Kathrin Ziegler/Getty

Retiring Young Can Cost You

What a difference two years makes.

What’s the difference between someone who retires at 60 and one who works until 62? Let’s look at the numbers. To make it a simple apples-to-apples comparison, let’s assume both “Bob” and “Joe” are covered under the Federal Employees Retirement System and worked full time throughout their careers. And let’s further assume they’re in the same basic retirement situation. 

So let’s say both Bob and Joe have 25 years of service. Both have worked at the GS-13, Step 10 level for the last three years in Washington, D.C. Their current salary is $138,868. Their high-three average salary will be $135,710 as of Dec. 31, 2022.

Bob will retire on that date. Joe plans to work two more years, until Dec. 31, 2024. They both save 10% of their salary in the Thrift Savings Plan. For the purposes of this comparison, let’s assume they’ll earn a 3% rate of return for the next two years. And let’s also assume that inflation will continue to be high over the next two years, so the cost of living adjustment for FERS retirees will be 7%, and the federal employee pay raise will be 5%. Of course, these numbers are impossible to predict exactly.

Bob’s Situation

From January 2023 to December 2024, Bob will receive $33,927.50 (25 years of service x 1.0% x $135,710) in his basic FERS retirement benefit. But keep in mind:

  • Bob will not receive a COLA until after he reaches age 62. If he turns 62 before Dec. 1, 2024, his benefit would increase to $35,963 (7% minus 1%).
  • For the two years he is retired, Bob will receive a gross annuity of $67,855. If he’s married and provided a survivor annuity, this would be reduced to $61,069.
  • Bob will have the following withholdings from his benefit: Federal and state income tax and premiums for health, life, dental, vision and long-term care insurance.

Bob is also eligible for a FERS supplement of $16,500 per year, or $33,000 over two years, to tide him over until he’s eligible for Social Security.

At retirement, Bob’s balance in the Thrift Savings Plan will be $500,000. He withdraws $40,000 over the next two years and has an account balance of $488,632 at the end of 2024. (He earned $14,400 in 2023 on his balance and $14,232 in 2024.)

Joe’s Situation

Joe’s salary for 2023 will be $145,811, and for 2024 it will be $153,101. This increases his high-three average salary to $145,930 by the time he retires. He’ll leave with the following: 

  • A FERS basic benefit of $43,341 (27 x 1.1% x $145,930).
  • A Social Security benefit of $25,200 (Social Security computes benefits using wages over the highest 35 years of work).
  • A TSP balance of approximately $575,000. Joe added $14,581 and $15,310 to his TSP account, along with $14,945 in agency automatic and matching contributions. He also earned 3% interest over this time. If Joe withdraws 4%, he will add $23,000 to his income in 2025.

How They Compare

Joe’s total income in the first year of retirement will be more than $91,500 (minus $4,334 if he elects a survivor annuity for his spouse). In Bob’s first year of retirement, his total benefits were $70,427 (minus $3,392 reduction for spousal survivor benefit, if he chose to provide one). That’s a difference in starting retirement income of more than $21,000.

With high inflation, the fact that cost of living adjustments are not provided on Bob’s retirement during the first two years erodes the value of his benefit.

By the way if Bob and Joe were employed under the Civil Service Retirement System, the difference in their situations would not be as dramatic. There are immediate COLAs on CSRS retirement benefits, regardless of age at retirement. In addition, the COLA computation doesn’t change at age 62 under CSRS and there are no agency contributions to employees’ TSP accounts. Social Security also is a factor in FERS, which is irrelevant under CSRS comparison, because employees covered under CSRS are exempt from FICA taxes.

It’s also important to remember that despite the difference in Bob and Joe’s retirement income, there are many other factors that might influence their desire and ability to retire comfortably. These can include other retirement income, their health or that of their family members, their lifestyle in retirement, and the possibility of embarking on a second career.