Unless you really hate your job, win the lottery, have health issues or marry a millionaire, consider the following. Delay your planned retirement by a year or two. Better yet, from a financial standpoint, hang on another three. Or more.
That’s a fact of life for the majority of still-working civil servants who are under the Federal Employees Retirement System (FERS) program. FERS has lots of moving parts. A reduced federal annuity. A 401k plan with a 5% government match. And Social Security. While that’s a lot to deal with, it is a good problem to have. And with some careful planning most FERS retirees can fix it so that their total income in retirement will be close to, if not more than, their salary while working. It can also permit many FERS retirees to be able to live comfortably without dipping into their TSP accounts before they have to.
So what’s the catch? In May, benefits expert Tammy Flanagan was my guest on Your Turn. She pointed out that by working two more years, from age 60-to-62, an $80,000 per year employee can boost their starting annuity by almost $30,000. All the while drawing full salary, qualifying for pay raises and boosting their high-3 average salary. Interested? After we did the show Tammy came up with this example of how delaying retirement can benefit you. A lot. Of course there are many other factors to consider. But money, as in having enough in your Golden Years, is a very big reason. You can adapt this example, of an $80K employees, extending work longer to get more in retirement. Here’s her example:
Length of Service at age 60: 19 years
19 x $80,000 x 1% = $15,200 x .90 = $13,680 (10% reduction under the MRA + 10 retirement because employee didn’t have 20 years of service at age 60 to qualify for an unreduced retirement)
Length of Service at age 61: 20 years
20 x $80,000 x 1% = $16,000 + $12,000 = $28,000 (The extra $12,000 represents a FERS supplement of $1,000 a month payable to age 62 when retiree could file for SSA and get an even larger SSA benefit based on their lifetime of FICA taxed wages)
Length of Service at age 62: 21 years
21 x $80,000 x 1.1% = $18,400 + $24,000 = $42,480 (The $24,000 represents the SSA benefit payable at age 62 of $2,000 a month from their lifetime of FICA taxed wages)
The difference between this person leaving at 60 vs. 62 is almost $30,000 a year more income for only two more years on the job. Of course, at age 62, the person who left at age 60 could claim their SSA benefit, but the gap would still be close to $5,000 a year or $600 a month in their FERS basic retirement benefit for life! In addition, they would have benefited from two more years at their presumably highest earning years added to their SSA record, and two more years of contributions and growth to their TSP account.
Of course, they could delay SSA and withdraw $24,000 a year from their TSP account so that they could receive $43,000 a year by delaying claiming SSA to age 70, and then take much smaller payments from the TSP so that they will satisfy the RMD requirements at age 72.
Definitely worth putting in your retirement planning kit. And passing on to a FERS friend.
Tammy is now “in retirement” (which in her case means working full-time as a retirement consultant). She can be reached at Tammy@retirefederal.com.