Should You Take a Buyout?
With agencies under orders to downsize, it’s becoming more than a hypothetical question.
Earlier this week, Eric Katz of Government Executive reported that the Environmental Protection Agency will begin offering employees buyouts and early retirement incentives this year. News like this puts employees at all federal agencies on high alert. I got several emails this week from readers as a result of this announcement. For example, Susan wrote, “Would you consider posting an article giving your thoughts about the pros and cons of taking these buyouts?”
In retirement planning, it’s important to be ready for a range of possibilities. It’s like planning a vacation. I’m usually the one to plan our family getaways because I don’t like surprises and I want to be sure we don’t miss out on something because we didn’t think ahead. As Col. John “Hannibal” Smith used to say on the TV show The A Team, “I love it when a plan comes together.”
So should accepting an early out offer, potentially with a buyout, be part of your plan? To answer that question, it’s first important to understand two terms: Voluntary Early Retirement Authority and Voluntary Separation Incentive Payment. The VERA and VSIP programs are key tools to help agencies meet goals of restructuring and downsizing. Use of them must be approved by the Office of Personnel Management.
To take an early out option under VERA authority, an employee must be at least age 50 with at least 20 years of creditable federal service, or any age with at least 25 years of service. The employee also must be in a position authorized by VERA authority granted by OPM, and leave federal service by the time the early out period closes.
Retirement benefits for those who leave under VERA are calculated in mostly the same manner as regular optional retirement. But there is a reduction for those under the Civil Service Retirement System for being under age 55. And for those under the Federal Employees Retirement System, the FERS supplement isn’t paid until the retiree reaches the FERS minimum retirement age. OPM provides more more information on VERA on its website.
The VSIP, also known as a buyout, allows agencies that are downsizing or restructuring to offer employees lump-sum payments up to $25,000 to voluntarily leave government. When authorized by OPM, an agency can offer buyouts to employees who are in surplus positions or have skills that are no longer needed. The idea is to avoid costly and disruptive reductions-in-force.
Some agencies, such as the Defense Department, have been granted authority in statute to offer buyouts and don’t need OPM approval to use them. DOD can offer buyouts of up to $40,000 through Sept. 30, 2018. OPM has more information on VSIP.
There are several questions to consider if you are offered the opportunity of a VERA, with or without a VSIP:
Are you ready to retire financially? Do you have a recent retirement estimate? For those under FERS, are you eligible for Social Security retirement or the FERS supplement? Have you considered how you will use your TSP investment in your retirement years?
How will this decision affect your net income? CSRS and FERS retirement benefits are subject to federal and often, state, tax withholding. Premiums will be withheld for insurance that you are eligible to continue into retirement. Social Security retirement benefits are subject to federal income tax if your income is above certain thresholds, although the majority of states exempt Social Security from income tax. TSP withdrawals are subject to income tax as well as certain tax penalties if you are under age 59 ½. The VSIP payment is treated as ordinary income for tax purposes. A $25,000 buyout payment can quickly become $16,000 after taxes.
Are you mentally prepared to retire? Have you discussed the option with your spouse or other people who would be impacted by your decision? If you’re not financially ready to retire, have you updated your resume and explored the possibilities in the job market for people with your skills, education and abilities?
Fore more information, see the column I wrote in 2012 on VERA and VSIP.
To return to the vacation planning analogy, the offer of a buyout is like considering a trip you weren’t planning to take until you found out that you could get an extra day free at a hotel. Should you do it? That depends on whether you’ve saved up enough for your trip, and whether that “free” extra day will also involve some additional cost for meals and activities. Only you can decide whether you should go, or wait until next year.