Whether you accepted the deferred resignation offer, retire from federal service, or your position is ultimately eliminated, there are five things every federal employee should know before they separate from service:
1. What type of Retirement are you eligible for under FERS?
When you retire, you may qualify for a pension, Social Security, FERS annuity supplement, Thrift Savings Plan, and insurance benefits. To calculate these amounts and determine your eligible benefits, you must first know what type of Retirement you will go out under. To determine your eligibility, the Office of Personnel Management will look at your age and years of creditable service. There are 5 basic types:
Full Retirement
To qualify for full Retirement, you will need 30 years of creditable service and to have reached your Minimum Retirement Age or MRA. Alternatively, you can be eligible at age 60 with only 20 years of service or 62 with only 5 years of service. You can start an immediate, unreduced annuity based on your High-3 Average and your years of service. If you are under 62, you can also receive a FERS annuity supplement calculated using your estimated Social Security estimate and your years of service. You can keep your health insurance at the same rate if you have been covered under FEHB for the last 5 years before Retirement. Finally, you can access your TSP balance, and the 10% penalty for withdrawals under the age of 59.5 may be waived under certain conditions.
Early Retirement
Early Retirement is for those who have met their MRA but do not have 30 years of creditable service. They are also eligible for an annuity, but it will be reduced by 5% per year until they reach full eligibility (age 60 or 62.) Insurance benefits will apply under the same conditions as full Retirement.
Those not wishing to take the reduced amount can also postpone their pension until eligibility is met. They could then start an unreduced annuity and resume their insurance benefits. Note that they would lose these temporarily until the annuity begins.
Voluntary Early Retirement Authority (VERA)
OPM may offer VERA to agencies to temporarily reduce the age and years of service requirements to qualify for Retirement. The retirement annuity and insurance benefits are the same, but the FERS annuity supplement would not begin until the person reaches their MRA. They could move the TSP to an IRA or other qualified account without penalty or taxes; however, other withdrawals from TSP may be taxable and subject to a 10% penalty if the person is under 59.5.
Deferred Retirement
You must have at least 5 years of creditable service to qualify but have not met your MRA. You can start a pension upon attaining the age of eligibility, but you cannot resume your insurance benefits.
Refund of Contributions: If an employee does not have 5 years of creditable service, they do not qualify for Retirement under FERS. However, they can have their contributions refunded to them with interest. It is a taxable amount unless moved to an IRA or qualified account.
2. Understand How Your Insurance Benefits Will be Affected (FEHB, FEGLI)
When you separate from service, certain benefits will change, and it is essential to prepare early. As long as you qualify, you can keep your health insurance at the same rate as a regular employee for the rest of your life. This is one of the most valuable benefits of the FERS system, as your agency is paying 70% of the cost. It is also important to work with a healthcare specialist when you reach the age of 65 to coordinate FEHB with Medicare.
Your life insurance or FEGLI benefits change much more dramatically. To keep all of your Basic coverage, the cost will rise almost 650% at Retirement for most employees. The age-rated options of A, B, and C can increase even more as the price increases every 5 years. There are other options at Retirement to keep some of your coverage at reduced rates, so please work with one of our FERS retirement consultants to review your options. We can also provide private life insurance coverage through one of the multiple carriers that we work with.
3. Compare Options for Your TSP and Know the Pros & Cons When Compared to IRA
You can usually access your TSP after 30 days when you separate from service. Whether to keep it inside TSP or take withdrawals depends on many factors and personal preferences. You can always move it to an IRA without tax consequences, but other withdrawals/penalties are based on age.
If you withdraw from TSP under 59.5, you will incur a 10% penalty unless you went out under Full Retirement or VERA (if 55 or older.) Withdrawals are taxable at any age unless they come from a ROTH account. You will also be subject to Required Minimum Distributions or RMDs at age 72 or later, depending on your birth year.
The main advantages of keeping some money in TSP are the low fees and the ability to take penalty-free withdrawals under age 59.5. There are drawbacks, however, as the fund choices are minimal, and you don’t have the same access or control over your investments. Most people are probably better off moving some or all of their account to an IRA. When moving from the group TSP account to an Individual account like an IRA, the participant has total access to the account. Multiple investments can be used; you can access them immediately and as frequently as you like, and there are various ways to create an income stream for retirement years. Please meet with one of our retirement specialists to review your options.
4. Know How Sick and Annual Leave is Paid
One of the main questions we get asked at United Benefits is about the leave issue. Your Annual Leave is paid out to you directly in Retirement, usually within 2-4 weeks after separating. Your Sick Leave is added to your years of service in multiples of 30 days, which calculates your pension amount. Note that Leave cannot be used to attain eligibility for Retirement under FERS.
5. How Will You Handle Your Social Security & FERS Supplement?
Social Security payments can begin as early as age 62 for FERS retirees. There is a penalty for each year you are under your Full Retirement Age (FRA), age 65-67, depending on the year you were born. Income limits also affect how much you can earn in taxable wages before your benefit becomes reduced or even eliminated. Once you reach your full retirement age, the income limits are eliminated, and the participant could begin receiving their benefits or keep deferring until the age of 70. At age 70, the increases for deferral stop, and Social Security payments would need to be started. There are multiple factors to consider regarding when the best time to start collecting Social Security is, so again, it is vital to work with one of our retirement specialists and/or your tax advisor.
The FERS supplement is also available to those who retire with full benefits. While it is calculated using your Social Security benefits, it is paid from your agency and will not affect your SS benefits. The supplement is paid from your MRA until the age of 62 and is also subject to income limits.
The above information is intended for educational and informational purposes only, and it is just a partial list of Retirement and Benefits that are affected when you separate from service, so it is always important to meet with someone familiar with the FERS system before separating/retiring. United Benefits has experts in all these areas and we are here to help. Fill out the form below for a free, one-on-one consultation and benefits review.