What is the Financial Impact of an Early Retirement from Federal Service?
An early retirement can be a great thing if it works. But will an early exit allow you to meet your goals and continue living the life you want?
In this post I want to explore the impact of an early retirement package offered by your agency under VERA/VSIP.
First let’s look at the program details, then we’ll explore the hypothetical financial impact with examples.
VOLUNTARY EARLY RETIREMENT AUTHORITY (VERA)
Opportunities for an early retirement come about when a federal agency applies and is approved for a reduction in force (RIF). This happens when reshaping and restructuring are a necessary goal of a federal agency.
The Voluntary Early Retirement Authority (VERA) is a measure that allows agencies to temporarily lower age and service requirements to increase the number of employees who are eligible for retirement.
This incentive allows eligible federal employees to receive a full immediate annuity and other benefits years before they would otherwise be eligible, thereby enticing them to go out early, while the agency can move employees off payroll and cut costs.
Additionally, an agency may sometimes add a lump sum payout, or a Voluntary Separation Incentive Payment (VSIP). The maximum amount may not exceed $25,000.
To be eligible under VERA/VSIP an employee must:
- Meet age and service requirements.
- Age 50 with 20 years of service, or
- Any age with 25 years of service
- Have served in a position covered by OPM authorization for the minimum time specified by OPM.
- Serve in a position covered by the agency’s VERA plan.
- Separate by the close of the early-out period.
The FERS annuity calculation is the same as “normal" retirement:
Pension = 1% x years of service x hi-3 salary
* There is no reduction for employees retiring under age 55. 100% of unused sick leave may be credited.
A FERS annuity Special Retirement Supplement (SRS) is also payable to an employee who has completed at least one calendar year of service; however, this benefit is delayed until an employee reaches minimum retirement age (MRA). This is age 55-57 depending on year of birth.
*It’s also important to note there is an earnings test that may reduce the SRS benefit if continuing to work after federal retirement.
Another benefit is the option to continue health insurance coverage under the Federal Employees Health Benefits (FEHB) program forward. To be eligible an employee must have been covered under the FEHB program for the last 5 years of service, or, for all service since the employee was eligible for these benefits - unless these requirements are waived.
- Coverage as an annuitant is identical to employee coverage except premiums are now paid on an after-tax basis.
Federal Employees Group Life Insurance (FEGLI) can also be continued if carried for the last least 5 years prior. However, this coverage gets expensive with increasing age and price bands.
Working after taking VERA.
Generally, employees who take an early out under VERA aren’t subject to any restrictions with their annuity if taking on a non-federal job after retiring, however the SRS earning test will apply.
Employees that come back to the federal workforce are considered a ‘reemployed annuitant’, which means the annuity continues and new salary is offset by the amount. Waivers and additional details may apply around the annuity in this circumstance moving forward.
What financial impact does an early retirement have under VERA/VSIP?
Here’s how to think about this:
- Is this an opportunity to retire from working completely, or
- Are you simply hanging it up as a fed and looking at doing something else?
Let’s consider 2 simplified examples.
VERA offered at age 53 to an employee with 30 years of service and a current Hi-3 salary of $160,000. Minimum retirement age (MRA) is age 57. VSIP is not offered.
FERS Annuity: 1% x 30 years x 160,000 = $48,000 annual
This employee would be able to take a $48,000 FERS immediate annuity for the rest of their life. Electing a full survivor benefit to protect a spouse will reduce the annuity amount by 10% to $43,200 year.
At age 53 there is potentially a lengthy time to plan for – we need to consider projected living expenses and what other assets are available to provide income?
The Special Retirement Supplement (SRS) will be available to start upon reaching MRA at age 57 and lasts until age 62 when eligible for social security. The SRS benefit is almost always less than age 62 social security estimates because it’s calculated from actual years of federal service.
Let’s assume the best case here, that this employee’s SRS amount is based on the maximum social security benefit FY 2023 at age 62 of $2,572 (*from SSA.GOV- the social security tax maximum earnings base is now at $160,200 FY 2023).
SRS = $2,572 x 30 years of federal service / 40 = $1,929 month or $23,148 year - starting at age 57 (MRA).
Because they retired at 53, the Thrift Savings Plan (TSP) isn’t accessible without penalty until age 59.5; if retiring at or after age 55 then you may access as early as age 55.
Cost of living adjustments (COLAs) begin at age 62, making inflation’s impact an important consideration on the purchasing power over the 9-year gap from age 53 to 62.
Looking at it from the standpoint of retiring and not working this looks challenging:
- Immediate FERS Annuity = $43,200
- SRS = $23,148 at age 57 MRA.
- TSP access at age 59.5
- COLAs at 62
Maybe there are significant other assets – taxable accounts or real estate – capable of producing income, while they satisfy waiting periods.
Another example with the similar circumstances, but a slightly older employee with a federal career that started later.
VERA offered at age 58 to an employee with 25 years of service and a current Hi-3 salary of $160,000. Minimum retirement age (MRA) is age 57. VSIP is not offered.
FERS Annuity: 1% x 25 years x $160,000 = $40,000 annual
This employee would be eligible for a $40,000 FERS immediate annuity for the rest of their life. Electing a full survivor benefit to protect a spouse will reduce the amount by 10% to $36,000 year.
The Special Retirement Supplement (SRS) would kick in immediately and last until age 62 when eligible for social security. Again, we will base this on the maximum social security benefit.
SRS = $2,572 x 25 years of service / 40 = $1,607.50 monthly benefit or $19,290 year.
TSP would also be accessible immediately without penalty since they are retiring after age 55. However, it’s important to consider using a conservative or ‘safe’ withdrawal rate to give this account an opportunity to last for the longer-term.
Cost of living adjustments (COLAs) are delayed until age 62, but this is now only a 4-year period to account for the impact of inflation.
- FERS Annuity = $36,000
- SRS = $19,290
- TSP accessible.
- COLAs at 62.
This situation is more workable with access to additional benefits and assets.
How Much is Enough?
A lot of folks don’t want to retire, but they do want to do something different.
In that sense, the availability of annuity income and health benefits could be the push to the next chapter. Guaranteed income and predictable health insurance are a big advantage in this type of transition.
A few options for many folks consider include pursuing a second career, engaging in a passion project, or simply finding a job that can provide income and less stress. From this standpoint the annuity income could be leveraged in different ways – save, spend, give away - depending on the next opportunity being pursued.
Both retiring completely and doing something else their have appeal, ultimately it comes down to how you are feeling about work and the numbers. And let’s not forget the option to continue your federal career and accruing benefits, just because you are offered an early out does not mean you have to take it.
If you’re on the younger side and offered VERA you may need to work after accepting an early out, unless you have accumulated significant assets with income producing potential, or you’re willing and able to live on much less income for a period.
However, an early out can give you flexibility to do something else with the security of guaranteed income and other benefits.
Costs and Considerations:
- Give up the 1.1% FERS annuity multiplier (age and eligibility requirements apply)
- Cost-of-living adjustments (COLA) delayed until age 62.
- Eligible for Special Retirement Supplement at MRA.
- Lost agency matching contributions to TSP.
- Early & unreduced immediate annuity.
- Continue health insurance coverage under FEHB.
- Opportunity to work outside federal service & do other things.
- Early retirement!
What are your ideas on early retirement? I’d love to hear them. And please keep an eye out for the second part to this post – the financial impact of early retirement not under a VERA option.
I hope this brief article provides insight on retiring. If you'd like to talk about your situation and your retirement plan, I’d love to hear from you.
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*The content is developed from sources believed to be providing accurate information.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.