The Early Way Out

By Tammy Flanagan

May 26, 2006

In last week's column, we looked at benefits for employees who resign before being eligible to retire. This week's topic is early retirement.

Voluntary early retirement goes by various names. Informally, it's called taking an "early out." Officially, it's sometimes called VERA (Voluntary Early Retirement Authority), often coupled with VSIP (Voluntary Separation Incentive Payment).

In March, the Government Accountability Office reported (GAO-06-324) that agencies are increasingly using such authorities. The study found that:

Agencies are using early outs to reshape their workforces. Employees are using them to reshape their careers.

Do You Qualify?

If you find yourself with an early out opportunity (your agency must make the offer and accept your application), you will be eligible for immediate retirement benefits if:

The Civil Service Retirement System and the Federal Employees Retirement System have the same eligibility requirements for early retirement benefits, but different ways of computing them. Here's how the two systems compare:

CSRS: (Years of service - 2) x 2 + 0.25 = ____%. Then multiply this percentage by your high-three average salary to get your retirement benefit. (Note: Unused sick leave is converted to service credit and will increase the length of service used in the computation.) The benefit is reduced by 2 percent per year if you are under 55. Let's look at an example:

Years of service: 25 years, 6 months
High-three average salary: $65,000
Age: 52 (3 x 2% = 6% reduction for age)

(25.5 - 2) x 2 + .25 = 47.25% x $65,000 = $30,712 / year
$30,712 x 6% = $1,842
$30,712 - $1,842 = $28,870/year or $2,405/month

FERS: The retirement benefit is computed as follows: Years of service x 1% x high-three average salary. There is no age reduction on the FERS early retirement benefit. A FERS supplement is payable at the minimum retirement age, which is 55 to 57, depending on the year of birth. For employees who transferred from CSRS to FERS, the supplement is computed using only the service after the transfer to FERS.

To compute the supplement:

Here's an example:
Length of service: 25 years, 6 months
High-three average salary: $65,000
Age: 52
FERS retirement benefit: 25.5 x 1% x $65,000 = $16,575/year or $1,381/month

Social Security at age 62: $1,200
25 years of service/40 = .625
$1,200 x .625 = $750/month or $9,000 / year
At your minimum retirement age, the benefit would be: $16,575 + $9,000 = $25,575/year

The FERS supplement is subject to a limit on earned income. In 2006, the earnings limit is $12,480 per year. For retirees exceeding this amount, $1 in supplement benefits would be withheld for every $2 earned above the limit. Thrift Savings Plan

You have several options about what to do with your Thrift Savings Plan benefits if you choose to take an early out:

Health and Life Insurance

If you are eligible for early retirement, you may be eligible for continuing your Federal Employees Health Benefits Program coverage. You must have been continuously enrolled (or covered as a family member) in any FEHBP plan (not necessarily the same plan) for the five years of service immediately preceding retirement, or if less than five years, for all of your service since your first opportunity to enroll.

You also can continue coverage under Federal Employees Group Life Insurance if:

Also, you will receive a lump-sum payment for any unused annual leave when you separate from federal service.

Things to Remember

Here are some of the things you should consider when weighing an offer to retire early:

Resources To Do Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.

By Tammy Flanagan

May 26, 2006