Delivered on: Wednesday, February 17, 2021

Retiring Early Under the MRA+10 Rules

What you gain, what you lose, and what you’ll never get back

  • ELIGIBILITY: how to qualify to retire under the special MRA+10 rules
  • PURPOSE: identifying ideal candidates for this program and comparing this to other ways to retire
  • PENSION: calculating penalties with a life-long effect on your federal pension
  • OTHER BENEFITS: how benefits like SRS, SS, FEHB, FEGLI and TSP are impacted by an MRA+10 decision

Download Handouts: CLICK HERE

Register for our next 30-minute webinar: FedImpact.com/webinar

Find a comprehensive retirement workshop for your area: FedImpact.com/attend

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Prefer to read instead? Below is a transcript from the video:

Hello, and welcome to today’s webinar on retiring early under MRA+10 rules. Boy, this is a really common question that we get from employees who attend our workshops, so that I know that it’s on the minds of lots of employees out there. Now for our audience today, we have a lot of you on here. Clearly, you’re all FERS employees and you’re interested to see what the MRA+10 rules look like and how they might apply to you, so we’re really grateful that you’re here. I’m going to stay focused on delivering the content, and our support team is standing by to be able to answer questions in the Q and A area. So if something comes to mind, please shoot them a message over there in Q and A and they will respond directly to you.

Now all of your questions are private. Those go only to our support team. They are not broadcast to the whole group, so keep that in mind as you’re sending over your messages. Now handouts, those are available for download, so there’s a link right at the bottom of this page, as well as in the offer section, to be able to go ahead and download the handouts.

Now this session, like all of our webinars, is being recorded. We will get the replay. We’ll send you a link at the conclusion of this. It’ll maybe give us a day to get all of that rendered and up ready for you, but you’ll get that at least by tomorrow. Okay? And stay to the end. We are going to do some comparing and contrasting on a couple of different scenarios, and I think you’re going to be interested to see the end results.

My name is Chris Kowalik. I am the founder of ProFeds, of course, the developer of the FedImpact Workshop and the FedImpact Podcast. We’re really happy to be able to do these webinars because it allows us to do a little bit deeper of a dive into some topics that get a little bit off course from mainstream, but still apply to a lot of people that have a lot of questions. So like I mentioned, our support team is standing by to answer your questions in the Q and A, so don’t be bashful. Keep them nice and busy today.

All right. So today’s topic, Retiring Early Under the MRA+10 Rules, What You Gain, What You Lose, and What You Never Get Back. It is important to realize that any time we go against what the government has laid out for us as far as full eligibility, there are going to be consequences. And so we’ve got to know that so that we can look for them and determine whether those consequences are worth what we gain on the other side of a decision. And so our agenda today to do this is, the first thing we’re going to cover the MRA+10 rules. Who qualifies to retire under the MRA+10 rules and what’s the catch? Right? What is the gotcha that the government throws out there once someone goes out under a retirement like this?

I do want to make a special point of clarification that this not an early out offer. That will be our next webinar that we’ll talk about early outs. So just get that thought out of your mind. Although you’re technically retiring earlier than what the government allows as far as full eligibility, this is not an early out. That’s a totally different set of rules and very different calculations.

All right, so in order to assess the MRA+10 rules and the consequences, and kind of the good, bad, and ugly here, we’re going to review three case studies today. And then we can assess the outcome. From an income standpoint, we’re going to look at the pension, Social Security, the supplement, and the Thrift Savings Plan. Those are all sources of income to you in retirement. The other benefits we’re going to look at will be survivor benefits, FEGLI, and health benefits under FEHB. And so some of these are going to be a little bit more in your face. Others, I’ll more casually talk about. But really important to know that one decision that you’re making will affect lots of different parts of your benefits, and that’s exactly what we’re going to show you today.

All right. So in order to know whether you should go out under MRA+10, or even what the consequences are, we have to first start with what it looks like to be fully eligible to retire because if we don’t know that, we don’t know what we’re missing out on by selecting something different. So for FERS employees, to be fully eligible to retire, you must meet one of these three age and service years requirements on the left hand side of the screen. You either have to be at least 62 with five years, at least 60 with 20, or at least your minimum retirement age with 30. That allows you to be fully eligible to retire. And this is excluding special groups like law enforcement, air traffic controllers, and firefighters, and all those guys. They have different eligibility rules.

But for regular FERS employees, this is what we look at. So that minimum retirement age, if you don’t already know what yours is, it will be a very important number for you to keep in the back of your head today. So on the right hand side, you’ll see a table that’s labeled minimum retirement age. You find the year in which you were born. You go to the right hand side, and that is your minimum retirement age. So eventually, we’ll have everyone under 57 because eventually, everyone under FERS will be born in 1970 or later, but until then, we’re going to see a spread between 55 and 57 for your minimum retirement age.

All right, so let’s take a look at an MRA+10 retirement and what we mean. So this special rule or special provision only applies to FERS employees who have not met the requirements to be fully eligible. So for instance, if you’ve met your minimum retirement age and you already have 30 years of service, MRA+10 doesn’t apply to you. You’re already eligible under the full eligibility rules and that’s what you should look at. This MRA+10 applies to employees who have reached their minimum retirement age, again, somewhere between 55 and 57, and they have at least 10 years of creditable service. And five of those years must be federal.

You might wonder what the other five could be, things like buying back five years of military service. It could help you to get to 10, but at least five of the years have to be regular federal service. All right. So as long as you’ve met those two requirements, you’ve met your minimum retirement age and you have at least 10 years of creditable service, you can go ahead and retire from FERS, but there’s a catch. And there’s actually quite a number of catches that you’re going to see highlighted in our example today. The biggest most, in your face, catch is that there’s going to be potentially a hefty penalty applied to your pension, and it’s forever.

So, we’re going to dig into some of these numbers so that you can see them. All right. So in the event that someone meets the MRA+10 rules and they decide they’d like to entertain this, they’re going to have two choices. They can either take their pension right away with the penalty applied, which, and we’ll talk about the second choice here in a second. But for this choice, the penalty that would be applied is equal to 5% for every year you’re under the age of 62, and of course, months are prorated in that as well.

So, if you are 57, and you go out under MRA+10, you are five years under the age of 62. There will be a 25% penalty to the pension. And that penalty is forever, forever, forever. I need you to fully appreciate that because this is a lifelong decision that you are making with respect to how your pension is calculated and how it changes over time. That penalty is forever.

All right, second choice gets a little bit more complicated. But the second choice is to voluntarily postpone receiving that pension to try to avoid or mitigate the penalty. To avoid the penalty, you have to wait until you reach either age 60 or 62, depending on the number of years of service that you have when you leave. So anybody who has between 20 and 29 years of service, they can draw their pension at 60 with no penalty. Those with 10 to 19 years of service, again, if they go ahead and leave, say, at 57, they could draw their pension at 62 with no penalty, so it’s a longer road to have to wait if you have fewer years of service. Again, you’re going to see this in action here in our three case studies.

Now to completely mitigate the penalty, or not to completely avoid, but to just mitigate, to chip away at the penalty, the closer that you get to those ages that I just mentioned, either 60 or 62 above, you’re doing yourself a favor by chipping away at least a little bit of that penalty, even if all of it doesn’t go away. Okay? All right.

So, there are some direct consequences to the MRA+10 retirements, other than just the pension. The first is that you will be ineligible for the Special Retirement Supplement. This is usually paid to FERS employees who are retiring under the age of 62. And unfortunately, those who go out under MRA+10 rules simply disqualify themselves from receiving this benefit. And it can be a relatively substantial amount of money, depending on kind of your Social Security benefit and how many years of service that you had. Again, we’re going to see this in the case study that we’re going to review.

Next, direct consequence is that while you’re still eligible for the health benefits and the life insurance coverage under FEHB and FEGLI, you have to be drawing your pension for the coverage to be active. So remember the scenario where you voluntarily postpone receiving your pension? If you do that, your FEHB and your FEGLI will be temporarily lost. Once you begin drawing your pension, then they’ll be restored. So there’ll be a little bit of a lag in a benefit existing. If you were of course, to need health coverage, or healthcare during that time under FEHB, you wouldn’t have that program. And God forbid, if you were to die during that time while you were postponing receiving your pension, the life insurance would not be there either.

Now some indirect consequences of MRA+10 retirements, you have a lower pension because, not just because of the penalty itself, but because there are fewer years included in the pension calculation than if you had waited until you were fully eligible. So those years that you’re foregoing serving, those aren’t being included in your pension calculations, so you’re going to naturally start with the lower pension, and then it’s going to be penalized on top of that.

Next up are lower survivor benefits. Because your spouse can receive a percentage of the benefit that you’re receiving, if you start with the lower pension, your spouse is naturally going to have a lower survivor benefit than if you had waited until you were fully eligible. Of course, another indirect consequence is if you’re retiring prior to when you’re supposed to under full eligibility rules, you’re going to have fewer years to contribute to the Thrift Savings Plan, and you’re going to have fewer years that you are contributing to Social Security, which very well may lower the benefit that you’re receiving, and certainly keep it from going up any higher. So again, lots of in your face consequences, some other direct consequences, and then ones that you might not think about until you really dig into this.

All right, so we’re ready to talk about our case studies. In order to do so, I wanted to give you some similarities between the cases, between the people that we’re going to talk about. But I wanted them to be similar enough that you could draw the conclusions of why their scenarios are so different. But they each have a twist to them. So all the three people that we’re going to review, all of them are age 57. They all have 27 years of service. They have a salary of $80,000 a year. They’re maxing out the Thrift Savings Plan, so the $19,500 that they’re normally allowed to contribute, as well as the $6500 catch up contribution.

They each have a Social Security benefit that’s very normal of $1,200 a month. And they have maxed out the FEGLI coverage that they could possibly have on their own life, and based on their salary, we’re looking at just under a half a million dollars of coverage. So that paints a little bit of a picture of what the commonalities are between these three people. But like I said, there’s a twist. So we’re going to talk about Wendy, Patrick and Robin. And each of them have a little bit different of a scenario that they’re trying to work through. And I want you to see how this looks. So for Wendy, she’s willing to wait until she’s fully eligible to retire to go. So although she’s 57 now, with 27 years of service, she’s willing to wait until she’s fully eligible, which would be 60.

Patrick, on the other hand, is itching to go. He wants to take this private sector job. He’s been kind of tired with his government job. He wants to go do something different and still get paid and all of that, but he’s ready to kind of wrap it up on the federal side. And then Robin is like, “Heck no. I am not going to get another job. I am really for real retiring.” And so let’s see what each of these look like. We’re going to dig in a little bit.

All right, so for Wendy, we’re going to review Wendy first. She is willing to wait until she is fully eligible to retire. And so let’s see what the numbers look like for Wendy. So the pay that we first have to acknowledge is that since she’s going to continue working between 57 and 60, so 57, 58, and 59, she will draw her full salary. And we’re looking at about $243,000 between those three years. Her Thrift Savings Plan, she’s also going to continue to contribute for the next three years, which means that between her own contributions and the 5% match that she gets, she’s putting in an additional $90,000 into her account. And of course, she’s not using the TSP during that time. She’s contributing to it, which is a great byproduct of continuing to work.

Her pension, if she waits until 60 to retire, her pension would of course be calculated off of the full 30 years of service, and that would end up being a little bit more than $24,000 a year that she would receive for the remainder of her lifetime, and of course would be subject to cost of living adjustments. Another benefit that she would receive, it’s a little bit of a short timeframe, but in the year in which she’s 60 and 61, she would receive the Special Retirement Supplement. And based on the calculation of how that works, those two years, the supplement would equal almost $22,000. And so again, this is Wendy waiting to retire until she is 60.

Of course, during that time, she has the health benefits and the life insurance in place, and she can keep those in retirement as long as she had that coverage for five years immediately prior to retiring, which we’re assuming that all of our individuals that we’re reviewing today have had. So that’s Wendy. Wendy is more like a normal employee who is just going to go ahead and wait until they’re fully eligible to do it, to make the decision to go ahead and retire.

Now Patrick on the other hand, remember, Patrick is probably going to take a private sector job. He’s been tempted for a while and just trying to sort through how it all works. So for Patrick, we’re going to kind of separate this out from his federal job and his private sector job. So the pension for Patrick, we have to do two different calculations. The first is, if he were to take the benefit, the pension, right at 57 when he retires, we know that because he’s five years under the age of 62, he’s going to have a 5% penalty for each one of those years, which is a total of 25%. So his pension after that penalty’s been applied is $15,714 a year.

But Patrick says, “Hey, listen. I’m going to go get another job. I don’t really need to take my pension. So maybe I could just wait to take it.” And so Patrick decides that he could wait until 60 to draw his pension. And if he does so, it will be just shy of $21,000 per year, a pretty big difference by waiting three years to draw the pension. Now for the Special Retirement Supplement, Patrick is ineligible for this because again, he’s going out under the MRA+10 rules. And from a federal job perspective, he doesn’t have any additional pay or any additional contributions into the Thrift Savings Plan between 57 and 59.

And again, he can keep that FEHB and FEGLI as long as he’s had that coverage in place for the five years immediately prior to retirement and he’s drawing his federal pension. Oh, boy. So, this is our first little hang-up for Patrick. I suppose the first one was that his pension was going to be penalized. But here we have a little snag. He knows he’s going to go get another job, but he might not be really sure what those benefits look like and to see could he get health insurance and life insurance through his other employer to make up for the fact that it won’t be in place for those three years where he’s going to voluntarily postpone receiving his pension?

Well, let’s take a look at the private sector job that Patrick is looking at. Of course, there’s no pension over there. Pensions don’t exist out in the private sector anymore, so you guys are pretty lucky. He will continue to be paid over there. And we’re going to assume that Patrick’s going to have the exact same pay that he had while he was a federal worker. That might actually be higher in the private sector, or depending on what he’s doing, it might be a lot lower. It just depends. And so this $242,000 is the three years combined.

Now Patrick does have a 401(k) over there in his new job, but it’s not quite as generous as the TSP was. In fact, in the private sector, the 401(k)s most often only match 3% instead of 5%. So although he’s still going to max it out at the $26,000, he’s only going to get a 3% match over there in his private sector 401(k). Now he did look into the health benefits and the life benefits, and they’re available, but they’re a lot more expensive than what he had as a federal employee. So if he decides to delay or voluntarily postpone receiving that pension to avoid the penalty, he might have to shell out some extra bucks on the health insurance and the life insurance to compensate for the fact that they’ve been lost on the federal side, at least until he begins drawing that pension, so that’s Patrick in a nutshell.

The next case study that we’re going to review is Miss Robin. And Robin says, “Come hell or high water, I am retiring from federal service. I’m done. I’m not going to get another job. I’m retiring for real.” And so let’s take a look at Robin’s scenario. So in her case, they’re the same numbers that Patrick had as far as the pension because they’re both going ahead and leaving at 57. In her case, she’s decided that because she doesn’t have another job, she’s going to need the money. She’s going to need her pension. She doesn’t want to take all that extra money from the Thrift Savings Plan, and so she’s going to go ahead and take the penalized pension of $15,714 per year.

Just remember, that penalty is forever, so it doesn’t pop up when she gets to 60 to the full amount. She is going to have that lower pension applied for the remainder of her lifetime. And just like Patrick, she’s not eligible for the Special Retirement Supplement. She’s getting no additional pay between 57 and 59. And of course, she’s not contributing to the Thrift Savings Plan during that time either. And because Robin is still taking her pension, the penalized pension, she will be eligible for health benefits and life insurance because again, the requirement is she must be enrolled in it and have it for five years immediately prior to retirement and is drawing the pension.

When we’re thinking about weighing all of these decisions, there’s a lot that goes into this. And I wish there were more plates on this little lever here because there’s tons of decisions that pull this in all sorts of different directions. You see, each one of these people had a different objective. Wendy said, “I want to wait to get the most that I possibly can from the government program.” Patrick is like, “Yeah, that sounds great, but I have this other opportunity over here that I want to take advantage of in the private sector,” maybe have a little burnout, or whatever that might look like.

And then Robin says, “Hey, for my mental health, I need to be done working.” She’s just had it and ready to go live her life in retirement, and not be worried about going into work. Maybe there’s health issues. Maybe she wants to travel, whatever it might be, there’s different motivations for each person in these scenarios. And that’s a little bit harder to articulate because we can’t put numbers to that necessarily. But that always is a factor in making decisions. It’s the behavior and the soft things that typically come out of these decisions, like how we feel, versus the math of what the numbers tell us.

But I’m always curious, I’m a numbers person, so I like to see what this really shakes out to look like. Well, let’s compare them. If we compare Wendy, Patrick, and Robin, I want to show you side by side how each of these work. So for Wendy, remember she was the one that was willing to wait until she was fully eligible, between the age of 57 and 59, she’ll continue to get her full paycheck, which is about $243,000. There won’t be any pension payable between 57 and 59 because she’s not retired yet. That would not happen until 60. But I wanted to put together the numbers of what the pension looks like between 60 and 85. I think we all have a reasonable desire to live until 85. That’s even lower than the normal life expectancy, so it seems reasonable to run numbers out that far.

For Wendy, from 60 to 85, she will have $741,000 of pension income to her benefit. And keep in mind that from 60 to 61, she was eligible for the Special Retirement Supplement, so she got an extra $21,600 in those two years while she was drawing her pension. And then because she worked an extra three years, in her Thrift Savings Plan, she has an extra $90,000 plus added to that account. That’s not the balance of her TSP, that’s simply the extra amount that she was able to dump in there from 57 to 59.

Now Patrick, on the other hand, this pay is not federal pay. This is when he went out to his private sector job. And we just said he was making the same amount, so that number might fluctuate. It might be much higher, might be much lower. Depends on what type of job Patrick is looking at. But we also know that for a pension, he’s not receiving anything between 57 and 59 because he voluntarily postponed receiving that pension so he could avoid the penalty.

He said, “Hey, I’ve got this other job. I don’t need my pension right now. I don’t want to take that 25% hit to it. Let me just wait to draw it until I’m 60.” And so for Patrick, if we look at his pension between 60 and 85, we have a total of $639,000. Less than Wendy, but still pretty nice. Now for the Special Retirement Supplement, we know Patrick doesn’t get that because he went out under MRA+10 rules. But because he went out to a private sector job that had a 401(k) and he was able to contribute and get at least a 3% match over there, he was able to add another $85,000 to a different bucket. It’s not the TSP. It’s his 401(k), but another bucket of income to be able to pull from in retirement.

And then we have Robin. So Robin was the one that said, “Nope. I’m retiring now no matter what.” And between 57 and 59, of course, she didn’t have a federal job, so she wasn’t paid from that. She does have a pension, so she went ahead and started her pension at age 57. And between 57 and 59, that totaled $47,142. So we’ve broken that apart from the other part of the pension that was payable between 60 and 85, which is $479,000.

Now the Special Retirement Supplement, Robin didn’t get that. And because she wasn’t working, she couldn’t contribute to an employer sponsored plan like TSP or a 401(k). So there was no extra money that Robin added. Here’s the big question that all of you are probably wondering. Who’s the winner and who’s the loser in this? Who won and who lost? Well, I would argue that all of them won in their own way. They won because they got out of the situation what they wanted. Some of it was money. Some of it was mental relief from maybe going to their job, whatever that might look like for each person. And so it’s easy to say which math won. The math is a little bit less subjective than emotions and how we feel about retiring. But it’s really important to recognize that everybody has their different metric by which they’re judging whether they’re winning or losing in a situation.

When it comes to the math of course, any time we can get someone to work longer, contribute more to the 401(k), or the TSP, or any benefit like that, and by virtue of working longer, you’re living on your money for fewer years in retirement, the numbers are always going to play out better. Right? It’s just math. It’s how it works. But for Patrick, he has a little bit of a hybrid system, where he’s got good things happening on both sides, that he’s willing to suffer the consequence of maybe having a little bit lower of a pension because he didn’t work an additional three years. But he’s happy because he got out to do something different that he wanted to do, and he mitigated a lot of his losses because he had that private job.

And then Robin, looking at Robin’s situation, if her real goal was not so much money, but letting her be home and travel and be with her grandkids, or whatever her plan was in retirement, then looks like Robin won as well. It’s just she didn’t have as much money to live on in retirement. So hopefully, I know I went through this pretty quickly, I wanted to try to stay within our 30 minute timeframe here. But hopefully, this gives you an idea of which scenario seems most like you, so that you can start plugging in your numbers and see how your consequences look, good or bad, to making an MRA+10 decision.

But of course, you’ve got to get the rest of the story. So we’ve shown you the little treetops version of how all of these benefits are affected. If you are considering retiring soon, I encourage you to attend one of our workshops. We have virtual options. We’ve got live options coming, hopefully soon. We’re trying to make those things happen. Our workshops are free to attend, and we cover all of the federal benefits topics and those decisions to be made.

So, to see a list of all of the available workshops that we have, please go to fedimpact.com/attend. All right. Next up, handouts. You will have handouts available. We will email them to you along with the replay from today’s session. Now for our next webinar, I mentioned a little bit earlier today, we’re going to cover the early out offers. We’re starting to see some rolling offers happening with different agencies, and so I want to cover the VERA/VSIP rules for early outs, how it’s very different than MRA+10, and what the consequences, good and bad, can be from an early out. So if you’d like to join us, please go to fedimpact.com/webinar to be able to register.

All right. Thank you all very much for joining us. I can’t believe we were able to stay right at about the 30 minutes. I know we went through this very quickly. But hopefully, this webinar was helpful for you. Thanks so much and take care.

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