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Advice on how to prepare for life after government.

Buyout Considerations

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Many federal employees are being offered early retirement this year – and many more wish they were. Often, the offers come with a Voluntary Separation Incentive Payment, otherwise known as a buyout. (See GovExecs Buyout Watch for a running tally of agencies offering such incentives.)

The bad news is the buyout payment remains $25,000 -- the same as it was when I last wrote about this subject in 2006. Still, buyouts remain attractive. Here’s what you need to know if you are one of the lucky ones who receive such an offer and are eligible and ready to act on it -- or if you are just doing some wishful thinking.

Do You Qualify?

If you find yourself with an early out opportunity (your agency must make the offer and accept your application), you will be eligible for immediate retirement benefits if you are:
  • 50 years old with 20 years of creditable service
  • Any age with 25 years of creditable service
The Civil Service Retirement System and the Federal Employees Retirement System have the same eligibility requirements for early retirement benefits, but different ways of computing them. Here's how calculations compare under the two systems:

CSRS: (Years of service - 2) x 2 + 0.25 = ____%. Then multiply this percentage by your high-three average salary -- the average of your basic pay, including locality adjustments, over the highest salary of three consecutive years of your career. (Note: Unused sick leave is converted to service credit and will increase the length of service used in the computation.) The benefit is reduced by 2 percent per year if you are younger than 55.

Let's look at an example:

Length of service: 25 years, 6 months
High-three average salary: $65,000
Age: 52 (3 x 2% = 6% reduction for age)
(25.5 - 2) x 2 + 0.25 = 47.25% x $65,000 = $30,712/year
$30,712 x 6% = $1,842
$30,712 - $1,842 = $28,870/year, or $2,405/month

FERS: Years and months of service (including credit for unused sick leave, as applicable -- 50 percent credit for retirements before 2014 and 100 percent credit for retirements effective on or after Jan. 1, 2014) x 1% x high-three average salary. There is no age reduction on the FERS early retirement benefit. A FERS supplement is payable at the minimum retirement age (55 to 57, depending on your year of birth). For employees who transferred from CSRS to FERS, the supplement is computed using only the service after the transfer to FERS.

To compute the supplement:
  • Estimate your Social Security benefits as if you were 62, using all Social Security wages (including those gained under FERS and other nonfederal wages).
  • Calculate civilian service creditable under FERS, rounded to the nearest full year.
  • Divide the years of FERS service by 40.
  • Multiply the Social Security benefit by the figure determined in the previous step.
Here's an example:

Length of service (including any credit for unused sick leave): 25 years, 6 months
High-three average salary: $65,000
Age: 52
25.5 x 1% x $65,000 = $16,575/year, or $1,381/month payable immediately

Additional supplement payable at the minimum retirement age:
Social Security at age 62: $1,200
25 years of service/40 = .625
$1,200 x .625 = $750/month, or $9,000/year

Total benefit: $16,575 + $9,000 = $25,575/year

The FERS supplement is subject to a limit on earned income. In 2012, the earnings limit is $14,640 per year. For retirees exceeding this amount, $1 in supplement benefits is withheld for every $2 earned above the limit.

Thrift Savings Plan

There are several things to consider as you weigh your options for withdrawing funds from your Thrift Savings Plan account:
  • Be sure to read the TSP’s booklet on withdrawals and its publication on tax information.
  • If you are going to work after you retire from government, you can postpone your TSP withdrawal. You also can choose to transfer some or all your TSP balance to an individual retirement arrangement, or your new employer's 401(k) plan.
  • If you are younger than 55 when you retire, your TSP withdrawal may be subject to a 10 percent early withdrawal penalty for those payments that you receive prior to age 59½. To avoid this penalty, you can postpone your withdrawal, or choose to receive monthly payments based on life expectancy or a life annuity.
  • If you are 55 or older in the year you retire, you can withdraw TSP funds without incurring the 10 percent penalty. If you transfer your TSP to an IRA, you will incur the penalty on withdrawals until you are 59½.
  • The new Roth TSP option has additional limitations on withdrawals: The earnings in your Roth balance become qualified, and are therefore paid tax-free, when five years have passed since Jan. 1 of the calendar year in which you made your first Roth contribution and you have reached age 59½, or have a permanent disability.
Health and Life Insurance

If you are eligible for early retirement, you may be eligible to continue your Federal Employees Health Benefits Program coverage. You must have been continuously enrolled (or covered as a family member) in any FEHBP plan (not necessarily the same plan) for the five years of service immediately preceding retirement, or if less than five years, for all your service since your first opportunity to enroll.

You may qualify for a waiver of the five-year test if you were covered under FEHBP since the beginning of your agency’s latest statutory buyout authority and if you:
  • Retire during your agency's statutory buyout period; and
  • Receive a buyout under the agency's statutory buyout authority; or
  • Take early optional retirement as a result of early out authority in your agency; or
  • Take a discontinued service retirement based on an involuntary separation due to reduction in force, directed reassignment, reclassification to a lower grade or abolishment of position
If you meet these requirements, then you do not have to write a letter requesting a waiver. Instead, your agency must attach a memorandum to your retirement application stating that you meet the requirements for a preapproved waiver.

You also can continue coverage under Federal Employees Group Life Insurance if:
  • You have been insured for the five years of service immediately before the date your annuity starts, or for the full period of service during which you were eligible to be insured if less than five years.
  • You have not converted your life insurance coverage to an individual policy -- or if you already have converted the coverage, you cancel the converted policy.
Annual Leave

You will receive a lump-sum payment for any unused annual leave when you separate from federal service.

Things to Remember

Here are some things you should consider when weighing an offer to retire early:
  • How much do you enjoy your work?
  • How much time have you spent planning for retirement, financially and psychologically?
  • Can you afford to retire?
  • Are there opportunities for you to use your skills in the private sector, or state or local government?
  • By retiring earlier than you had planned, you will receive your retirement benefit longer.
  • If you have a basic retirement income and you continue your FEHBP and FEGLI into retirement, you won't need as much salary or benefits from a second career. With health insurance included in your retirement, you could consider self-employment as a possible second career.
  • Accepting a buyout with early retirement is a commitment to retire. You generally can't change your mind once you apply. Be sure this is what you want to do.
  • A $25,000 buyout might add up to only $16,000 after taxes. 

Tammy Flanagan has spent 30 years helping federal employees take charge of their retirement by understanding their benefits. She runs her own consulting business at www.tammyflanagan.com and provides individual counseling as well as online training for the National Active and Retired Federal Employees Association, Plan Your Federal Retirement as well as the Federal Long Term Care insurance Program. She also serves as the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Federal News Radio on Mondays at 10 a.m. ET on WFED AM 1500 in the Washington-metro area. Archived shows are available on NITPInc.com.

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