PODCAST EPISODE 131:
How the FERS Supplement is Affected if You Work After Retiring

If you’re a federal employee under the FERS program and you plan to retire prior to age 62 and plan to keep working after you retire from federal service, listen up to how one of your great perks under the FERS plan may be affected.

Hi, Chris Kowalik of ProFeds here and welcome to the FedImpact podcast, where we offer candid insights on your federal retirement. As you know, this show is all about helping you to get crystal clear on what you want retirement to look like and taking action to make it happen.

So in our day to day work here at ProFeds, we come across a lot of different kinds of federal employees. Now, for those who are under the age of 62 and under the FERS program, most of them have their eyes set on a benefit called this Special Retirement Supplement. And their biggest question that they ask us in our workshops is how do I not do something silly to lose this benefit? They’ve heard the rumor mills that there’s ways for this to be taken away from them and all of that. And some of that’s true, some of it’s not. And so we’re going to get to the bottom of that today to show you exactly how that works.

So today’s topic is really going to be all about how retirees under the FERS program can potentially lose the Special Retirement Supplement based on work that they have after leaving federal service. And of course, nobody wants to lose benefits in retirement, but surprisingly, sometimes the odds work in your favor when you do. So stick around to see how.

Overview

For our session today, we’re going to start by giving a little bit of context on the Special Retirement Supplement kind of in a general sense, then we’ll talk about this earnings test and what happens if you make quote, too much money. We’ll give a couple of examples and an easy formula for you to be able to figure out for yourself if you’re going to trip the wire to perhaps not get the supplement or perhaps all of it. And then we’re also going to look at somewhat of an overlooked element of the Special Retirement Supplement, the earnings test that can really be your silver lining. And so we want to make sure that you kind of know where we’re going in this podcast, but excited to be able to share this with you today.

Now, of course, I’m going to mention a couple of resources today. All of that will be in the show notes. So if you’re listening to this podcast from our website, the show notes are there right below the player. If you happen to be listening from a traditional podcast platform like iTunes or Spotify, we’ll show you exactly how to be able to access all the items that we refer to.

Background

Let’s jump in to give a little bit of background on the Special Retirement Supplement for those of you who may not be terribly familiar with how this works. So most of you have heard the analogy that OPM uses to describe the FERS kind of overall retirement plan. So we have the FERS pension, their social security and the Thrift Savings Plan. Right? That’s the three legged stool that OPM always refers to. But what happens if an employee retires before the social security age of 62, right? We’re kind of sawing off one of those legs if we’re going to use that analogy. And now we have a wobbly stool and that isn’t really what the intention was. So the Special Retirement Supplement was designed to provide a benefit that was similar to social security. Most often we find that it’s somewhere between 50% and 75% of the social security benefit that someone’s expecting at 62.

Now, we did actually a webinar about the Special Retirement Supplement and kind of all the ins and outs and how it’s calculated and what years count, what years don’t and all of that. So we’ll link to that in the show notes so that you have that nice and handy and can go watch that webinar. Sometimes topics are a little bit easier to cover when we have some visuals and this was one of them. And so it’s a little bit harder to describe it in great detail on a podcast. But if you want to hear all about that, please watch that webinar where we go into all of those details. So again, if you’re not quite sure how it works and all the calculations that go into that, definitely that’s the webinar to watch.

The intention of the Special Retirement Supplement

The Special Retirement Supplement was intended for people who are really retiring. And so when Congress wrote this special part of FERS to account for the fact that many of you are going to be eligible to retire prior to the age of 62, they weren’t really thinking that you would be out having another job. They’re thinking you’re really retiring, not only from federal service, but from work altogether. And so once they realized that there were people that were going on to have other work, they wrote in some special rules called the earnings test for the supplement.

So some basic information that we need to know about the Special Retirement Supplement. For FERS employees who are fully eligible to retire, when you leave service, you are going to get this benefit right away. And there’s always a caveat, right? The right away is that this benefit is payable to you right away, but in good government fashion, you’re probably not going to get it for six or 12 months. And so they’ll pay you back pay and all of that. So it’s not actually going to land in your bank account right away, but it is payable right away.

There are other groups of people that will still get the supplement, but they’re going to get it later. So people like early out retirees, discontinued service retirees, military reserve technicians, all of these people are going to get the supplement once they reach their minimum retirement age. So if we have somebody that took an early out at 55, but their minimum retirement age is really 57, there will be two years that they do not get the supplement, but once they reach that minimum retirement age, then it will be payable from that point all the way until 62.

But I have two very important groups of people that we want to highlight that do not ever get the supplement. That is those retiring under the FERS MRA plus 10 retirement and deferred retirees. So I’ll give a quick glimpse into each of these so that you know if you’re maybe one of these people. So the MRA plus 10 retirement are those employees who have reached their minimum retirement age. So again, somewhere between 55 and 57, depending on the year that you were born, and you have at least 10 years of service, but you don’t have the 30 necessary to be fully eligible. So you have somewhere between 10 and 29 years of service, and you still want to go ahead and leave, most of you realize there’s a penalty that’s pretty hefty. If you go ahead and take that pension right away, you will not get the special retirement supplement ever.

Same thing for deferred retirees. So these are people who are vested in the FERS program, so they have at least five years of service, but they’re not old enough to qualify for one of the retirement rules as far as being fully eligible. So in this case, let’s say we have a 40 year old who has five years of service, they’re technically vested for a pension, but they’re not going to be able to draw it until 62. So if at 40 years old, they decide to leave federal service and go back out to the private sector, that’s okay. They’ll eventually get that pension, but it’ll be 25 years later when they turn 62. So again, neither one of these categories of retirees are going to receive the supplement.

The Earnings Test

Let’s get into the heart of today’s topic, which is really the rule for income once you’re already retired from federal service, you go out and you get another job, right? You might work for yourself. That’s self-employment income, that’s still going to count. And if you have another type of job, if you’re a Walmart greeter, if you’re a federal contractor, a whole slew of income that you can have out there, let’s talk about that. I also want to point out that all the rules that we’re about ready to talk about, as far as this earnings test, like how much you can make and still draw your benefit, are the exact same rules for the Social Security program. So if they sound familiar, that might be why.

All right. So let’s talk about the rules for 2022. You are allowed to earn up to $19,560 of income from other jobs. So these are actual wages. This is not your pension. This is not money from the Thrift Savings Plan. You actually have to be in a job wages earning capacity to trip this wire here. So this number, this $19,560, this number changes each year. So this is the number for 2022. Next year, it will be different. I promise. And keep in mind, the income that we’re talking about is your income. It’s not your spouse’s income. So your spouse might continuing to be in the private sector, maybe they’re a government employee as well. None of that matters for this particular test.

And so with this limit, this $19,560, anything you earn above that amount will cause your Special Retirement Supplement benefit to decrease. And it also might go away completely. And that’s never something Feds want to hear, but we want to be really straight with you about how this works and what to expect. So for every $2 that you earn above that $19,560, you are going to be penalized by $1. The penalty itself is applied the following year. And so if you’re earning that extra income this year, OPM’s going to ask you to report that, they’re going to send out a message asking you to report that income. And if you’ve tripped that $19,560, you’ve earned more than that, based on how much you earned, OPM will penalize your supplement next year.

So what this essentially means because of the way the rules are written, is that anyone who qualifies for the Special Retirement Supplement will automatically get it in the first year because that penalty is delayed. So even if you walk right out of government service and into say a contractor job, which I know is a very popular transition, you obviously will make more than the $19,560, but because they don’t look at your federal employment as wages for this test, you’re automatically going to get the Special Retirement Supplement in that first year, but the second year, you will not get the supplement. You’re going to have made way too much money to be able to get any of this. So there are some exceptions for special groups of people like our special provision employees, law enforcement, firefighters, air traffic controllers. I promise we’re going to cover that here in just a bit.

Let’s look at a couple of examples. Let’s say that you’re 57 years old and you have 30 years of service. You will be eligible for the Special Retirement Supplement. You’re fully eligible to retire so you are fully eligible for the supplement. But if you take a job after you retire and you’re making $100,000, you will simply make too much money to get the supplement. Conversely, if you take a job making less than $19,560, you’re going to get the full supplement because you didn’t cross that threshold or trip that wire for this earnings test to kick in. And if you’re somewhere in the middle, we have to figure out what happens with this Special Retirement Supplement. So you’ll probably lose some of it, but we don’t exactly know where that threshold is for everybody because it’s going to be different.

It’s often helpful when we’re talking about the supplement to determine what the highest level of income is that would make the supplement go away completely, and then just work backwards from there. So in order to do this, we need two pieces of information. We need the amount of the Special Retirement Supplement benefit that you will receive and we also need to know the allowable earning limit for that year. So let’s pretend for our example that the supplement that you’re set to receive with all the calculations is $1,000 a month. Just so everybody can get a sense of how all these calculations work.

Again, if you want to know your calculation, we lay all of that out in that webinar that we link to. So please, please go listen to that and you can pencil whip all of your numbers. It’s a pretty simple calculation there.

Now, we also know the allowable earnings limit for that year is $19,560. We’ve talked about that number several times today. So here’s the trick to figuring out when the supplement goes away completely. You’re going to take the amount of the benefit that you are supposed to receive. You’re going to double that amount and add the allowable limit, the allowable earning limit. So in this case, in this example, if your supplement is supposed to be $1,000 a month or $12,000 a year, we’re going to take that $12,000 times two and we’re going to add $19,560. And that tells us that by the time you make $43,560 a year, you have completely made your Special Retirement Supplement go away. You simply made too much. So that is the limit that once you make that amount, 43,560 in this example, your supplement is completely gone.

Now, if your benefit is higher or lower than that $12,000 that we’re using in our example, your income that would make the Special Retirement Supplement go away will be different, but I wanted to give you that formula to know how to figure out what that top limit is. But what if you make somewhere between $19,560 and the $43,560 in this example? Well, we’re going to take your income, subtract out that $19,560 and divide by two. So stick with me here. If you make $30,000, you’re going to subtract out the $19,560, which you are allowed to earn, and we’re going to divide that number by two. And that tells us that of the $12,000 a year that you were set to make in the supplement, $5,220 of those dollars will be penalized. Meaning you’re not going to receive the $52,220 for that year.

Hopefully you followed along with me. If not, you might want to rewind this podcast and listen to that example again, maybe get out a piece of paper and do some of these numbers for yourself, but it can feel like this formula that doesn’t make any sense, but if we just look at how the math works to it, then it makes it a little bit simpler to know how we’re going to be affected by this calculation.

Exception for Special Provision Employees

I mentioned that there are some special exceptions for special provision employees. So these are firefighters, law enforcement officers, air traffic controllers. Of course, it’s very, very common for them to retire much earlier in life. And so it’s certainly possible for their late forties, for them to be eligible to retire as long as they have the right number of years. And because they’re fully eligible under their particular retirement system, because they go off some different rules, it would seem unfair for them not to get the supplement. So we know that most people who retire that early aren’t really retiring. They’re just retiring from federal service. And so there are some special rules for the supplement that are written for this group.

Here’s how it works. If we have someone under the age, under their minimum retirement age, so let’s say they’re 48 and they retire from a law enforcement position, they’re going to receive the supplement from 48 all the way until 62, but there’s a catch. In this case, the catch works in their favor. From 48, until they reach their minimum retirement age, which will probably be 57, there will be no earnings test, meaning they can go out and make as much money as they want from 48 to 57 and draw the entire supplement. But once they’ve reached that minimum retirement age, from that point until 62, they will be subject to the earnings test just like everyone else. So if you’re listening to this podcast and you fall into one of those special categories, know that you have some special rules to follow that are really in your favor. So if you’re going to go out and make your millions, do it before you reach your minimum retirement age, or at least recognize that you are not going to get the supplement.

The silver lining

I talked at the beginning about this idea of there being a silver lining. And that is, if you work another job and you’re earning additional income, that’s a win, right? And I hope that this is a job that you really enjoy. Maybe you finally left federal service and you’re going off to simply do a job that you really find great satisfaction in and you’re earning this extra money. We want to look at that as a win. That’s not a penalty to you.

But oftentimes, Feds only look at the money that they’re losing by this earnings test and not also look at what is coming in the door. So would you rather have $30k, $40k, $50k, $100k coming in the door from a job, hopefully one that you really like, or would you rather sit back and just collect your Special Retirement Supplement payment, which in this example was $12,000 a year. Now, neither one is wrong, but when we’re looking just at the sheer math of things, it’s great that you’ve got this extra income coming in. The key is, you have to recognize that, let’s say you go out and make $50,000. In this example, that would’ve meant your entire supplement has gone away. You’re making $50,000, but in order to do so, you have to give up $12,000 of benefit.

Wrap-Up

So hopefully, this has been a helpful explanation to the earnings test in the Special Retirement Supplement. I know I’m kind of jumping in with the assumption that you have some background on the supplement. Again, if you need to get a refresher, please go listen to that webinar that we did, where we dive into all the nitty gritty on the supplement. But hopefully, if you’re considering having another job after you’ve left federal service, that this helps you to understand how this particular benefit under the supplement may be affected.

And again, as I promised, we want to make sure that any of you listening from a traditional podcast platform have access to that webinar as well so you know right where to go to get it. So if you want the link to that and the other show notes, we’ve got the transcript to the podcast, all that good stuff, please pull out your phone and text the word PODCAST to (224) 444-6144. And we will make sure that you get the link to that. We’ll also remind you when new podcast episodes are released so that you have that. Again, text the word PODCAST to (224) 444-6144 and we will send that right away.

So just want to recap here, if you are eligible for the Special Retirement Supplement and you don’t have another job, there will be no penalty to you. You’re going to receive your entire benefit and be on your merry way. But if you do have another job after you leave federal service, it’s safe to assume that you might get less than what you thought. But being aware of how that other job might affect the Special Retirement Supplement and trip that earnings test, well, if nothing else, help you to manage your budget a little bit, and the expectations that you have on your income in retirement.

Now, there’s a phrase that we use in our workshops and in our work directly with federal employees. And that is, “don’t trip over a dollar to pick up a penny.” Meaning, in this case, don’t give up an opportunity to make more money in a job, again, hopefully one you really love, just because you may give up the Special Retirement Supplement. Income is income. And the more money that you make through a job, even a part-time job in retirement, will extend the timeline that your money lasts for you throughout what we hope is the remainder of your life.

And remember, if you need more details about the Special Retirement Supplement and how it works, please, please watch that webinar that we did on this topic a while back. It’s in the show notes, and for anyone who texts the word PODCAST to (224)444-6144, we will make sure that you get that right away.

All right. Well, that’s it for today, folks. I hope that our talk about the supplement and this crazy earnings test has been helpful to you to think through kind of those various aspects of your retirement income. I also hope that you’ll stay tuned to the FedImpact podcast to get straight answers and candid insights on your federal retirement. Be sure to subscribe through the podcast channels so that you are sure not to miss an episode. Thank you so much. We’ll see you next time.