A Little Lower

By Tammy Flanagan

October 12, 2007

A few weeks ago, I wrote about how to decide whether to retire from federal service to work in the private sector or continue in your federal career. Several readers commented about the salary rates I used in the examples, saying they'd like to see how scenarios would work out for employees who don't earn executive-level pay. Others had some questions about computations of Social Security benefits discussed in the column.

This week, I'll respond to each of those issues, using a couple of scenarios involving a hypothetical employee I'll call "Daniel." He's among the 43 percent of federal employees (as of 2004) who earn less than $50,000 per year.

Please keep in mind that all of the numbers below are approximate and based on estimates of such variables as salary level, insurance premiums and tax withholdings.

Daniel Under CSRS

For the first scenario, let's assume Daniel is in the Civil Service Retirement System, and that the following factors apply:

The first set of two columns in the chart below illustrate Daniel's current federal salary and withholdings. The second set shows his retirement income plus pay from a second career.

Current Salary Retirement Income +
Second Career
Annually Monthly Annually Monthly
Current federal salary 42,000 3,500
CSRS Retirement 22,500 1,875
Insurance -3,000 -250 -3,000 -250
TSP Contributions -2,100 -175
Income Taxes -7,380 -615 -3,375 -281
CSRS Retirement Contributions -2,940 -245
Medicare Tax -609 -50
Net Income 25,971 2,164 16,125 1,343
New Salary 30,000 2,500
401k Contributions 14,000 1,167
Income Taxes 3,200 267
Social Security Taxes 2,295 191
Net Income from Second Career 10,505 875
Total Net Income While Employed 25,971 2,164 26,630 2,219
After three years of working a second career and receiving his federal retirement, the increase to Daniel's Social Security benefit (assuming he had some credits from other work prior to his federal career) would be about $900 per year or $75 per month. In addition, the income from saving $14,000 a year in a 401(k) plan could result in about $2,700 per year, or $225 a month, of additional investment income.

In the above example, Daniel could begin a second career and, at the end, he would have increased his investment income and his Social Security benefit. If he decided to continue working in his federal career for three more years instead of retiring early, the increase to his CSRS benefit would be about $2,853 per year, or $238 per month. He also would have an increase in his Thrift Savings Plan income for being able to continue saving 5 percent of his salary.

For Daniel, the key to improving his situation by retiring early from federal service would be the ability to shelter $14,000 a year in his new 401(k) and live on about the same income he had while he was working for the government. Daniel may not be able to afford to retire completely at the end of three years in either situation, since his retirement may not replace enough of his current income. Whether he stays in his federal career or whether he retires early to pursue a private sector job would depend on careful planning and diligence in continuing to save. With the right job offer, Daniel might be able to transform his career into something completely new, or if he prefers less upheaval in his life, he could also do quite well to finish his career in federal service.

Daniel Under FERS

In this scenario, let's assume Daniel is covered under the Federal Employees Retirement System and is going to retire from federal employment at his first opportunity and immediately return to work in the private sector using the valuable skills he's gained. And let's apply the following factors:

Current Salary Retirement Income
+ Second Career
Annually Monthly Annually Monthly
Current Federal Salary 42,000 3,500
FERS Retirement 12,000 1,000
Insurance -3,000 -250 -3,000 -250
TSP Contributions -2,100 -175
Income Taxes -7,380 -615 -1,800 -281
FERS Retirement -2,940 -245
Contributions and the FICA Tax
Medicare Tax -609 -50
FERS Supplement 7,200
Earned income will offset supplment
TSP Income TSP will continue to accrue interest until full retirement.
Net Income 25,971 2,164 7,200 600
New Salary 30,000 2,500
401k Contributions 4,500 375
Income Taxes 5,100 425
Social Security Taxes 2,295 191
Net Income from Second Career 18,105 1,508
Total Net Income while employed 25,971 2,164 25,305 2,108
Under FERS, Daniel's basic retirement benefit would increase by only 1 percent per year by staying in federal service, and there would be no inflation adjustment until after he turned 62 (unless he's in a special group, such as law enforcement officers or firefighters). He would be able to accumulate additional retirement savings (hopefully with matching contributions from his new employer) and Social Security benefits, whether he continued in his federal career or chose a private sector job. He would be able to save a little more in his 401(k) plan for his future retirement than he had saved in his TSP while working for the government since he would be able to begin receiving his FERS basic benefit while he also was earning his salary.

Daniel also would have the benefit of maintaining his federal health insurance upon retirement, so he wouldn't need health benefits in his second career.

Social Security Considerations

When I wrote about these kinds of comparisons before, one reader responded, "I believe you made a mistake. Under FERS, the Social Security supplement is reduced if the retiree earns above a threshold amount. This has to been taken into account when calculating the benefit of working after retirement."

Another commented, "We were told in a retirement seminar that you can retire and get another job but you can't make more than $12,000 a year or you will lose the Social Security bridge payment that goes with the FERS retirement plan."

Here's an explanation: The FERS basic benefit is payable regardless of whether the retiree is entitled to receive the supplement or not. The supplement is considered an extra temporary payment meant to "bridge" the time between retirement under FERS and qualifying for Social Security retirement.

I didn't consider the supplement in my analysis, since as both of these readers have pointed out, the supplement is not fully payable unless the individual is no longer working (or at least they have earnings below $12,960 per year, which is the 2007 limit that applies before the supplement begins getting reduced). I included the supplement in the chart above, but have crossed out the amount since the earned income would have eliminated this benefit.

Another reader wrote, "I am thinking of retiring, but am a bit confused as to what my retirement would be. I have 23 years of service, so I am under FERS. Based on my birth year, I am eligible for retirement when I reach 60. I am currently 58, so in two more years I will have 25 years. Will I receive a pension plus TSP distribution?" This person is entitled to a reduced FERS basic benefit today since he or she is over the FERS minimum retirement age with more than 10 years of service. If the employee waits until age 60 to retire, then he or she would be entitled to an unreduced benefit plus the FERS supplement. For a more detailed discussion of retirement eligibility, see my previous columns on this topic: Eligibility: Facts and Myths (July 6, 2007) and Retirement Estimate: The Details (May 11, 2007).

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

October 12, 2007