A question that we often hear is, “I have plenty of years in the federal system (but I am nowhere near the required age), yet I want to retire now! Can I retire today and still get a pension?”
Like most questions we get, it isn’t as simple as answering that question alone. First, we probably need to explain what it means to be fully-eligible to retire from federal service.
What it Means to be Fully-Eligible to retire
To be considered “fully-eligible” to retire from federal service, the Office of Personnel Management (OPM) will insist that you meet BOTH age and service year requirements. Those age and service year requirements will depend on a few factors such as which retirement system you are participating in (CSRS/FERS) and perhaps what your federal job is (such as a regular employee or Law Enforcement). If you’re unfamiliar with these rules, you can check out OPM’s eligibility requirements for both CSRS and FERS.
First off, to have any monthly pension paid out to you, you must be considered “vested” within the federal retirement system. That is, you must have contributed to the CSRS/FERS retirement program for at least 5 years. If you meet that criteria, you have a pension waiting for you… eventually.
NOTE: This is true as long as you do NOT take a refund of the contributions you made to the CSRS/FERS retirement system. If you were to do so, you will surrender any future pension payments you would have been eligible for down the road.
Presuming you meet these basic criteria, you qualify for a deferred retirement if:
- you are NOT old enough to be “fully-eligible,” and
- you have at least 5 years of federal service, and
- you do NOT take a refund of your CSRS/FERS retirement contributions
This is NOT an MRA+10 Scenario
Just so we’re clear, a deferred retirement is NOT the same thing as the MRA+10 retirement that it is often confused with (since you can “postpone” receipt of the pension to avoid the penalty…that sounds like “deferred,” but it is wildly different).
An MRA+10 retirement is an entirely separate retirement option that is available only to FERS employees who have reached their Minimum Retirement Age AND have at least 10 years of service. We did a FedImpact Webinar on MRA+10 Retirements a while back, so take a listen if you need to brush up on that scenario.
Now that is all cleared up, let’s talk about what a deferred retirement entails.
Deferred Retirement
When an employee retires under a “deferred” retirement scenario, the following happens:
The pension is calculated (using their creditable years of service, their current high-3 and the appropriate percentage)
The pension will begin when the employee reaches the age when they would have qualified to retire (based on the years of service they had when they left service)
Sick leave is never used in calculating a deferred retirement (it is just lost)
NOTE: The employee does NOT have a choice to draw their pension immediately (even with a penalty) – this is an involuntary delay in the pension starting
Additionally, several other benefits are also permanently affected:
- The employee permanently loses access to their health insurance (FEHB) upon leaving federal service
- The employee permanently loses access to their life insurance (FEGLI) upon leaving federal service
- The employee permanently loses eligibility for the FERS Special Retirement Supplement
Two Case Studies
Let’s take a look at two examples to put some numbers to all of these rules. The only difference between these two examples is how many years of service each employee has when they leave federal service (because that dictates WHEN they can begin drawing their deferred pension).
Example scenario #1: Cindy
FERS employee
Regular employee type (not Law Enforcement, etc.)
Born in 1972 (currently age 50)
Currently has 8 years of service
Current high-3 is $80,000
Wants to leave service now
In this example, we know that the employee is not fully-eligible to retire at age 50. In fact, with only 8 years of service, she would need to be age 62 to be fully-eligible to retire. This is where the “deferred” retirement scenario comes into play.
STEP 1: Calculate the pension
We must pretend for a moment that she is eligible to retire and calculate her pension as of “now” – even though we know she can’t get it now.
The formula we would use is: High-3 X # years of service X 1.0% = Pension
In this case: $80,000 high-3 X 8 years of service X 1.0% = $6,400/year
STEP 2: Determine when it can be paid
If Cindy leaves service with 8 years under her belt, she’ll need to wait until such age that she would have been eligible with only 8 years of service. In this case, she’d need to wait until age 62 to begin drawing the pension of $6,400/year.
You’ll notice that there is no “penalty” assessed to the pension, but not receiving any pension for 12 years feels like penalty enough!
Example scenario #2: Jason
FERS employee
Regular employee type (not Law Enforcement, etc.)
Born in 1972 (currently age 50)
Currently has 30 years of service
Current high-3 is $80,000
Wants to leave service now
In this example, we know that the employee is not fully-eligible to retire at age 50 (even with a whopping 30 years of service). In fact, with 30 years of service, he would need to have reached his Minimum Retirement Age (which for him is age 57) to be fully-eligible to retire. Let’s see how the deferred retirement scenario plays out differently for Jason than it did for Cindy.
STEP 1: Calculate the pension
Again, we must pretend for a moment that he is eligible to retire and calculate his pension as of “now” – even though we know he can’t get it now.
The formula we would use is: High-3 X # years of service X 1.0% = Pension
In this case: $80,000 high-3 X 30 years of service X 1.0% = $24,000/year
STEP 2: Determine when it can be paid
If Jason leaves service with 30 years under his belt, he’ll need to wait until such age that he would have been eligible with 30 years of service. In this case, he’d need to wait until age 57 (his MRA) to begin drawing the pension of $24,000/year.
Just like in Cindy’s example, you’ll notice that there is no “penalty” assessed to the pension, but Jason still didn’t receive his pension for 7 years after he left federal service! That sure feels like a penalty!
Protecting the Pension for a Spouse
In the scenarios above, both employees leave service “now,” but Cindy starts receiving her pension at age 62, and Jason starts receiving his pension at age 57. At the time that they apply to have payments begin, they would have the chance to elect a Survivor Benefit for their spouse. Essentially, the Survivor Benefit allows up to 50% of their FERS pension to be payable to their respective spouses in the event of Cindy or Jason’s death.
However, if Cindy and Jason haven’t started to collect their FERS pension (either because they haven’t reached the correct age yet OR they simply didn’t complete the paperwork to do so), there is NO MONTHLY PENSION payable to their surviving spouse. The only thing that the surviving spouse would receive would be a refund of the contributions that Cindy and Jason had made into the FERS retirement program while they were working. Yowzas – that’s a real eye-opener for many considering this option!
When it Comes Time to Start Receiving the Pension
When an employee finally reaches the target age when the pension should start (Cindy at age 62 and Jason at age 57), they will need to file an RI 92-19 form with OPM. This is not automatic – if you don’t ask for your pension, OPM will not pay it out to you.
If you were to forget to file to receive your pension and finally do so 10 years later, OPM will pay all 10 years of pension to you all at one time. As you can imagine, this causes an enormous tax problem.
Some Observations
The decision to leave federal service prior to becoming fully-eligible to retire should not be taken lightly. There are a number of serious consequences (i.e. loss of income, loss of health/life insurance) that should be given appropriate consideration before making this giant decision. These decisions are irrevocable – for instance, even after you start drawing your pension, you will NOT be eligible to re-enroll in FEHB or FEGLI. It’s a done deal.
So, does this mean a deferred pension is a horrible option? Maybe not. Your personal situation will largely dictate just how much sense a deferred retirement makes for you. Perhaps you have another career offer in the private sector, and it makes more sense for you to get what you can from the federal system and pursue opportunities elsewhere. That’s valid, but not without consequence.
Bottom line: If you are considering a deferred retirement, make sure you plan for losing your federal health care and life insurance, and that your pension (very likely) will be less than you may have been expecting. Since no cost of living adjustments are applied between the time you separate and the time you start drawing your pension, inflation will have a huge impact on the purchasing power of your money when you finally receive it.
Whatever you decide, make sure that you have all the facts and how they will affect your retirement. Don’t sell yourself short when leaving federal service – KNOW BEFORE YOU GO!
There’s a lot that goes into planning the retirement you’d hoped for. I highly encourage you to attend one of our retirement workshops where we cover all of the federal benefits topics and the decisions that need to be made right there in the training session. You’ll leave with clear action items for each section and have an opportunity to meet one-on-one to do a deeper dive into your situation.
