Phased Retirement Q&A

More details on the option to partially retire while still working.

Last month, I wrote about the new phased retirement option for federal employees, enabling them to work part time while they start to draw retirement benefits.

That column sparked a series of questions and comments about how the new provision will be implemented. I thought I’d tackle some of them this week.

Will the phased retirement also forestall required minimum distributions from the Thrift Savings Plan?

My associate, Bob Leins (a certified public accountant with NITP Inc.), posed this question to TSP officials and they pointed him to a section of the law that enacted the phased retirement option, which states that for certain defined purposes, “a phased retiree shall be deemed to be an employee.”

According to the TSP, this means no employee is entitled to treat phased retirement as a separation for plan withdrawal purposes. That in turn means employees will not be subject to required minimum distributions (which are compulsory after participants are age 70 ½ and retired) until they are fully retired.

Employees in phased retirement can continue to make contributions to the TSP and are eligible to make any withdrawals they are allowed to make as employees (whether age-based or due to financial hardship). Also, employees in phased retirement will remain eligible to receive TSP loans and to repay them through payroll deduction. If an employee has a TSP loan upon entering phased retirement status, he or she will not have to prepay the loan, nor will it be declared a taxable distribution.

Could the phased retiree qualify for a Federal Employees Retirement System supplement? If so, would it be prorated?

I’m not sure on this one yet, but since the FERS supplement is tested for outside earnings, it most likely would be reduced to nothing as a result of the partial earnings of the phased retiree.

The earnings limit is $14,640 for 2012. The supplement is reduced by $1 for every $2 earned above this limit. So if a phased retiree was receiving 50 percent of a $70,000 salary ($35,000), this would be $20,360 above the earnings limit and would reduce the supplement by more than $10,000 -- most likely eliminating it altogether. The supplement is worth approximately $35-$40 per month for every year worked as a civilian federal employee under FERS. Thirty years of service would provide a supplement of around $1,200 a month. If it was paid at 50 percent, it would be cut to $600, whereupon the earnings limit would reduce it to zero.

What's good for the government is not always good for the employee. A retirement-eligible worker with 36 years of service and making $80,000 per year is eligible to receive roughly $56,000 in retirement pay if fully retired. An employee taking half-time phased retirement would get $28,000 (half retirement pay) and $40,000 (half of regular salary) for a total of $68,000, which is $12,000 more than collecting full retirement. That means the employee is earning $11.50/per hour ($12,000 divided by 1,040 hours) for the part-time work for which he or she was paid $38.40 per hour while fully employed. I don’t think many employees will take the offer to get paid roughly 30 cents on the dollar for the same work. No wonder the bill was passed. It’s another no-win for the employee.

I see what you’re saying, but the reasons for taking a phased retirement would be more comprehensive than just looking at the difference between one’s full retirement benefit and the amount being paid for partial retirement and partial salary. Even employees who continue to work full time when they are eligible for retirement are working for the difference between their retirement benefit and their full salary. Yet many continue to do so because they can increase the amount of their lifetime retirement benefit and make additional contributions to the Thrift Savings Plan. This allows them to have a more comfortable retirement once they make the decision to fully retire.

Sometimes, a partial retirement can make the mental transition to full retirement a little easier on the employee. Kevin Cahill, a research economist, has written an article called “Thinking About Phased Retirement?” that explores some of the benefits of the phased approach.

I predict phased retirement will not be popular and little used.

Have ye no faith, my friend? My prediction is the option will be welcomed by many federal employees who are eligible to retire, but just not ready to jump in head first. I’ve been polling people at my preretirement seminars, and in most cases I’m getting a better than 50 percent favorable response to the idea.

NEXT STORY: Don’t Give Up on a Pay Raise

X
This website uses cookies to enhance user experience and to analyze performance and traffic on our website. We also share information about your use of our site with our social media, advertising and analytics partners. Learn More / Do Not Sell My Personal Information
Accept Cookies
X
Cookie Preferences Cookie List

Do Not Sell My Personal Information

When you visit our website, we store cookies on your browser to collect information. The information collected might relate to you, your preferences or your device, and is mostly used to make the site work as you expect it to and to provide a more personalized web experience. However, you can choose not to allow certain types of cookies, which may impact your experience of the site and the services we are able to offer. Click on the different category headings to find out more and change our default settings according to your preference. You cannot opt-out of our First Party Strictly Necessary Cookies as they are deployed in order to ensure the proper functioning of our website (such as prompting the cookie banner and remembering your settings, to log into your account, to redirect you when you log out, etc.). For more information about the First and Third Party Cookies used please follow this link.

Allow All Cookies

Manage Consent Preferences

Strictly Necessary Cookies - Always Active

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data, Targeting & Social Media Cookies

Under the California Consumer Privacy Act, you have the right to opt-out of the sale of your personal information to third parties. These cookies collect information for analytics and to personalize your experience with targeted ads. You may exercise your right to opt out of the sale of personal information by using this toggle switch. If you opt out we will not be able to offer you personalised ads and will not hand over your personal information to any third parties. Additionally, you may contact our legal department for further clarification about your rights as a California consumer by using this Exercise My Rights link

If you have enabled privacy controls on your browser (such as a plugin), we have to take that as a valid request to opt-out. Therefore we would not be able to track your activity through the web. This may affect our ability to personalize ads according to your preferences.

Targeting cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.

Social media cookies are set by a range of social media services that we have added to the site to enable you to share our content with your friends and networks. They are capable of tracking your browser across other sites and building up a profile of your interests. This may impact the content and messages you see on other websites you visit. If you do not allow these cookies you may not be able to use or see these sharing tools.

If you want to opt out of all of our lead reports and lists, please submit a privacy request at our Do Not Sell page.

Save Settings
Cookie Preferences Cookie List

Cookie List

A cookie is a small piece of data (text file) that a website – when visited by a user – asks your browser to store on your device in order to remember information about you, such as your language preference or login information. Those cookies are set by us and called first-party cookies. We also use third-party cookies – which are cookies from a domain different than the domain of the website you are visiting – for our advertising and marketing efforts. More specifically, we use cookies and other tracking technologies for the following purposes:

Strictly Necessary Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Functional Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Performance Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Social Media Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Targeting Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.