Considering Early Federal Retirement? You should know what happens to your benefits when you retire before you are eligible for your full benefit package?
People often wonder about the best date to retire so that they can avail maximum federal employee benefits. It’s always advised that a person retires only after he or she is eligible for it. It will help the person to be financially sound while he or she needs to face the realities of retirement. If a person is planning to retire early, the person should know about the consequences of retiring early in order to make a wiser, better and smarter decision.
Why do Federal Employees Elect Early Federal Retirement and Sacrifice Some Federal Employee Benefits?
There are many reasons of why people choose to retire early and sacrifice some of the federal employee benefits that might have grown over time. The reasons may range from complex health issues to just being tired of working for the federal government. Some people also leave jobs to start something of their own and some just fear that they might lose their job if the agency they are working for is abolished in the new administration. No matter what the reason is, every federal employee must know about what happens to his or her federal employee benefits if they choose to retire earlier than the eligibility. Here’s what actually happens.
If an individual chooses to retire earlier than the eligibility date, the person will get an automatic 30-day extension of their FEHB (health insurance). At the end of these extended days, a person has the option of converting to an individual policy from the current insurer. The person can also continue the current coverage for 18 months as per the temporary continuation of coverage.
The costs and coverage of the individual policy will vary. The costs for a Temporary Continuation of Coverage (TCC) will include a person’s share, the government’s share and a two percent administrative fee. In both scenarios, there is no need to undergo a physical. Also, there is no ban on the pre-existing conditions.
A person can easily convert the life insurance to an individual policy. But it must be noted that there will be no coverage for dismemberment or accidental death in an individual policy. The policy also cannot be term insurance and has to have premiums.
If a person has got five years of creditable federal service, the person can choose to leave the retirement funds on deposit with OPM or Office or Personnel Management and be entitled to FERS pension or CSRS at a later date. This option is highly recommended to ensure that a person maximizes the federal employee benefits or retirement benefits even if the person retires earlier than the eligibility date.
When a person leaves a federal job, the annual leave, compensation time balance and credit hour are paid to the person. It is credited in a short period of time from the date of leaving the job. The sick leave is useless until a person plans to come back to the federal service. If it happens, one can re-credit this one among federal employee benefits.
With a TSP, a person has several choices. When a person leaves their job, he or she can leave their retirement balance in the TSP, create an income stream with the balance or make a TSP Withdrawal. A person also has the option of making inter-fund transfers even after retirement. The TSP can also be transferred to a tax-deferred retirement plan of a subsequent employer or to an IRA. When choosing the transfer option, you should remember to do a direct transfer (from TSP to a new plan) to help avoid any sort of withholding.
People who are wondering what will happen if they choose to retire before reaching 55 years of age should know that whatever money you withdraw from your TSP before reaching 59 1/2 years of age would be subject to a 10 percent early withdrawal penalty plus the corresponding income tax on that withdrawal. For people serving the nation as a special category employee (the ones who are in Firefighting, Air Traffic Control or Law Enforcement, etc.) have 50 as the age, not 55. You may be able to avoid this early withdrawal penalty by exercising a 72(t) withdrawal strategy, but you should talk with your financial advisor before attempting this maneuver to ensure you understand the requirements, etc.
It is recommended that federal employees, as with all employees, choose the best date to retire for their unique circumstances. Talk with a financial professional to ensure your receive proper education and information regarding your federal employee benefits and to make sure you are prepared for the realities of retirement. In the event that you choose to retire early it is recommended that you work with an expert prior to retirement and especially when it comes to how you handle your TSP. You will also want to consider the ever-increasing expenses associated with FEGLI and may want to change your life insurance to an individual policy prior to retirement. Take a few precautionary steps and always talk with a professional to make sure you have the information you need before opting to for early federal retirement.