According to several new studies, younger workers in the private sector plan to retire earlier than colleagues who are 10 or 20 years older. Most of those surveyed did not work for Uncle Sam. But the concept of shorter careers by age group seemed strange considering the fact that most private sector companies no longer offer new workers’ pensions. And that many of those who offer 401k plans offer little if anything in the way of matching contributions. And the “fact” that so-many younger people don’t believe Social Security will be around when they retire.
The stock markets gains since 2009 have been spectacular. Better than most predicted. And that could have convinced many younger people, who think Recession is a cable TV series, that they’ll be financially able to hit the retirement ranks earlier than the generations before them. And they may turn out to be right. Unless inflation rears its ugly head again, and we have extended periods (like a decade or more) when inflation outstrips pay raises and retired people — especially those on fixed benefits — see their nest egg shrink each year. That’s food for thought for most current feds who will retire under the Federal Employees Retirement System. FERS, as most know, has a much better 401k deal, but it lacks the long-time inflation protection of the old Civil Service Retirement System. Since FERS replaced CSRS most retirees are under the old system with its linked-to-inflation feature. But for most current workers, who will retire under FERS, its diet-COLA formula (which kicks in when inflation exceeds 2%) is a major consideration. Feds who will retire under FERS need to consider what could happen to their annuity benefit over a period of high inflation. Many feds now spend as much in retirement as they did working. The trick is maintaining their standard of living.
Over time, prices for most goods and services go up faster than the government’s official inflation. Especially for older retirees. Those losses compound year after year. Unless you decided to work longer to boost the starting annuity. So is the concept of working another two, five or even 10 years horrifying? Or does it make sense?
That’s what we’re going to be talking about today at 10 a.m. EST on our Your Turn radio show. Talking with THE expert, Tammy Flanagan. She says that someone working under FERS today making $80,000 per year could boost their starting annuity by almost $30,000 by sticking around another two years. That, by anybody’s standard, is a lot of money. Now and later. The vast majority of still-working civil servants are under the FERS plan. While it has a less generous civil service benefit than the Civil Service Retirement System it succeeded, FERS workers get Social Security credit and also qualify for a 5% government match to their Thrift Savings Plan accounts. Because it has more moving parts and different rules, retiring under the FERS program can be trickier. But worth it, if done correctly. Working longer for a larger annuity means many FERS retirees can delay tapping into their TSP accounts for years.
Here’s her example for how it would work for an employee making $80k:
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)
Of course 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! 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.
They could 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 required minimum distributions at age 72.
So is it worth considering working longer to protect your buying power in retirement? Or is that too horrible a concept? Many will probably conclude it’s worth putting it high up on their retirement planning checklist. And passing on to a younger FERS friend who is living with the thought he or she may leave sooner than they should. Either way, hope you listen to today’s Your Turn episode at 10 a.m. EDT streaming here or on the radio at 1500 AM in the Washington D.C. area.
Tammy works full-time-plus as a retirement consultant. She’s helped lots of feds make life-improving decisions. And she can be reached at Tammy@retirefederal.com.