Retiring Sooner Than You Expected

Last week, I got a little ribbing for writing about divorce so close to Valentine’s Day. So this week, I decided to write about a topic that some of you may love: retiring a little sooner than expected. I’m going to tell you about a recent retiree and a soon-to-retire employee who were able to get sweetheart deals that allowed them to retire a bit earlier than initially planned.

Before I share these two examples, I need to explain a few retirement rules. For most federal employees, unused sick leave will add a little more money to your retirement benefit by providing additional time towards the computation of your retirement benefit. But it generally won’t help you be eligible to retire any sooner.

For example, if you’re planning to retire at age 55 under the Civil Service Retirement System, you will be required to have 30 years of creditable service to be eligible for retirement before your sick leave can be credited in the computation of your retirement benefit. The same goes for the Federal Employees Retirement System if you want to retire at your minimum retirement age (55-57, depending on your year of birth). You’ll need 30 years of properly documented creditable federal service covered by FERS retirement contributions to earn an unreduced retirement benefit.

Under both CSRS and FERS, employees can retire at 60 with only 20 years of creditable federal service. In addition, employees are eligible for an unreduced, immediate retirement benefit at age 62 with as little as five years of civilian federal service. (Military active duty service also can be credited, but there is a minimum of five years of civilian service to qualify for a CSRS or FERS non-disability retirement benefit).

These are the basic rules. But as with so many rules, there are exceptions. Or maybe it’s more accurate to say there are more rules. Here are two examples of the complexity of the government retirement benefit calculations and eligibility rules as they apply under FERS.

Uncertain Beginning, Sweetheart Ending

John retired under a Voluntary Early Retirement Authority/Voluntary Separation Incentive Payment opportunity on Sept. 30, 2017, at the Defense Department. His organization had offered employees an early-out option if they had 25 years of creditable service at any age or were at least 50 years old with 20 years of service. In addition to early retirement, eligible employees were offered a buyout of up to $40,000. Those who accepted, including John, had to be off of the payroll by Sept. 30.

John was already over his minimum retirement age, and was planning to retire in December once he had 30 years of service. But the opportunity to add $40,000 (before taxes) to his retirement nest egg for a loss of three months of service credit in the computation of his retirement retirement benefit was an easy tradeoff. He applied and was accepted for the VERA/VSIP.

Since John was not yet 62, he also could take advantage of the FERS annuity supplement payment in addition to his FERS retirement benefit to bridge the time between his retirement and age 62, when he will qualify for Social Security retirement. Under a VERA, this supplement is payable at the minimum retirement age. For younger employees, the supplement begins when they reach the minimum age after retiring under VERA. In John’s case, he was 59 years old and had 29 years and 11 months of service after adding the credit for his unused sick leave. This was OK, however, because the age and service requirements for a VERA are more generous than a regular FERS retirement. He was over 50 and only needed 20 years to qualify for an immediate unreduced FERS retirement benefit in addition to the FERS supplement.

That’s what John thought, at least. Without the VERA/VSIP, John would have needed to wait until his 30th anniversary in December to retire to avoid a 5 percent age penalty for every year under age 62—and the loss of the FERS supplement.

After his Sept. 30 retirement, John received his buyout payment from his former agency along with his final paycheck and payment for his unused annual leave. So far, so good. He also was placed into interim retirement status by the Office of Personnel Management while his claim was assigned for processing. By Jan 1, 2018, he had received interim FERS retirement benefits covering the October to December time frame. Everything seemed to be on track, since it generally takes OPM about 60 days after receiving a case to complete the processing.

On Jan. 10, John received a letter from OPM indicating that they had completed his retirement claim. The only problem was that he also received a notice that OPM had overpaid him $1,546.88, and they were going to collect the overpayment from his future retirement benefits. There was not much explanation for the overpayment, other than the reason of “interim pay.”

John was confused, not to mention worried, since the interim pay did not include the FERS supplement and was also a little less than his basic FERS retirement benefit would have been. Why did he owe money back to the government? He thought it might have something to do with retiring before completing 30 years of service. He was expecting to receive back pay to Oct. 1, the first month of his FERS retirement, along with his missing supplement payments. What happened?

John contacted me for help. After a thorough review of his paperwork, I spotted the problem. Somehow OPM didn’t know that he had retired under a VERA/VSIP. Due to a number of errors involving his agency’s retirement specialist, its payroll office and a claims examiner at OPM, his retirement was processed incorrectly. Fortunately, once the mistake was identified, it was quickly corrected. John let me know last week that a large deposit was made to his bank account which he hoped indicated the problem had been resolved. He’ll know for sure on March 1, when his February payment is due to be paid.

The Multiplier Effect

Generally the the FERS retirement benefit is computed as follows: 1 percent x high-three average salary x years and months of creditable service. In order to qualify to use a 1.1 percent multiplier to compute the FERS retirement benefit, an employee needs to be at least age 62 with at least 20 years of service.

For George, this issue became more complicated when he inquired with his agency and with OPM as to whether he could add his unused sick leave credit to his actual federal service to come up with 20 years of service. This would allow him to retire in July 2019 with 20 years of service that includes five months of unused sick leave credit. That’s five months sooner than when he would have completed 20 years of actual federal service in December 2019.

The difference in George’s retirement computation would be 22 percent (using the 1.1 percent multiplier) of his high-three average salary for the July retirement instead of only 20.5 percent (with 20 years and six months of service using the 1 percent multiplier). If his high-three average were $80,000, the difference would be $100 per month added to his retirement benefit and the chance to retire five months earlier.

The question of whether sick leave can be used to get to 20 years of service and qualify for the more generous benefit is not as easy to answer as it might seem, however. The key is understanding the definition of service credited for eligibility as opposed to service credited for use in the computation of a FERS retirement benefit.

An employee who is at least age 62 only needs five years of creditable civilian federal service to be eligible for an immediate unreduced FERS retirement. However, the rules for the computation of the FERS benefit after age 62 are different.

Since George will be eligible to retire on his 62nd birthday with more than five years of service, he doesn’t need to worry about the definition of eligibility. But as for computation, the rules state that for the 1.1 percent multiplier to be used, the employee must be at least 62 years old and have at least 20 years of total creditable service. But since 2009, unused sick leave can be credited towards the computation of a FERS retirement benefit.

Therefore, an employee who retires at age 62 or later with 20 or more years of creditable service will have their benefit computed using the 1.1 percent multiplier. For George, that turned out to be sweet news.

Photo: Flickr user Kayla Kandzorra