Some people in these jobs have contacted me lately to ask about the special considerations they face in contemplating retirement. Let's look at some of them.
CSRS vs. FERS
One important factor to take into account is most of these younger retirees are now covered under the Federal Employees Retirement System rather than the older Civil Service Retirement System.
Here are some of the highlights of retirement benefits for air traffic controllers, law enforcement officers and firefighters under CSRS:
- The retirement benefit is a single defined benefit that replaces approximately 50 percent of pre-retirement salary -- or more, depending on how long the employee served.
- CSRS employees are exempt from Social Security and until 1987 did not have a retirement savings plan through the government.
- The CSRS benefit is paid regardless of how much income the retiree earns in a second career.
- CSRS benefits get a full cost-of-living adjustment annually.
FERS is different. It's a three-tiered system that has different rules for receiving benefits at various ages and different treatment of income earned after retirement.
The FERS basic retirement benefit is computed at 34 percent of the high-three average salary for 20 years of "covered" service in one of the special positions. After 20 years of covered service, additional service is computed at 1 percent. Just like under CSRS, this benefit is paid even if the retiree goes back to work.
These retirees also are entitled to cost-of-living adjustments beginning with the first year of retirement -- unlike most FERS retirees, who have to wait until they turn 62. The FERS cost-of-living adjustment is computed at a rate that is slightly less than the consumer price index adjustment on which CSRS benefits are based.
The mandatory retirement age for the special positions varies slightly -- 57 for law enforcement officers and firefighters, and 56 for air traffic controllers -- but all are entitled to receive a FERS supplement immediately upon retirement that bridges the time between their retirement and qualifying for Social Security at 62.
FERS allows employees in these special groups to retire at any age if they have 25 years of service in a law enforcement officer, firefighter or air traffic controller position, or at age 50 with 20 years of service. This could mean retirement as early as 46 for someone who started a government career at 21. The supplement is included with the FERS basic benefit and does not have any affect on the future Social Security benefit. For those who retire under the FERS minimum retirement age (55 to 57, depending on year of birth), the supplement is paid regardless of earned income that the retiree may have.
After reaching the minimum retirement age, the supplement is tested for outside earnings and the retiree may lose some or all the supplement, depending on how much income they receive. The supplement generally is worth $30 to $35 per month for every year of civilian FERS service. So 20 years of service would provide a supplement of $600 to $700 a month. The supplement is not adjusted for cost of living.
Reduced Social Security retirement is available at age 62. The benefits are reduced by 20 percent to 30 percent, depending on how far the recipient is from the full Social Security retirement age of 65 to 67. (Click here to determine your full Social Security retirement age.)
Social Security benefits are based on the highest 35 years of Social Security covered wages. Those who stop working before 62 will have a lower average wage than people who continue to work at full career salary until 62. Here's more information about the Social Security retirement benefit computation.
Thrift Savings Plan
Throughout their careers, FERS employees have the opportunity to build up additional retirement savings in their Thrift Savings Plan accounts. Retirees who continue to work after leaving government may not immediately need the additional income that the TSP can provide. They can keep their investments in the plan, move them to an Individual Retirement Account, or transfer them to a 401(k) plan, if their new employer provides one.
Of course, not all employees who retire at a young age will take on second careers. They may need to use their entire FERS retirement package, including the TSP funds, at an early age.
Those who decide to begin withdrawals from the TSP immediately upon retirement have the option of getting monthly payments, or a life annuity. The TSP has an online calculator to help determine how much income TSP investments might provide.
For employees who leave government in the year they turn 55 or later, there are no tax penalties on TSP withdrawals. Those who retire at any age and choose a life annuity or a series of payments based on a life expectancy computation also are exempt from the tax penalty usually applied for early withdrawal. Federal employees who do not fall under one of these exceptions should be aware that a tax penalty will be applied. If they receive a TSP distribution before they are 59½, in addition to the regular income tax, they will have to pay an early withdrawal penalty tax equal to 10 percent of any portion of the distribution not transferred or rolled over.
A Tax Break
Finally, one last note on a relatively new tax break for a particular group of employees: The Office of Personnel Management has determined that retired federal law enforcement officers meet the definition of "public safety officers," and thus can exclude the premiums for health insurance or long-term care insurance from their taxable retirement income. The premiums can be for coverage for themselves, their spouses or dependents. The premiums must be made directly from the retirement benefit to the insurance provider.
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.
For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.