I’ve got to start this by saying retiring is a very personal decision, and if you can retire early and leave a little money on the table that’s completely ok.
The age you are ready, financially, and emotionally, is a big part of retiring well.
But it’s smart to dig into the numbers to explore all the possibilities and use that information against the emotional part of the decision.
What is the right time to retire? What is the best age to retire? Is age 62 the right time to retire? How much income do we need to provide the lifestyle we want?
By looking closer maybe you’ll find the numbers have already made the decision for you, or you have options you didn’t realize.
It’s no secret that age 62 is retirement focal point, especially for federal employees, and with good reason.
Let’s look at a few considerations 62 brings along with it.
The 1.1% multiplier
Your FERS annuity could get a 10% raise. It’s always surprising how overlooked and often unknown this important distinction to FERS pension annuity income is.
Federal employees who retire at age 62 or after with at least 20 years of service receive a 1.1% multiplier in their FERS annuity calculation. This equals a 10% raise over the most common 1% multiplier.
However, the only way to receive the 1.1%, or additional 10% on your pension, is to retire on an immediate annuity at age 62 or later. Deferred or postponed retirements are not eligible to receive the increase. Special category employees and disability are exceptions to the general rule.
Is this a big deal? It could be - every situation is unique and so are each person’s goals.
Let’s look at a VERY simplified example with an employee considering retirement at age 60 or delaying until age 62.
Years of service
Annual pension $
*In this example I’ve indexed the Hi-3 to increase by 1% each year.
You can see the difference in benefit amounts is significant:
- Age 60 to 62 = 21% jump in benefits or $7,945 per year
- Age 61 to 62 = 15% jump in benefits or $6,055 per year
The 1.1% multiplier or 10% raise can also be a way to look at offsetting the cost of a full survivor benefit on your annuity, which costs 10% of your benefit. Remember, a survivor benefit is required to allow a surviving spouse to carry FEHB forward.
What would a 10% raise to your FERS annuity income mean to your retirement goals?
FERS Annuity Cost of Living Adjustments
Your FERS annuity typically doesn’t start receiving COLA’s until your reach age 62 - unless you retire under disability, are CSRS, or are subject to mandatory retirement as a special category employee, then COLA’s begin immediately.
This means if you retire earlier you won’t receive the annual increases that are provided to account for inflation until you hit age 62. And, if inflation runs high in these years you could be locking in a significant reduction in the purchasing power of your annuity benefits.
How does much does it matter?
Let’s take the previous example and assume you retire at age 60 with an annual pension of $37,500, and you immediately encounter a higher inflationary environment like the one we’ve been experiencing.
For simplicity we’ll assume an annual inflation rate of 6.5% over a 2-year period leading up to the age 62 COLA - I know the real equation depends largely on what YOU spend money on as inflation varies wildly by the category of expense.
Here is what the impact on purchasing power looks like - again simplifying the calculation with an annual inflation adjustment.
Year 1 = $37,500 x 6.5% inflation = $35,062
Year 2 = $35,062 x 6.5% inflation = $32,783
In this example inflation costs us close to $5,000 in purchasing power in 2 years.
For quite a few years inflation hasn’t been an issue, but the current reckoning with easy money policies of the past is likely to continue, keeping inflation sticky.
We know the Federal Reserve wants to get back to a 2% inflation target per its mandate, but that doesn’t seem realistic any time soon.
Social Security Eligibility
Eligibility to claim Social Security benefits also begins at age 62. However, it comes with a tradeoff in the form of reduced benefits.
Did you know that claiming benefits at age 62 results in a 30% permanent reduction in benefits?
Social Security benefits also increase by 8% per year each year you delay taking benefits between age 67 to the maximum benefit age of 70.
But here’s the thing about Social Security – it gives you choice, making the decision that works best for your situation is up to you.
One of the keys is to consider what role this income will play in your plan well before reaching age 62 or retiring.
Claiming at 62 or any of the ages on this graphic may be perfect, it just depends on your plan – the assets you have, the income sources available to you, and the goals you have for your retirement lifestyle.
One more thing – the Social Security calculation is based on an average of your best 35 years of wages (if you don’t have 35, years without earnings receive a zero) up to a maximum annual wage of $160,200 (FY2023). Adding additional years at peak earnings can give your ending benefit a boost.
Check out your estimates provided by SSA, but remember they aren’t adjusted well for increases your salary may see over time.
There’s also lot in here that’s unpredictable, longevity being a big one. The ideal situation is to have social security firmly in the background as a supporting actor to annuity and investment income. That brings even more freedom to decide.
Is the Extra Time Worth the Extra Money?
Those are the big 3 – 1.1% multiplier, COLA’s, and Social Security eligibility - but there’s a lot more to talk about in this conversation.
Additional Investments & Potential Growth
Although it may seem obvious that continuing to earn income and make contributions to your TSP and investment accounts can be beneficial in potentially increasing your assets and retirement income. Another change from the SECURE ACT 2.0 (coming in 2025) is an increase to catch-up contributions employees ages 60, 61, 62, and 63 can make. This amount will be increased to the greater of $10,000 or150% of the regular age 50 catch-up limit allowing you to put away additional tax-advantaged money.
Extra years on FERS annuity calculation
This one is straight-forward, if you stay in federal service each additional year increases your annuity benefit by 1% or 1.1% of your Hi-3 salary. If your Hi-3 is $150,000 that’s an extra $1,500 or $1,650 each year. Guaranteed income like this is not an easy find.
Increases to Social Security
Adding peak income years to your earnings record can make a difference and increase the ultimate benefit you are eligible for. Remember they take an average of your top 35 years. There is some degree of simple math here, the longer you pay in and the fewer years the government must pay out benefits make an impact.
--HOWEVER, the elephant in the room is that a lot of people don’t want to retire completely, they are just ready to be done with their federal career (I get it, way too many meetings).
Retire and Double Dip
I’ve seen this work well for folks. Once eligible for an immediate unreduced annuity a common strategy is to find another opportunity outside of federal service that pays well – this gives the option to save and invest additional income to build assets or simply enjoy the extra income. Delaying or deferring can also work here.
Find something you are passionate about
I can’t argue with this one either. Find a passion that pays enough to cover the bills, - if you’re working you aren’t consuming as much or spending down assets –not to mention pouring yourself into something you love is powerful and can be really good for you. The happiest retirees I know have two things in common – activity and purpose.
What’s your idea of retiring well? I’d love to hear it.
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.