Federal retirement expert, Chris Kowalik, shares her candid insights on why age 62 is a magic age for most FERS employees to retire. She helps FERS employees to understand the potentially significant incentives in store for them if they can hang on to retire from federal service until age 62.
- Learn the three unique changes that happen for FERS employees if they wait until age 62 to retire, and the financial impact each one has on their retirement (HINT: one of them gives you a 10% raise in retirement)
- Bonus tips (even for CSRS employees) on the benefits of working longer, and the effect that has on key benefits like the pension, Thrift Savings Plan, Federal Employees’ Group Life Insurance, Survivor Benefit and Social Security
- How knowing two important numbers will help you to build a money strategy in retirement
Scott: Hello and welcome to this episode of Fed Impact, candid insights on your federal retirement. I’m Scott Thompson with MyFederalRetirement.com. I’m here today with Chris Kowalik of ProFeds, home of the federal retirement impact workshop. Chris is here today with us to shed some light on how FERS employees are incentivized to wait until at least age 62 to retire from federal service. Hi, Chris.
Chris Kowalik: Hi, Scott. Thanks so much for having me today.
Scott: Chris, when federal employees are trying to choose a time in their life to retire, there is often some confusion because there are so many factors to consider. In fact, there’s so many factors that I’m not even sure we could cover them all in one podcast episode. What do you have for our listeners today to help them get a handle on when to retire?
Chris Kowalik: Yeah, you’re right, Scott. We will probably have to break this up over several episodes to be able to cover all of the considerations. So what I’m going to focus on today is specific to our FERS employees, so those typically hired for the first time in 1983 or later, and how waiting until at least age 62 can have a tremendous impact on their retirement. So for our CSRS employees who have tuned in today, they’ll still be able to pick up some tips about the benefits of simply working longer as well near the end of the episode.
Now before I forget, I also want to hear from our listeners so I know what they thought of today’s episode, and what topics they want to see in the future. So we’ll give all the details to provide feedback at the end of this broadcast.
Scott: Okay, great. Let’s jump right in. We often hear that age 62 is the magic number for FERS employees to retire. Why is that?
Chris Kowalik: Gosh, this is a topic that I cover regularly in our retirement workshops and it always seems to surprise our attendees so I knew it would be a great topic to talk about today. Now there are there potentially significant incentives for FERS employees to wait specifically until the age of 62 to retire.
Scott: Okay, let’s start on the first one.
Chris Kowalik: Great. So I’ll start with the most obvious one that most employees are aware of and that is that social security is immediately available at age 62. So most employees will be eligible at that time, assuming they’ve had a whole lifetime of work in social security earnings as FERS employees. Now of course, just because you can take social security at age 62 doesn’t necessarily mean you should. There are strategies behind when you should turn on social security, but the fact that at 62 if we have somebody retiring at that point, that gives some flexibility to provide that income stream to those who really, really need it. Now those social security strategies that I just mentioned, the idea of having that strategy, it’s complex and it’s so complex that we would spend an entire episode on just that and I suspect we will.
Chris Kowalik: But if we just look at social security in a bubble without taking any other financial factor into consideration, the argument could be made that you should take social security as soon as you’re eligible at 62. The same argument could be made that it’s much better to wait to draw social security at a later age when the payout is higher. So say somewhere between 65 and 67, known as the full retirement age. Or even waiting until 70. So everybody’s strategies are going to be a little bit different.
Scott: Okay, I’ll ask the question that I know everybody wants to know. Which one is right?
Chris Kowalik: That is a question I get all the time in these workshops. That’s really the funny part about financial planning strategies. It always depends on the bigger financial picture. So sometimes taking social security right away is truly the best strategy for someone, and like I said, flip side is sometimes waiting is best. So I encourage all of our listeners to look at the big picture. Mainly because we can’t make a decision about social security and when to turn it on just in a vacuum. There’s so much that goes into that planning strategy that we need really a bigger chunk of time to unpack it and to get into all the details, but I promise to our listeners that we’ll have an episode completely devoted to social security strategies, so stay tuned.
Scott: Yeah, you’re right Chris. That is a topic that I know our listeners would really benefit from since social security is such a big part of a FERS employees overall retirement plan. So social security being available at age 62 was the first consideration. What’s next?
Chris Kowalik: The next reason that age 62 is such a magic number for FERS has to do with the formula used to determine how much their retirement check is going to be. So of course we want to do everything we can to make sure those retirement checks are as high as possible, right? That seems like everybody’s objective. So let’s start with the standard FERS retirement formula. So this is the formula to calculate how much the retirement check is going to be. Most people have at least seen this formula. You might not all of the different components, but the pension formula, we take an employee’s high three average salary times 1%, times the number of years of service that they have that are credible. That all sounds very simple, but FERS employees who can wait to retire until age 62 or later and who have at least 20 years of service under their belt when they leave, they move to a 1.1% formula instead of that 1%. Now I know when I first saw this, I said, “Big whoop. 1%, 1.1%. What’s the big deal?”
Chris Kowalik: But that’s a 10% raise, and I know lots of people that want a 10% raise. So it’s certainly very hard to convince a FERS employee who is eligible and ready to retire, at say 56, to wait until 62 to get this. But if we have somebody teetering on the brink of, “Well I’m 60 or 61 and I just had it up to here,” this might be just enough of incentive to wait.
Scott: Yeah, I imagine a lot of federal employees would love a 10% raise.
Chris Kowalik: Oh yeah.
Scott: That could be a big game changer for many FERS employees, and you’re right. It may be just the right incentive they need to keep working another year or two.
Chris Kowalik: Mm-hmm (affirmative).
Scott: So you mentioned there were three big reasons why 62 is the magic number for FERS. What’s the third reason?
Chris Kowalik: The third reason why it’s so beneficial for FERS to wait until 62 to retire has to do with when a retirees pension is going to go up. So most employees know that that’s called a COLA, or a cost of living adjustment in retirement. Now, I want to clarify some language here because I hear the wrong words being used to describe how pension checks change in the future. It’s important to know that the change to a retiree’s pension, that’s called a COLA. The change to an employee’s pay is called a pay raise.
Chris Kowalik: They’re so different in a couple of different ways. The first way, a pay raise has to be signed by the president. It is very, very political and there is this big production over who’s going to get what kind of pay raise and is it across the board and do locality pay changes and it happens every year and it’s this big thing in congress.
Chris Kowalik: A cost of living adjustment, on the other hand, is something that happens automatic. It’s automatic when the US Treasury releases the number called the consumer price index for wage earners, or the CPIW. So it doesn’t pass through congress, it doesn’t pass the president’s desk. Once the treasury releases that based on a bunch of different economic factors, that increase simply happens and so quite different. Now, let me give you an example of an employee who retires at the age of 56 under FERS.
Chris Kowalik: So presumably they have at least 30 years of service. That would make them eligible to retire at that age. And let’s say they’ve just had enough, they’re ready to move on, and they leave at 56. That means that for 56, 57, 58, 59, 60, and 61, their pay has not changed at all.
Chris Kowalik: It’s sadly impressive how detrimental that can be to a retiree’s ability to keep the money that they need to survive.
Chris Kowalik: Because although their pay hasn’t gone up for all of those years, the thing that has gone up is the actual cost of living. So they have simply not kept up with that and the sad part that I’ll add to all of this, a byproduct of that happening for someone that retires under FERS much earlier than 62 is they end up depleting more out of their Thrift Savings Plan and really too quickly. So they start depleting those assets to make up for the fact that everything around them is costing more, but their pay hasn’t kept pace.
Scott: Wow. Wow. That can really make a huge difference by getting COLAs right away and sometimes employees are so eager to retire that they may not even realize how important those incremental increases are in their paychecks.
Chris Kowalik: Oh, you got it. You got it.
Scott: You mentioned at the beginning of our broadcast that you had some tips for even our CSRS or CSRS listeners, that they can benefit from, too. So what do you have for those people?
Chris Kowalik: Yeah, on the surface most people realize that the longer they work the better off they are, at least financially speaking. So I’ve compiled a few things for our listeners to be thinking about and kind of weighing in their mind as they contemplate not only working until age 62, if they’re FERS, but perhaps even beyond that point, okay? So if the longer someone works, of course, like I said, the better off they are financially and that is the case for so many reasons. The first is a very obvious one, which is they’re going to continue to receive a full paycheck. They’re not going to take the pay cut that they have in retirement if they simply keep working and drawing their full paycheck. Of course hopefully they’re continuing to receive pay increases like annual raises, step increases, or what we refer to ask within grade increases or WIGI.
Chris Kowalik: Then promotions. So all of those things. Just the longer naturally someone works, their going to be increasing their pay, which of course is going to change the high three calculation that’s used in their pension formula.
Chris Kowalik: So there’s a lot of byproducts of working longer. Now another one, of course the longer someone works, they’re not only increasing their pay that effects the high three, but they’re increasing the number of years that are going to be added into that pension calculation.
Chris Kowalik: So let me give you some numbers so everybody can put this into perspective. Let’s say we have an employee, again, under FERS or CSRS, that we have an employee … In this case let me share with you the FERS example just because the formulas are different. We have an employee that has a high three of 100,000.
Chris Kowalik: For every extra year they work, it adds another thousand dollars a year to their pension, per year. So to our point earlier, if they’re at least 62, with at least 20 years of service, and they continue to work extra years, it’s adding $1,100 a year to their pension because they’re on that different formula. So it can be pretty impressive how much more you can receive in retirement by continuing to work another year or two or five, depending on what your situation is.
Now when an employee continues to work, of course some other natural things happen. They continue to save more in the Thrift Savings Plan because they have more time, they increase the social security benefit that’s waiting for them to eventually be paid at 62 or later, because they’re contributing to the social security program for longer. Some other byproducts when they continue to work longer, they keep some costs down that change in retirement. So for instance, the FEGLI program, the Federal Employees Group Life Insurance, that gets very expensive in retirement. So that of course, we’re going to kind of hold at bay and then a program like the survivor benefit plan, this is the one that protects the pension in the event that the retiree should die.
Chris Kowalik: An employee doesn’t begin paying for that until they ultimately retire. So kind of holding some of those things at bay and then of course from a financial planning standpoint, the longer you work, the fewer years you have to think about providing income for yourself in retirement.
Scott: Wow. That is really a lot to think about. I appreciate all the information you’ve given us today. Do you have any parting words for our listeners today?
Chris Kowalik: I do. When it comes to retiring from federal service, you have to know your numbers. So rough out a retirement budget and know what expenses you’re likely to have in retirement, and that may change drastically or not so drastically from when you’re working. It’s important to rough those out. That’s going to tell you how much income you need in retirement. So that’s the very first step. The second step is building your income strategy. So that income might come from the federal pension itself, so surge or first pensions. We have social security, the Thrift Savings Plan, your spouses 401K, or other investments or annuity products that you might have out in the private sector.
Chris Kowalik: The problem of course with planning for retirement is we never know how long we’re going to live. If we knew that, it would be very easy to plan for retirement, but we don’t. So I suspect everyone listening and even those who aren’t on the broadcast, I bet every one of them wants to know that their money’s not going to run out in retirement. That’s a pretty common and standard desire that people have when they move into that retirement phase, is that they simply don’t run out of money.
Scott: Right, right. You’ve provided some great words of wisdom today and I hope our listeners will really put the tips into action. I know you mentioned Chris, that you would love to get some feedback from federal employees and want to encourage our listeners to interact with you. What kind of feedback are you looking for and where should they go to visit to give you that feedback?
Chris Kowalik: Perfect. Now like I always tell employees, I want you feedback. I want to know that the information that we’re providing is relevant information of topics that you want to hear about. So for all of you out there that have ideas on topics that you want to hear in the future or just want to share your reaction to today’s content, you can visit our website, FedImpact.com/feedback and share your thoughts.
Scott: Great. Again, it’s been a pleasure to have Chris Kowalik of Pro Feds with us today. Stay tuned for another upcoming episode of the Fed Impact podcast to get straight answers and candid insights on your federal retirement.