Unless you hate your job, win the jackpot, have health problems, or marry a billionaire, you should think about delaying your retirement by a year or two. Even better, from a financial viewpoint, wait three more years, or even more, if possible.
That’s a reality for most still-working public workers covered by the Federal Employees Retirement System (FERS). FERS features several moving components, including a reduced federal annuity, a 401(k) plan with a government match of 5%, and Social Security. Although that’s a lot of work, it’s an excellent problem to have. And, with proper preparation, most FERS retirees may ensure that their overall income in retirement is comparable to their salary while working, if not greater. It may also allow many FERS retirees to live well without drawing into their TSP savings before they have to.
Then what’s the catch? Tammy Flanagan, a benefits expert, was a guest on Your Turn in May. She said that by working two more years, from age 60 to 62, an $80,000 income annually might increase their starting annuity by nearly $30,000. While earning their full salary, qualifying for salary raises, and increasing their “high-3” average salary.
Are you interested? Tammy made up this example to show how postponing retirement may benefit you (a lot!). Of course, there are several other factors to take into account. However, money, as in having enough in your golden years, is a significant factor. You may use this example of an $80K employee working more hours to receive more in retirement. Here’s the example:
- Duration of service at 60: 19 years
- 19 x $80,000 x 1% = $15,200 x 0.9 = $13,680 (10% reduction under the MRA + 10 retirement because the employee didn’t have 20 years of service by the age of 60 to be eligible for an unreduced retirement).
- Duration of service at 61: 20 years
- 20 x $80,000 x 1% = $16,000 + $12,000 = $28,000 (The extra $12,000 is a FERS supplement of $1,000 per month payable until age 62 when retiree can file for SSA and get an even greater SSA benefit based on their lifetime of FICA taxed wages).
- Duration of service at 62: 21 years
- 21 x $80,000 x 1.1% = $18,400 + $24,000 = $42,480 (The $24,000 represents the SSA benefit of $2,000 per month payable at age 62 from their lifetime of FICA-taxed wages).
The difference in income between this individual leaving at 60 and 62 is nearly $30,000 more per year for only two additional years of working. Of course, the individual who retired at 60 may collect their SSA benefit at 62, but the shortfall in their FERS basic retirement benefit for life would still be close to $5,000 per year or $600 per month. Furthermore, they would have benefited from two additional years at their presumably best earning years added to their SSA record, as well as two additional years of contributions and growth to their TSP account.
Of course, they may defer SSA and withdraw $24,000 per year from their TSP account to get $43,000 per year by deferring SSA until age 70 and then taking considerably lower payments from the TSP to fulfill the RMD requirements at 72.
Definitely one to have in your retirement planning kit. Also, don’t forget to forward this to a FERS peer.
Tammy is now “retired” (in her case, this means a full-time job as a retirement consultant).