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Answers to some of your common questions about CSRS and FERS

Federal retirement expert Tammy Flanagan says “the devil is in the details.”

Federal employees and retirees have so many questions regarding retirement, and it is always a situation where the “devil is in the details!”  Let’s look at a few of the very common questions that come up when planning for retirement under CSRS and FERS:

Question: Should I stay on the payroll and use up my annual leave balance before I retire, or should I take the lump sum payment?

Answer: Which is the right choice? Taking the lump sum. The simple reason is that you're not supposed to take leave when you are on your way out the door. The comptroller general has ruled that federal managers cannot grant an employee "terminal leave" if they know in advance that the employee is going to separate from federal service when the leave is used up. However, there are always ways around this by using the leave throughout the year, so it is worth looking at this question another way by trying to figure out if you would come out better financially by taking the lump sum or expiring out the balance prior to retirement? That's a more interesting, and more complicated, question.

Here is an example to consider

This employee plans to retire under the Civil Service Retirement System next year. Her plan was to take her annual leave (at least 240 hours carried over from 2023), extending her date to retire rather than leaving earlier and getting a lump sum payout, but she is looking at both options.

Option 1: Take the lump-sum payment. Receive a lump sum payment for 240 hours of leave (or more). Let's assume that her hourly pay rate (which is her annual pay rate divided by 2,087) is $59.07. The payment for 240 hours of unused annual leave would be $14,176.80, minus taxes. Of course, she will earn additional leave by continuing to work in 2024.

Option 2: Retire when the annual leave is used up. That way, she'll receive four more pay periods (240 hours) worth of full salary instead of retired pay, and her retirement benefit will reflect two more months of service since she extended her service by the amount of annual leave.

So far, it looks like using the leave and staying on the payroll makes sense. The employee figured her additional salary for staying on the payroll longer would be $18,902 before deductions (these include retirement contributions, insurance premiums and taxes). Taxes are withheld from the annual leave payment, but not retirement deductions or insurance premiums. She calculated that she would come out with about $5,000 extra in her pocket by staying the extra two months and receiving her full salary longer. Also, her retirement benefit would increase by $32 per month for the rest of her life with the additional two months of service. 

There is something else to consider, however. If she retires and gets a lump-sum payment for unused annual leave, she can then receive a retirement check for an additional two months. Since she is retiring under CSRS, her monthly annuity payment was computed at $6,485 before taxes and insurance withholdings. That's a lot of money just for waking up every day.  Under this scenario, she would end up with around $8,000 in cash by retiring and taking the lump sum payout. Considering that if she stayed on the job two more months and her retirement goes up only $32 a month, it would take her more than 20 years to break even ($8,000 / $32 = 250 months / 12 = 20.8 years).

But if you're covered under FERS, it's a different story. By staying longer on the payroll and using the annual leave, you can continue to contribute to your Thrift Savings Plan and Social Security, as well as your retirement benefit. Plus, you would receive your full salary longer. The basic FERS retirement benefit would be only about half as much as it would be under CSRS. Under FERS, the computation generally is 1% (or 1.1%if retiring at age 62 or later with 20 or more years of service) times the high-three average salary times years and months of service. Under CSRS, after 10 years of service, all years are worth 2% times the high-three average salary. But the additional matching and automatic TSP contributions for four more pay periods would be almost $1,000 for this employee, plus the same amount in employee contributions -- or more (assuming TSP contributions are 5% of salary or greater).

The bottom line is that regardless of the financial advantages or disadvantages of using the leave while employed, it might be nice to have the lump-sum annual leave payment to weather the transition from employee to annuitant. It can take several months before your retirement benefits are finalized. It is nice to have a little cash cushion to tide you over during this period.

Question:  My husband died at 50 (in 2018). I have not claimed a survivor’s benefit other than for our daughter who is now 21 and received benefits until she was out of high school.  I am now trying to decide if I should claim my widow’s benefit at age 60 or wait until I’m 62 to claim my own Social Security retirement.

Answer: I'm sorry that you became a widow so young. Because your daughter was already over 16 when her dad died, you weren’t entitled to receive any benefits when you lost your husband (parents can collect when the child is under 16).

This is a complicated question, and the answer is, “it depends.”  Here are the factors that would help determine the best action:

·       Are you working? If you are, there is an earnings limit that would potentially reduce or even eliminate your ability to receive widow’s and / or Social Security retirement benefits. For 2024, if you earn more than $1,860 / month ($22,320 / year), you will have her benefit reduced by $1 for every $2 earned over this limit). If you are not working, but return to work, be sure to notify Social Security to avoid being overpaid. 

·       How much is your late husband's benefit amount compared to your own earned benefit? In cases where your husband’s benefit was substantially greater than your own benefit, it might make sense to draw your own benefit first and delay the widow’s benefit until you reach your full retirement age when it won’t be subject to an age reduction for filing early. On the other hand, if your own earned benefit is substantial and by delaying your claim to age 70, you will receive a greater benefit than the widow’s amount, it could make sense to claim the widow’s benefit early (at age 60 or when your earning fall below the limit) and delay your own earned benefit payment. 

·   How much of your total income is coming from SSA (is this your main source of income or do you have substantial income from investments / retirement accounts and your own pension benefit?)

Once all of the pieces of the puzzle are considered, then it can become more clear whether she should apply sooner or later and for whose benefit should take precedence.

In most typical claims for benefits a:

• Widow or widower, at full retirement age or older, generally gets 100% of the worker’s basic benefit amount.

• Widow or widower, age 60 or older, but under full retirement age, gets between 71% and 99% of the worker’s basic benefit amount.

• Widow or widower, any age, with a child younger than age 16, gets 75% of the worker’s benefit amount.

• Child gets 75% of the worker’s benefit amount.

Here are some references to help when deciding when to claim Social Security benefits:

Social Security Website: www.ssa.gov

Social Security:  If You Are the Survivor

Survivors Benefits

Smart Social Security Strategies for Women

2024 Social Security Changes

Exempt Amounts Under the Social Security Earnings Test

eBook by Mary Beth Franklin, Maximizing Social Security:  https://marybethfranklin.com/ebook-on-social-security-estimated-benefits/

Question: I'm a retired Federal Law Enforcement Officer who has medical coverage through FEHB (Blue Cross). Amazingly, I'm coming up on my 65th birthday next summer and have spoken to several friends in similar situations and their responses fall into two camps.

A. Take Medicare A and B, drop to a lower Blue Cross coverage plan and all is good.  Except that I'd pay over $400 per month for Medicare coverage due to Income-Related Monthly Adjustment Amounts (IRMAA) which would cost me approximately $5000 per year to enroll in Part B, or

B. Don't take Medicare and let my current coverage stand. No Medicare payment whatsoever.

My question is what would happen if at some point in the future I'm "required" to take Medicare (the current system changes to make all retirees take Medicare) and then get charged the 10% per year late fee for not taking Medicare when I’m first eligible?  I guess I want to have my cake and eat it too, but right now it seems like Medicare may be an unnecessary expense, if the rules don't change and I'm not subject to the penalty down the road. The question may not even be answerable (several people believe this to be true) because there may be too many unknowns, but I'd appreciate any input you could provide.

Answer: You have been told correctly concerning the option to forgo Part B and just use FEHB alone or enroll in Part B (and Part A) and possibly change to BC/BS Basic (or GEHA High Option or Aetna Direct or any FEHB plan that provides incentives to enroll in Medicare A and B). If Congress requires Medicare to continue FEHB in the future, It could happen that they would do the same thing that is happening for postal retirees next year (but that is a completely unknown and “not on the table” option at this time):

According to the National Association of Active and Retired Federal Employees, eligible Postal annuitants and family members not enrolled in Medicare Part B as of Jan. 1, 2024 will be eligible for a six-month, penalty free, Special Enrollment Period (SEP) to enroll in Medicare Part B, beginning April 1, 2024. While the SEP is available to those interested in the option, there is no requirement to enroll in Part B. However, those who do take advantage of this SEP will not have to pay the late enrollment penalty, which increases premiums by 10% for each 12-month period they could have been enrolled in Part B but did not sign up for coverage. Instead, the Postal Service will cover the penalty. Annuitants who decide to enroll will still have to pay the Medicare Part B monthly premium. OPM and the Social Security Administration will determine who is eligible for the SEP and inform those who meet the requirements.

If you decide not to take Part B, you will continue to pay your deductible, copays and coinsurance from age 65 to age 105 (or beyond).  Most likely, you will find that for the first 10 years or so of that period, you will most likely come out ahead if you don't take part B and remain in good health, but no guarantees! In my opinion, paying the IRMAA could be a small price to pay for 100% coverage for the rest of your life on both inpatient as well as outpatient medical care. In addition, if you are still working in your second career, consider your income once you are fully retired. Will you drop to a lower IRMAA bracket? Only 7% of all Medicare beneficiaries are impacted by IRMAA surcharges.

Talk to someone in their 70s, 80s or older and ask them how often they are at the doctor's office and how much they pay out of pocket if they have FEHB and Medicare. Where do you find people like that? Visit your local chapter of NARFE where you will find many retirees older than 65; some are covered by Medicare and some are not! It is estimated that on average 20% to 25% of Medicare eligible retirees choose not to enroll in Medicare Part B, however, 75% to 80% of them do.

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