... few agencies allow for "terminal leave"}

[Nestegg_User]

With delaying FERS and 30-something years of service you gain roughly 3% per year for each incremental year, the COLA to your high-3 is arbitrary and unknown (set by POTUS and congress) and you are wasting the FERS supplement, offset somewhat by the 1.1% kicker but only if you go till 62.

With delaying social security you are gaining 8% per year by delaying and you get a COLA based on US wage growth. And with no requirement to be working while you delay.

I went out at the top of the GS pay grid at 56 with 36 years including SL credits. Bottom line if you are financially prepared to retire and want to retire go for it. There are no outsized credits for delaying and you are wasting the healthiest and most active years of your retirement.

All the many feds I know that are delaying to 62 or later aren't financially prepared to retire earlier. The 1.1X deal makes them feel better but bottom line earlier just isn't an option because they didn't contribute enough to the TSP and/or mismanaged their investment choices in the plan and/or didn't pay down their debts.

MnD, thank you very much for this post. Explains very well in a nutshell many of my concerns and how they can be mitigated to some extent. Also is very helpful to hear from others who have been in similar situations, especially with regard to the FERS, and what was their thought process. As you mentioned, in talking with similar aged co-workers, I hear a myriad of reasons (mostly financial) why they can't retire at MRA......while I am beginning to feel more confident.....I think the BH approach is the key difference (contribute more to TSP, Roth, save, live below means, etc.).

OP...
at least you get full COLA in your current employment

I was a "Step 00" (yes, there is such a thing) before retirement.... you only get half COLA until your pay comes back into the level (for me that would have been about a decade). Needless to say, it was a bit of an inducement to retire at 30 years (was well above MRA but below 62) and it certainly didn't make sense to w@rk until 62 {I was the slightly lower PIA, but older spouse}. I also didn't claim SS until FRA (actually just shy, but had waited due to making Roth conversions) while spouse will take at 70.

Your health insurance situation is probably the most important aspect as to the 57 or 62 start (where I just can't see any reason for delay to 62, since the 1.1 multiplier doesn't apply unless you w@rk until that age); unless you have better coverage than FEHB, and remember that even in retirement they cover a fair bit of the cost, it further indicates that you should do a regular full retirement rather than deferring. As to the supplement, you would have to calculate what salary you would need to have, in addition to the extra costs of w@rking such as commuting/parking, to determine if future employment between your MRA retirement and whenever you plan to actually start SS makes sense.

[Stang70]

But a lot of those same colleagues were not engaged/informed about their TSP. They kept too much in the G Fund, sold stocks “low” during the Great Recession out of fear, etc.

So their retirement was delayed and/or less robust then it could have been.

Thanks, delamer. I remember an older coworker nearing retirement who had been invested quite aggressively when the Great Recession arrived.....he sold low.....delayed way too long getting back in the market......and essentially doomed himself to working well past his intended departure date.

[Stang70]

OP...
at least you get full COLA in your current employment

I was a "Step 00" (yes, there is such a thing) before retirement.... you only get half COLA until your pay comes back into the level (for me that would have been about a decade). Needless to say, it was a bit of an inducement to retire at 30 years (was well above MRA but below 62) and it certainly didn't make sense to w@rk until 62 {I was the slightly lower PIA, but older spouse}. I also didn't claim SS until FRA (actually just shy, but had waited due to making Roth conversions) while spouse will take at 70.

Your health insurance situation is probably the most important aspect as to the 57 or 62 start (where I just can't see any reason for delay to 62, since the 1.1 multiplier doesn't apply unless you w@rk until that age); unless you have better coverage than FEHB, and remember that even in retirement they cover a fair bit of the cost, it further indicates that you should do a regular full retirement rather than deferring. As to the supplement, you would have to calculate what salary you would need to have, in addition to the extra costs of w@rking such as commuting/parking, to determine if future employment between your MRA retirement and whenever you plan to actually start SS makes sense.

Thank you for your input, Nestegg. I'm always learning something new.....hadn't heard of the Step 00 before. I can imagine how that might entice you to strongly consider stepping out prior to 62.

As you stated, the FEHB coverage is a critical piece in the plan too.

[FrugalFed]

With delaying FERS and 30-something years of service you gain roughly 3% per year for each incremental year, the COLA to your high-3 is arbitrary and unknown (set by POTUS and congress) and you are wasting the FERS supplement, offset somewhat by the 1.1% kicker but only if you go till 62.

With delaying social security you are gaining 8% per year by delaying and you get a COLA based on US wage growth. And with no requirement to be working while you delay.

I went out at the top of the GS pay grid at 56 with 36 years including SL credits. Bottom line if you are financially prepared to retire and want to retire go for it. There are no outsized credits for delaying and you are wasting the healthiest and most active years of your retirement.

All the many feds I know that are delaying to 62 or later aren't financially prepared to retire earlier. The 1.1X deal makes them feel better but bottom line earlier just isn't an option because they didn't contribute enough to the TSP and/or mismanaged their investment choices in the plan and/or didn't pay down their debts.

I mostly agree with this and it is sensible advice. One quibble I have is with the "the COLA to your high-3 is arbitrary and unknown" point, though. In the grand scheme of things, the federal pay scale broadly adjusts for inflation over the long run, even if there is arbitrariness year-to-year. In years of high inflation, that adjustment can be significant. For example, the President proposed an average 5.2% pay increase for 2024, and it was an average 4.6% in 2023. Add that to the extra bump to the pension for working another year and the significant bump in multipler at age 62 and it it's certainly not chump change.

In other words, all things being equal, there is a greater benefit to working to age 62 in a high-inflation environment (compared to the low-inflation environment we enjoyed until recently), because the pension is not inflation-adjusted (COLA-lite-style) until age 62. The "age 57 versus age 62" decision can never be actuarially-neutral, because the rate of salary increases (indirect inflation impact) in those five years is an unknown that has a significant impact on the numbers.

Maybe this all is a bright side to the fact my youngest will (hopefully) go to college the year I turn 62 -- makes the retirement question a little less fraught! I can probably afford to pull the trigger before then, but it's not like I'll be traveling the world or something until all the kiddos are launched, so I'll probably stick around and get my 1.1X.

[rich126]

I just wanted to clarify a few items in this thread. (Note minimum retirement age anyone born in 1970+ is 57, for those born in 1953-1964 inclusive it is 56 and in between it increases by 2 months per year and if you were born before 1953 hopefully you are already retired or in CSRS).

Note this is for the vast majority of federal workers, there are some jobs that do allow something more similar to a military retirement after 20 years of service.

1. Retirement requirements for immediate pension and health insurance continuation w/o penalties
A. MRA+30 years of service
B. 60 + 20
C. 62 + 5 years

2. Early retirement applies for people at MRA and at least 10 years of service who retire before age 62. Pension is permanently reduced by 5% per year (it is prorated on a month by month basis). If you take early retirement you can keep your health insurance.

3. Postponed retirement. This is the only retirement I'm aware of that allows you to leave government service w/o an immediate pension or health insurance but allows you to get it at any point later. In order to become eligible for this you need to be at your MRA and have at least 10 years of service. In this case say you left after 15 years of service at 57, then you can wait until 62 and get your pension w/o penalty and your health insurance. If you had 20 years of service, you can actually get it at age 60 w/o penalty. You can also get it prior to the age limit but penalties are from age 62 regardless of years of service. For example you leave at 57 with 21 years of service and decide at 59 you want/need your pension and your health insurance. You can do so but you will leave 15% of your pension permanently (difference from age 62 to when you get the pension times 5% per year).

4. Deferred retirement - Not going to talk about this since you do not have access to health insurance in retirement. You can always go back to work for the government for at least 5 years and reach MRA+service time to get it.

Interestingly enough if you leave the government job after qualifying for the postponed retirement and come back, things pick up as if you hadn't left and you simply add in years of service to your retirement multiplier and you maintain eligibility for the health insurance as long as you continue to carry it. So in the example above, if the person left at 57 with 21 years of service and came back at 59, they could work 1 full year and then take retirement immediately (60+20) and retire w/o any penalty.

Personally I never saw any point at staying until 62 to get an extra 10% for my pension. For example retirement with an average high 3 year salary of $150,000 and 25 years would get you $37,500 pension at age 60. Work 2 more years and now you get $150,000 * 27 * 1.1 = 44,550. But in the meantime you didn't get $75,000 in pension for those 2 years as well as the social security supplement which should be another $30,000 or more. Also in my case I could easily get another job making more than my government salary and still collect the pension. I suppose if you loved your job or your skills weren't applicable to any contractor maybe it would pay to stay.

Finally the social security supplement earnings test is a bit weird in that it lags your earnings. If you time things well, say you retire at the end of the year at age 60 and get a new job at the beginning of the year that would easily wipe out the supplement due to high earnings. You still would collect the supplement for about 17 months before it stops and in essence only lose out on the last 7 months. This is because they send out a form around April and then any adjustment for the prior year doesn't take place until June (I think, maybe July). So in this example the person only had his job he retired from in the previous year so that doesn't count. Then he earned his new job wages and the following year they would fail the earnings test and would lose the supplement in June or July. You don't have to pay back the previous money. Now if you are younger it would stop and you would have to reapply if you stopped working again.

[Stang70]

In other words, all things being equal, there is a greater benefit to working to age 62 in a high-inflation environment (compared to the low-inflation environment we enjoyed until recently), because the pension is not inflation-adjusted (COLA-lite-style) until age 62. The "age 57 versus age 62" decision can never be actuarially-neutral, because the rate of salary increases (indirect inflation impact) in those five years is an unknown that has a significant impact on the numbers.

FrugalFed, thanks for your input. The uptick in inflation definitely factors into the pension calculation. It was always a factor in the past but to a lesser degree during the lower inflation period. With two years until I reach MRA, I can hope inflation lessens but history now shows how quickly it can spike (and for how long?).

Maybe this all is a bright side to the fact my youngest will (hopefully) go to college the year I turn 62 -- makes the retirement question a little less fraught! I can probably afford to pull the trigger before then, but it's not like I'll be traveling the world or something until all the kiddos are launched, so I'll probably stick around and get my 1.1X.

Those important considerations definitely influence your decision to continue working until 62. Sometimes life makes the decision for us, but I can't think of a more important reason in this case for doing it. Hats off to you for taking care of number one...family.

[Stang70]

Personally I never saw any point at staying until 62 to get an extra 10% for my pension. For example retirement with an average high 3 year salary of $150,000 and 25 years would get you $37,500 pension at age 60. Work 2 more years and now you get $150,000 * 27 * 1.1 = 44,550. But in the meantime you didn't get $75,000 in pension for those 2 years as well as the social security supplement which should be another $30,000 or more. Also in my case I could easily get another job making more than my government salary and still collect the pension. I suppose if you loved your job or your skills weren't applicable to any contractor maybe it would pay to stay.

Rich126, thank you for providing additional information on the FERS. The helpful summury is useful for those readers who might be unfamiliar with its intricacies.

Appreciate your insight on your decision to depart prior to 62!

Finally the social security supplement earnings test is a bit weird in that it lags your earnings. If you time things well, say you retire at the end of the year at age 60 and get a new job at the beginning of the year that would easily wipe out the supplement due to high earnings. You still would collect the supplement for about 17 months before it stops and in essence only lose out on the last 7 months. This is because they send out a form around April and then any adjustment for the prior year doesn't take place until June (I think, maybe July). So in this example the person only had his job he retired from in the previous year so that doesn't count. Then he earned his new job wages and the following year they would fail the earnings test and would lose the supplement in June or July. You don't have to pay back the previous money. Now if you are younger it would stop and you would have to reapply if you stopped working again.

Good information regarding the supplement. Lots of landmines to be aware of.