I get this question a lot: When can I retire? The person asking sometimes means When am I eligible to retire? or When can I afford to retire? Every once in awhile, it means When will I know I am ready to retire?
The eligibility question is easy. Under CSRS or FERS, you have to be old enough and have enough creditable service to retire under one of the available options. There is a difference, depending on whether you are applying for an immediate “regular” retirement, an early retirement benefit, deferred or disability retirement.
When considering your service requirement, be sure to review your federal service history and to understand the rules. Sometimes, your past federal service counts for leave accrual, as shown on your leave service computation date (SCD), but not for retirement eligibility or benefits. For example, temporary service performed after 1988 that was not covered by FERS retirement contributions does not count towards retirement eligibility or benefits computation. Other types of service such as military service may require a deposit—a payment into FERS or CSRS—in order to be fully creditable towards retirement.
Your work schedule might also impact your eligibility. Most federal employees work full time, but others work part-time, intermittent or WAE (When Actually Employed) work schedules. Extended periods of LWOP (Leave Without Pay) may also affect your retirement eligibility date.
You can find the rules for CSRS eligibility and FERS eligibility at www.opm.gov. For answers to service credit questions, employees should contact their agency human resources office to speak to a retirement specialist. The Office of Personnel Management maintains a list of agency benefits officers. These employees should be able to direct you to someone who can assist you with service credit questions.
But Can You Afford to Retire?
The second question is more difficult to answer. To be financially ready to retire, your retirement income has to adequately replace your earned income.
Think about what you spend every month. It is the net pay that you bring home every two weeks, not your gross salary that covers your living expenses and commuting costs, medical bills and all of the other things that define your lifestyle. Keep in mind that overtime, cash awards and other such allowances will not be used to compute your high-three average salary rate, which is used to calculate your CSRS or FERS retirement benefit. One way to determine your basic pay is to review the withholding from your salary for CSRS or FERS retirement. If you have income that is not “basic pay,” there won’t be retirement deductions withheld. Your salary is subject to a variety of withholdings—Thrift Savings Plan, FICA (Social Security) tax (FERS and CSRS Offset only), Medicare tax, federal income tax, state and local income tax when applicable, and deductions for your insurance coverage.
Remember that your CSRS or FERS retirement benefit is also subject to tax and insurance withholdings as well as certain reductions before withholdings are deducted. Reductions may be made for survivor benefit elections, former spouse entitlements from a court order or divorce decree, age reductions, unpaid deposits and part-time proration adjustments.
It is important to do some pre-retirement tax planning. The tax savings you had as an employee for “premium conversion” benefits will also end at retirement. This means that you will no longer be able to reduce your taxable income with the cost of your health insurance premiums or flexible spending account allotments. Tax deferred (or in the case of the “Roth” TSP, after tax) contributions to your Thrift Savings Plan account will also cease when you retire. In retirement, you may continue to contribute to a health savings account if you are covered by a high deductible health plan. If you do have an HSA, you can pay Medicare Part B premiums and long-term care insurance premiums with tax-free dollars. Also, Retired public safety officers may deduct up to $3,000 per year from their taxable retirement income for the cost of health and/or long term care insurance.
For additional tax information, retirees may refer to the following IRS publications:
- IRS 721 (Tax Guide to U.S. Civil Service Retirement Benefits)
- IRS Publication 969 (Health Savings Accounts)
- IRA 590a (Contributions to Individual Retirement Arrangements)
- State tax information can be found in the April issue of NARFE Magazine or from your state tax office or website.
To maintain your lifestyle in retirement, try to compute your net retirement income and compare how close it comes to your net take home salary. If you can replace your net paycheck, this will go a long way towards achieving retirement financial security. When planning for the future, allow for inflation and unexpected expenses.
The earlier you plan to retire, the more important it is to have an adequate retirement nest egg. If you retire in your 50’s, you need to plan for your retirement savings to stretch over more years than if you retire in your 70’s. According to the Census Bureau, the nation's 90-and-older population nearly tripled over the past three decades, reaching 1.9 million in 2010 (when the last decennial Census was taken in the U.S.).
Another financial factor that is difficult to predict is future inflation. According to the Social Security Administration, since 1975, the cost of living adjustment has ranged from over 14 percent in 1980 to as low as 0 percent several times over the past decade. It is not easy to predict future interest rates and inflation to determine how much can safely be withdrawn from your retirement savings over your remaining lifetime.
It is also hard to predict the unforeseen expenses that might come up. There are often unexpected healthcare and housing expenses, vacations or the cost of replacing big-ticket items, such as a car or home improvements. There can be costs related to helping parents or children who need financial assistance. Retirees must also be prepared for potential changes in the laws governing cost of living adjustments and health insurance coverage.
Retirees can reduce their living expenses by downsizing or moving to a less expensive area, and by paying for major home improvements while still employed. A part-time job or second career can also provide additional income in retirement.
So let’s assume you’re eligible and have the financial resources to retire. Are you mentally prepared for retirement? That’s an entirely different matter, one I will address next week.