Federal retirement expert, Chris Kowalik, brings some clarity on an often confusing special type of federal retirement — deferred retirement — and some potential significant drawbacks to it.
Key takeaways:
- the eligibility requirements for deferred retirement
- how a deferred federal retirement pension is calculated
- when a federal retiree starts to receive a deferred pension
- considerations of the drawbacks of deferred retirement — including how it affects health and life insurance coverage, and the FERS Special Retirement Supplement
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Scott: Hello and welcome to this episode of FedImpact, candid insights on your Federal Retirement. I’m Scott Thompson with myfederalretirement.com and I’m here today with Chris Kowalik of ProFeds, which is home of the Federal Retirement Impact Workshop. In today’s episode, we’re going to be talking about a special type of retirement from Federal Service called deferred retirement.
Welcome back, Chris.
Chris: Thank you. As always, love talking about these topics that don’t get a lot of attention in the mainstream articles. We hear all sorts of wrong information about deferred retirements, so we’re here to bring some clarity to this important subject for all of our listeners today.
Chris: Yeah, so it’s easiest to define a deferred retirement by first defining what it means to be fully eligible to retire. So we’ll kind of set that as our baseline. So, we’ll get to the deferred retirement and what that means here in just a moment, but let’s first determine the basic eligibility requirements for a Federal employee to be fully eligible to leave from federal service and be retired.
Scott: Okay.
Chris: So, to be fully eligible, employees must meet certain years of service and age requirements, and the requirements are different between CSRS and FERS. So, for all of you listening, we have included a couple of charts in the transcript underneath the play button, so if you’re looking at the My Federal Retirement site where you pressed play to listen to the podcast, if you just scroll on down you’ll see a couple of charts that we’re going to refer to.
So to be fully eligible under the CSRS program, an employee would need to meet at least age 62, with at least five years of service. At least age 60, with at least 20 years of service, or at least age 55, with at least 30 years of service. At that point, this person doesn’t need a deferred retirement, they’re going to get an immediate retirement and start drawing their pension right away. Now for FERS, it’s almost identical, but there’s one important difference. It’s still 62 with five years and 60 with 20, but when we get to the next rung of this ladder, it is MRA, which is the minimum retirement age, and that’s somewhere between 55 and 57, depending on the year that you were born, with at least 30 years of service.
So, in the chart that we have, again embedded right in this transcript, the minimum retirement age is based on the year that you were born, so you find your year of birth on the left hand side. You move to the right and that is the earliest age that you can retire with at least 30 years of service under your belt. So remember, the requirements we just reviewed, are what’s required for employees to voluntarily leave the government, draw an immediate pension, with no penalties.
But what happens if we have an employee who has met one of the years of service requirements, but has not met the age requirement? The question is, are they still eligible to retire? And the answer is, yes, kind of.
It depends. If an employee has at least five years of creditable service, they are eligible to retire eventually. In other words, five years of creditable service makes an employee vested in the retirement system. Eventually, someday, they will receive a pension.
Scott: Okay. Is there a certain point in time that the deferred pension always starts?
Chris: Yeah, so it’s … Of course, it’s going to be different between CSRS and FERS, because we have to make these things complicated. For CSRS, they actually made it pretty simple. If an employee has met the right number of years, but hasn’t met the age yet, then they can at a later time, in this case, 62 years old, come back and apply for their pension to begin at that time.
So, for CSRS, it’s always waiting until 62 to draw the pension, under this program.
For FERS, it’s much more complicated than that. The payment can begin as soon as the employee reaches an age that would have otherwise qualified them to draw their full pension. In the example that we used before where we were laying out full eligibility, remember it was 62 with 5 years, 60 with 20 or somewhere between 55 and 57 with 30 years of service. So once they meet one of those, then their pension can begin under the deferred retirement.
Let’s run into a couple of examples.
Scott: Okay, that would be great.
Chris: Sure. Let’s say that we have an employee who is 50 years old and they have five years of service. He decides that he’s had enough and wishes to go back to the private sector. He’s done with his government service and ready to go back. Since he had at least five years of creditable service, he could leave Federal service at 50 and at the age of 62, he could apply to begin drawing his CSRS and FERS pension. So in this example, CSRS and FERS employees would both draw the pension at age 62 and that’s because they only had 5 years of service.
Let’s see where CSRS and FERS vary. Let’s say the employee had a few more years of service under his belt at the age of 50. If he had 20 years of service at that time, if he were a CSRS employee, he would still have to wait until age 62 to begin drawing the pension. Under a deferred retirement, CSRS always have to wait until 62. But if he were a FERS employee, he could begin drawing the pension at age 60, because he would have at least 20 years of service at the time that he draws the pension. In this case, he met the age and the service year requirements earlier than 62. At 60, he had his 20 years and he’s good.
Now let’s do one more example. The pretend example employee is still age 50, but has 30 years of service at that time. He just can’t stick around any longer, he’s got to leave. We know he’s not eligible to retire under full eligibility rules, because he would need to be somewhere between 55 and 57 with 30 years of service, depending on which retirement system he’s in. But again, we’ll give you the example of this person being under CSRS and then being under FERS. So if he’s under CSRS, they have to wait to draw their pension, their deferred pension until age 62. Just like in the other examples that we reviewed. But if he’s under FERS, he could begin drawing his pension at his minimum retirement age, which is somewhere between 55 and 57, because he’ll have 30 years of service by that time.
Scott: Okay, now how does the calculation work on the pension if they don’t get it for several years?
Chris: Yeah, so that’s part of the catch with the deferred retirement. The pension calculation is done when an employee leaves Federal service. So the agency will determine the total creditable years of service. They’ll calculate the high three average salary and tally up the pension amount at that moment in time. Remember, this is done at the time the employee leaves the agency. So, let’s say for the sake of this conversation that the pension comes up to $10,000 per year. And I’m just throwing out a number here. If we use the very first example that we had just a few minutes ago, this person was leaving Federal service at age 50 and not able to draw their pension until 62. That means that for 12 years, that person has missed out on the cost of living adjustment that would have otherwise been applied to their pension. So at age 62, when this person begins drawing that $10,000 a year pension, it will really, it won’t really feel like that same $10,000 that it would have felt like had they drawn it right away. We’ve had 12 years of diminished purchasing power of that $10,000.
When that purchasing power of the $10,000, it really dwindles because there were no adjustments to it for those 12 years.
Scott: Right. Well and this probably does not seem like an ideal scenario for most people, is there any way to get the pension right away, even if it means taking a penalty?
Chris: Great question and the answer is no. By definition, a deferred retirement is available for someone who is vested in their particular retirement system, so that’s CSRS or FERS, but who do not meet the correct age at the time they leave Federal service. There is zero way for an employee in this situation to draw a pension immediately. Now, I do want to draw some special attention to two special types of retirements that deferred retirements often get confused with. And these are Early Outs and MRA + 10.
Now we’ve already released a podcast covering the specific details of the MRA + 10 retirement type. If you are a FERS employee who has already met your minimum retirement age and you have at least 10 years of creditable service, but less than the 30 that you need to be fully eligible, but you still want to retire, I encourage you to go listen to the MRA + 10 podcast. We cover all the rules and the consequences to selecting this type of retirement in that episode.
The other type of retirement that I mentioned is an Early Out retirement. Now not everyone is eligible for an Early Out offer, but it is essentially when OPM authorizes an agency to relax its eligibility requirements and allow employees to retire earlier than they naturally would otherwise be eligible to do.
So Scott, I know we have some … We’ve got the podcast for Early Outs in the lineup for the release of this, so I encourage our listeners to stay tuned if they’re considering accepting an agency’s Early Out offer and stay tuned for that podcast.
So back to deferred retirements. Quick recap. If an employee who has at least five years of creditable service decides to leave their Federal job prior to meeting the age and service years required under CSRS and FERS, there is a pension waiting for them down the road. And that pension can be drawn somewhere between age 55 and 62, depending on the specific retirement system as I mention above. There will be no cost of living adjustments between the time an employee leaves Federal service and the time they begin drawing their pension.
Scott: Well that sounds like that would be a pretty big drawback to someone deciding to do this.
Chris: Yeah, you know it might be. But here’s the reality. Someone who is 50 years old who has simply had enough of Federal service and are ready to leave, they are not going to stick around long enough to be fully eligible to retire, no matter what I tell them or no matter what you tell them. If they’re ready to go, they’re ready to go. I would just prefer that when they left, that they understood the financial impact of the decisions that they’re making. I’m not going to pretend that telling them this information will change their mind, but rather make sure that they fully grasp all the aspects of the federal pension and the impact that it will have on their ability to have the income they need in retirement.
Scott: Yeah, well that makes perfect sense, Chris. Other than a calculation and the lack of cost of living adjustments that you just shared, are there any other big whammies with deferred retirement?
Chris: Yeah, there are three big whammies. And even a couple of bonus whammies that I’ll throw in there when someone wants to take a deferred retirement. The first whammy is when someone takes a deferred pension, they lose access to the Federal Employees Health Benefits (FEHB) Program. And that’s forever. So even when they come back later at 62 or whatever the age is and draw their pension, they do not get their health insurance back.
Second whammy is that they lose their access to the Federal Employees Group Life Insurance (FEGLI). So FEGLI completely goes away forever, just like health insurance.
The third whammy is that they lose out on the Special Retirement Supplement. Now, to give a quick synopsis of what this program is for our listeners today, the special retirement supplement is a program that’s payable prior to the age of 62 for FERS employees that aren’t quite eligible for Social Security yet, but this bridges the gap. But for deferred retirees, they are ineligible for the Special Retirement Supplement.
So here’s some bonus whammies. They’re kind of by-products of a decision to take a deferred retirement. It really has to do with our forward progress of what we’re doing for ourselves. The longer we work for the government and how to make that work.
The first is the pension. For someone that retires at 50 under a deferred pension, that pension itself won’t look like the pension they would have had if they waited until 57 or 60 or 62. There’s a lot of things that go into the pension, one of them of course the number of years of service and the other is the high three average salary. So we would assume the employee, had they waited from 50 to 57, 60, 62, their pay is going to continue to increase over that period of time, which is used in the calculation of how all of their years of service are calculated into the pension. So again, this is a by-product of taking a deferred retirement, something that a lot of people don’t think about.
The other bonus whammy that we have here is that the TSP Account values won’t be as high as they naturally would have been had they waited to be fully eligible to retire. There’s going to be several years, at least five, maybe closer to 12 that they could have been continuing to contribute to the Thrift Savings Plan. Of course, we hope it’s growing, that’s the hope of a plan like that. And if they’re a FERS employee, they would have been in receipt of the match. So as long as the employee was putting in 5% of their pay each year, the agency was doing so as well and that of course makes that TSP account blossom to be as high as possible.
I always seem to deliver a bunch of whammies to employees throughout this podcast. I’m not trying to be a downer, but just a realist on how all of this stuff works.
Scott: Well you know I know our listeners who are considering taking a deferred retirement appreciate hearing your perspective. And even though it may not be exactly what they wanted to hear. Now, assuming that you don’t have any more whammies, do you have any parting words for our listeners today?
Chris: Yeah, so no more whammies for everybody today. For anyone thinking about taking a deferred retirement, I encourage you to carefully consider what you might be giving up leaving federal service and not making it to full eligibility. I’m a firm believer that if you’re armed with the right information, you’ll make better decisions.
Scott: Well, it is always great to have Chris Kowalik of ProFeds with us on the podcast. We’d like to ask you to stay tuned to the Fed Impact podcast to get straight answers and candid insights on your federal retirement.
