Timing Is Everything

Figuring out when to start receiving the benefits you’re entitled to in retirement.

More than 20,000 federal employees are projected to retire at the end of 2012, according to the Office of Personnel Management. When they do, they will start as many as three engines of income. More than half of those who are planning to retire will be entitled to both a federal retirement benefit and Social Security benefits. They also will be able to withdraw funds from their Thrift Savings Plan accounts.

The median age of a federal employee added to the retirement rolls in 2011 was 61. That means half of those who retired were older than 61, and many of them were eligible for Social Security. They faced a decision on whether to begin receiving Social Security benefits at the same time as their benefit under the Civil Service Retirement System or the Federal Employees Retirement System. A few weeks ago, I wrote a column called “Getting the Most From Social Security” and received many comments and emails on this subject. I’ve been considering the questions, so here are some additional thoughts on the topic.

In the end, it all depends on your age. Let’s look at three different groups.

Younger Than 62

For these folks, it’s a nonissue. They’re too young to apply for Social Security and will do one of the following things:

  • Continue working to supplement their CSRS or FERS retirement benefit. Some will take jobs in the private sector. Others may become reemployed in federal service under a dual compensation waiver. Others will become self-employed. People in this group are not ready to retire. They are simply changing gears.
  • Live on the retirement income they will receive under CSRS or FERS (with a FERS supplement, in many cases). Some in this group also will apply to receive monthly payments from their TSP account to supplement their retirement benefit. The concern for this group will be whether this income stream will be adequate to support their lifestyle for a life expectancy that could last longer than their federal career.

Between 62 and 70

Here’s an email I recently received:

I am retiring Dec. 29 at the age of 61 years and five months. Next July, at age 62, I would be eligible to receive Social Security but at a reduced rate that is 25 percent less than what I would receive if I waited until 66 to apply. According to my last Social Security statement, I would receive about $1,555 at age 62, $2,187 at age 66 and $3,031 if I waited until age 70. Someone in my office suggested that I might want to consider next July at 62 to start drawing from my TSP an amount equal to what I would get from Social Security versus waiting until I am 70 to start drawing from Social Security since I would get almost twice as much at age 70. I have enough money in my TSP to do this, but of course by 70 it would be depleted.

The decision regarding when to take Social Security retirement generally is based on the answers to the following three questions:

  • Are you still working? If so, there’s an earnings limit of $15,120 (for 2013). If you have earned income above that level, your Social Security benefit is reduced by $1 for every $2 you earn over the limit. If you continue working and earn well above this limit, then it makes sense to wait to apply for Social Security until you reach your full retirement age -- or later.
  • Do you need the money? Do you need the Social Security benefit to pay your bills? If this is the case, then the decision comes down to either taking your Social Security benefit when you stop working or possibly depleting your other assets (as described above). In the above example, the employee never mentioned whether she would need any additional income beyond her CSRS or FERS retirement benefit. If, for example, she needed at least another $1,000 a month to make ends meet, then the choice between applying for Social Security and withdrawing $1,000 a month from the TSP is valid. Another option she didn’t mention would be to work part time to make additional money. This would allow her to delay applying for Social Security as well as delay her TSP withdrawals. If she depleted her TSP to delay drawing Social Security, she would be giving up a nest egg that might double in size over the eight years. I’d think twice before doing that.
  • How long are you going to live? If the employee in the above takes Social Security at 62 and lives to be 80, she would receive 216 payments of $1,555 for a total of $335,880. If she waits until 70 to draw Social Security and lived to be 80, she would receive 96 payments of $3,031, for a total of $290,976. If you factor in inflation, it wouldn’t make a big difference. But if she lived to be 90, the difference in total benefits would be more than $200,000. That’s significant. If you’re in relatively good health and likely will live well past 80 -- and you can live comfortably without applying for Social Security -- then you should consider postponing your application.

Older Than 70

These folks are entitled to (and may already have applied for) the maximum Social Security benefit, which includes as much as a 32 percent increase in their benefit as a result of delayed retirement credits. In addition, this group will be required to take minimum payments from their tax-deferred retirement savings (such as TSP funds and individual retirement accounts).

These people potentially have the most comfortable stream of retirement income, but the least amount of time to enjoy it. Then again, if you’re in good health, you could live for a long time.

Millie Parsons worked for the FBI for nearly 63 years and retired at 89. She worked more than 20 years beyond earning the maximum CSRS retirement benefit of 80 percent of her highest three years of average salary. She enjoyed her retirement for 10 years before passing away in October at the age of 99. Millie never used an hour of sick leave during her entire federal career and was the longest continually serving employee in the history of the FBI.

Emil Corwin retired from the Food and Drug Administration at age 96 after serving for 26 years. (He wasn't hired until he was 70.) He died in March 2011 at the age of 107.