A Little Lower

A few weeks ago, I wrote about how to decide whether to retire from federal service to work in the private sector or continue in your federal career. Several readers commented about the salary rates I used in the examples, saying they'd like to see how scenarios would work out for employees who don't earn executive-level pay. Others had some questions about computations of Social Security benefits discussed in the column.

This week, I'll respond to each of those issues, using a couple of scenarios involving a hypothetical employee I'll call "Daniel." He's among the 43 percent of federal employees (as of 2004) who earn less than $50,000 per year.

Please keep in mind that all of the numbers below are approximate and based on estimates of such variables as salary level, insurance premiums and tax withholdings.

Daniel Under CSRS

For the first scenario, let's assume Daniel is in the Civil Service Retirement System, and that the following factors apply:

• High-three average salary: $40,000
• Length of federal service: 30 years
• Age: 55

The first set of two columns in the chart below illustrate Daniel's current federal salary and withholdings. The second set shows his retirement income plus pay from a second career.

In the above example, Daniel could begin a second career and, at the end, he would have increased his investment income and his Social Security benefit. If he decided to continue working in his federal career for three more years instead of retiring early, the increase to his CSRS benefit would be about $2,853 per year, or $238 per month. He also would have an increase in his Thrift Savings Plan income for being able to continue saving 5 percent of his salary.

For Daniel, the key to improving his situation by retiring early from federal service would be the ability to shelter $14,000 a year in his new 401(k) and live on about the same income he had while he was working for the government. Daniel may not be able to afford to retire completely at the end of three years in either situation, since his retirement may not replace enough of his current income. Whether he stays in his federal career or whether he retires early to pursue a private sector job would depend on careful planning and diligence in continuing to save. With the right job offer, Daniel might be able to transform his career into something completely new, or if he prefers less upheaval in his life, he could also do quite well to finish his career in federal service.

Daniel Under FERS

In this scenario, let's assume Daniel is covered under the Federal Employees Retirement System and is going to retire from federal employment at his first opportunity and immediately return to work in the private sector using the valuable skills he's gained. And let's apply the following factors:

• High-three average salary: $40,000
• Length of service: 30 years
• Age: 56 (minimum retirement age)

Daniel also would have the benefit of maintaining his federal health insurance upon retirement, so he wouldn't need health benefits in his second career.

Social Security Considerations

When I wrote about these kinds of comparisons before, one reader responded, "I believe you made a mistake. Under FERS, the Social Security supplement is reduced if the retiree earns above a threshold amount. This has to been taken into account when calculating the benefit of working after retirement."

Another commented, "We were told in a retirement seminar that you can retire and get another job but you can't make more than $12,000 a year or you will lose the Social Security bridge payment that goes with the FERS retirement plan."

Here's an explanation: The FERS basic benefit is payable regardless of whether the retiree is entitled to receive the supplement or not. The supplement is considered an extra temporary payment meant to "bridge" the time between retirement under FERS and qualifying for Social Security retirement.

I didn't consider the supplement in my analysis, since as both of these readers have pointed out, the supplement is not fully payable unless the individual is no longer working (or at least they have earnings below $12,960 per year, which is the 2007 limit that applies before the supplement begins getting reduced). I included the supplement in the chart above, but have crossed out the amount since the earned income would have eliminated this benefit.

Another reader wrote, "I am thinking of retiring, but am a bit confused as to what my retirement would be. I have 23 years of service, so I am under FERS. Based on my birth year, I am eligible for retirement when I reach 60. I am currently 58, so in two more years I will have 25 years. Will I receive a pension plus TSP distribution?" This person is entitled to a reduced FERS basic benefit today since he or she is over the FERS minimum retirement age with more than 10 years of service. If the employee waits until age 60 to retire, then he or she would be entitled to an unreduced benefit plus the FERS supplement. For a more detailed discussion of retirement eligibility, see my previous columns on this topic: Eligibility: Facts and Myths (July 6, 2007) and Retirement Estimate: The Details (May 11, 2007).

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.