Buyout Considerations

By Tammy Flanagan

July 12, 2012

Many federal employees are being offered early retirement this year – and many more wish they were. Often, the offers come with a Voluntary Separation Incentive Payment, otherwise known as a buyout. (See GovExecs Buyout Watch for a running tally of agencies offering such incentives.)

The bad news is the buyout payment remains $25,000 -- the same as it was when I last wrote about this subject in 2006. Still, buyouts remain attractive. Here’s what you need to know if you are one of the lucky ones who receive such an offer and are eligible and ready to act on it -- or if you are just doing some wishful thinking.

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 you are: 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 calculations compare under the two systems:

CSRS: (Years of service - 2) x 2 + 0.25 = ____%. Then multiply this percentage by your high-three average salary -- the average of your basic pay, including locality adjustments, over the highest salary of three consecutive years of your career. (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 younger than 55.

Let's look at an example:

Length 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 + 0.25 = 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: Years and months of service (including credit for unused sick leave, as applicable -- 50 percent credit for retirements before 2014 and 100 percent credit for retirements effective on or after Jan. 1, 2014) 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 (55 to 57, depending on your 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 (including any credit for unused sick leave): 25 years, 6 months
High-three average salary: $65,000
Age: 52
25.5 x 1% x $65,000 = $16,575/year, or $1,381/month payable immediately

Additional supplement payable at the minimum retirement age:
Social Security at age 62: $1,200
25 years of service/40 = .625
$1,200 x .625 = $750/month, or $9,000/year

Total benefit: $16,575 + $9,000 = $25,575/year

The FERS supplement is subject to a limit on earned income. In 2012, the earnings limit is $14,640 per year. For retirees exceeding this amount, $1 in supplement benefits is withheld for every $2 earned above the limit.

Thrift Savings Plan

There are several things to consider as you weigh your options for withdrawing funds from your Thrift Savings Plan account: Health and Life Insurance

If you are eligible for early retirement, you may be eligible to continue 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 your service since your first opportunity to enroll.

You may qualify for a waiver of the five-year test if you were covered under FEHBP since the beginning of your agency’s latest statutory buyout authority and if you: If you meet these requirements, then you do not have to write a letter requesting a waiver. Instead, your agency must attach a memorandum to your retirement application stating that you meet the requirements for a preapproved waiver.

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

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

Things to Remember

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

By Tammy Flanagan

July 12, 2012