If you have a simple exit strategy that gives you the best deal in retirement, chances are it’s wrong. Or at least not very simple. This is especially if you work for Uncle Sam. As most insiders know, government can be complicated. And frustrating. But also very rewarding. If you do it right and take advantage of your best exit options.

Whatever your plan and goal, there are plenty of instances where people don’t get the best deal for themselves. This is because they don’t know all the rules or questions to ask about their pension and when to get the best deal. There are a number of “best dates” to retire. Mainly for tax purposes or to get a share of the new salary increase. Days like December 31 or January 3 depending on your retirement plan. But in addition, there are definitely the best times to retire, based on the answers to what seems – to us laymen – simple. But are not. By a long shot.

Example: Recently, a reader/listener sent us a “simple” question about retirement. Like most “simple” questions, it turned out to be complex. So we passed it on to Tammy Flanagan. She is a retired Federal who now makes a living advising clients on retirement and other employment-related issues. Tammy will be my guest on Your Turn radio show today at 10 a.m. EDT. And we’ll talk about general questions about retirement. In the meantime, here’s an example of why many people should get help planning for their retirement. The question is apparently “simple”. The correct answer, anything but! The Defense civilian writes:

I am a Federal DoD employee and currently have 30 years of service, but I am 52. I have invested in TSP since 1992 at most. I believe my retirement age eligibility is 57, which is five years. Is there a benefit to retiring early? I am married and have two sons, currently 13 and 11, so by the time I can retire they will be entering/preparing for college.

Simple, right? It turns out that’s not so much the case. Here is Tammy’s professional response:

There are three main options for this employee to consider when planning for retirement.

  1. It is important for her to make estimates of the three parts of the FERS (basic FERS pension benefit; FERS supplement or social security pension; various distribution options of the TSP).
  2. Consider that all three benefit streams will be subject to federal income tax and, depending on the state, also state income tax.
  3. She will continue to pay her insurance premiums monthly in retirement using after-tax dollars.
  4. If she is married, a surviving spouse election must be considered, which will result in a 10% reduction in her basic FERS pension benefit.
  5. It’s also important to plan for long-term care so that future care needs don’t derail your financial plan.
  6. When planning TSP withdrawals, be careful in projecting future rates of return, as the market will fluctuate over time and may not provide the returns that have occurred in recent years of a bull market.
  7. Years of lower returns can be devastating and stressful if one’s FERS retirement and social security benefits aren’t enough to withstand those swings in return rates.

Here are the three options along with some considerations to keep in mind for each:

  • Resign before his MRA and request a deferred retirement from his MRA.
    • Her future benefits will be based on her high average salary at the time she separates from federal service.
    • She will not receive any cost-of-living adjustments to her FERS retirement benefit until age 62. The benefit will be of the same value for 10 years if she leaves federal service at age 52. Consider what your salary was 10 years ago. How different was it from today? If high inflation continues, it will significantly erode your purchasing power for your FERS benefit and could cause you to deplete your retirement savings too quickly.
    • It’s going to be hard to stop working and having no income for the next five years. TSP life expectancy payments based on $500,000 starting at age 52 with a future rate of return of 3% would provide a starting monthly payment of less than $1,300/month. Use the TSP Payment and Annuity Calculator to run different scenarios (remember that these payments will be subject to federal and possibly state income tax withholding, depending on which state you live in).
    • Payments other than life expectancy payments or a life annuity will incur a 10% early withdrawal tax penalty.
  • Continue to work until age 57 (MRA)
    • This is his first eligibility for an “immediate” retirement without reduction.
    • The FERS Retirement Supplement will be payable to provide another source of immediate income in addition to the basic FERS Retirement Benefit.
    • There are no cost-of-living adjustments on the FERS supplement and the basic FERS benefit will be a flat payment until age 62, when cost-of-living adjustments begin.
    • There will be no 10% early withdrawal penalty on TSP distributions, allowing greater flexibility in the type of withdrawal option selected.
    • Depending on the TSP balance, this may be the first realistic opportunity to retire with enough income to replace your net income while you were employed.
  • Continue to work until age 62
    • Eligible for the pension calculation factor of 1.1% for the basic FERS benefit, which represents a 10% increase in addition to having more service and an average salary greater than three more generous due to the continuation of work.
    • Eligible for Social Security retirement which is more tax-efficient than the FERS supplement.
    • The FERS and Social Security pension receive annual cost-of-living adjustments.
    • There is a better chance of having TSP distributions that will be sufficient to last over 30 years, allowing for future market fluctuations and years of higher inflation.
Age The length of service Retirement option Calculation of benefits (using an average salary of $80,000 over three)
52 30 Not eligible for immediate retirement; resignation with deferred retirement payable at age 57 30 x 1% x $80,000 = $24,000; Social Security payable at age 62*; Can receive penalty-free TSP withdrawals at age 59½ or life expectancy payments at any age.
57 35 First eligibility for immediate retirement 35 x 1% x $80,000 = $28,000; FERS pension supplement = 35/40 of age 62 SSA benefit*; eligible to withdraw TSP payments without a 10% early withdrawal tax penalty.
62 40 Eligible for immediate retirement and higher calculation factor 40 x 1.1% x $80,000 = $35,200; Eligible for Social Security*; eligible to withdraw TSP payments without a 10% early withdrawal tax penalty.

*www.ssa.gov estimates SSA benefit at ages 62-70.


Your retirement age and when you stop working

Retirement age is the age at which you begin to receive Social Security retirement benefits. For many people, this is not the same age at which you will stop working.

The age at which you stop working can affect the amount of your Social Security retirement benefits. We base your retirement benefit on your best 35 years of earnings and the age at which you start receiving benefits.

If you stop working before you start receiving benefits

If you stop working before you start receiving benefits and you have less than 35 years of earnings, the amount of your benefits is affected. We use a zero for each year without income when calculating the amount of pension benefits owed to you. Years without income reduce the amount of your retirement benefits.

Even if you have 35 years of income when you stop working, some of those years may be low income years. When you apply for retirement benefits, these years are averaged into your calculation, creating a lower benefit. However, if you continue to work, your low income years are replaced by your high income years. Higher earnings increase the amount of your benefits.

If you stop working between age 62 and full retirement age

You can stop working before full retirement age and receive reduced benefits. The earliest age at which you can start receiving retirement benefits is 62. If you apply for benefits when you reach full retirement age, you will receive full retirement benefits.

If you stop working after full retirement age

If you choose to work past full retirement age, you have two options:

  • You can work and receive full retirement benefits, regardless of your income.
  • You can delay the payment of retirement benefits and accumulate credits that increase the amount of your benefits.

Imagine if that had been a complicated question? Sip!

Almost useless factoid

By David Thorton

The sound of Darth Vader’s breathing is a registered trademark.

Source: Gizmodo