Early retirement options for federal employees

by Government Worker FI | Last Updated: March 8, 2019

I have worked for the federal government since I was 18 years old and have never known a federal employee to leave before their “minimum retirement age” (MRA).  In fact, I have only known a few who have left for the private sector. The water cooler talk after these people left was extremely negative. People gossiped about why these people would ever “give up” their pension.  In this post, I examine what early retirement options are available for federal employees and what that really means for their retirement benefits.

Why it is so hard to leave federal service

Federal employees who are under the FERS retirement system* and meet the full retirement requirements receive several generous benefits:

• A pension, equivalent to 1% of their salary for each year of federal service.
• The ability to maintain their employer subsidized health insurance for the remainder of their life!!

These are incredible benefits and I’m sure most people would be extremely envious of them.  I am extremely grateful for my job and the opportunities it has given me. However, I have observed many cases where instead of being happy about these retirement benefits, my coworkers are instead obsessed about the possibility that they will be taken away.

Having such generous benefits at the minimum retirement age means that many federal employees never consider early retirement.  (Or leaving for private sector jobs for that matter). In fact, I know some who feel “trapped” in jobs they do not like by these wonderful benefits.  

Why I’m writing about early retirement options for federal employees

One of my reasons for starting this blog was to help federal employees examine all of their retirement options.  I want to show federal employees that it is possible to pursue financial independence or early retirement outside of their pensions. (Note that the TSP is an important tool to consider in addition to the pension.)  Hopefully, I can inspire people to chase happiness, even if that means leaving federal service.

Note: This is the first post of many where I examine potential options in more detail.  I also plan on doing a lot of spreadsheet math and calculating various early retirement plans.  As I write more content on early retirement options for federal employees, I’ll update this page with links.  While this is fairly dry content, I think it’s necessary to set the stage for more enlightening posts on the topic.

Update: List of posts with case studies and detailed analyses of early retirement options for federal employees

• Is FIRE even possible for federal employees (March 26, 2019).
• Federal employee “off ramps” (April 3, 2019)
• Working for the man- deferred retirement (April 13, 2019)
• Why I don’t include my pension in my FI calculations (April 23, 2019)
• When to collect deferred retirement (May 2019)
• When can federal employees retire (December 2020)

Early retirement option 1: “Deferred Retirement”

A deferred retirement is where you leave the federal government before you reach minimum retirement age.  Here are the details:

• You do not get to keep your health insurance.
• If you have more than 10 years of service, you can request your pension at your MRA or at age 62.
  • If you wait until you’re age 62, you will receive your full benefit. Your benefit is calculated by {0.01 ✖(years of service)✖(average of high 3 years of salary)}.  So if you worked for 10 years and had a “high 3” of $100,000, you’d receive $10,000 per year for life starting at age 62.
  • If you request it at your MRA, your pension gets reduced by 5% for for each year under age 62.  So, my MRA is 57. So in the previous example, the $10,000 per year benefit would be reduced by 25% (i.e. (62-57)✖5%) for an annuity of $7,500 per year starting at age 57.
• If you have between 5 and 10 years of service, you can request your pension at age 62.  In this case it is calculated as {0.01 ✖(years of service)✖(average of high 3 years of salary}. So if had 7 years of service with a “high 3” of $100,000, you’d receive $7,000 per year for life.

Early retirement option 2: “Postponed Retirement”

Postponed retirement is an option for people who achieved their MRA but do not have 30 years of service. To receive a full pension, employees need to be at or above their MRA with 30 years of service, or be 62 with at least 5 years of service.  

Postponed retirement allows employees between their MRA and age 62 who don’t have 30 years of service to retire but not touch their pension benefits until age 62.  

Advantages of postponed retirement:

• You get your full pension {0.01 ✖(years of service)✖(average of high 3 years of salary} at age 62
• When you reach age 62, you can re-enroll in your federal health benefits.

However, the major disadvantage of postponed retirement is that you need to have reached your MRA. This is in contrast to deferred retirement which is available at any time.  Therefore, postponed retirement doesn’t fit the traditional “early retirement” moniker.

Early retirement option 3: “Voluntary Early Retirement Authority (VERA)”

VERA is by far the most generous early retirement option.  You can immediately receive your full pension for the remainder of your life.  You also get to keep your health insurance. However, there are certain restrictions:

1. You need to be 50 years old with 20 years of service OR any age with 25 years of service.**
2. VERA is only offered at certain times when an agency or office is trying to reduce staff.  

Summary- comparison of early retirement options for federal employees

In summary, a deferred retirement is available to anyone who has at least 5 years of service.  However, it offers the least generous pension benefit package.

On the other hand, postponed retirement does not fit the traditional “early retirement”  moniker. However, it might be a good option if you are older than the minimum retirement age.

VERA is by far the best deal for an early retirement as a federal employee.  However, VERAs may or may not be offered when you’re ready for early retirement. They’re also not an option if you’re one of the “retire by 40 (or 30)” crowd, since they require 20-25 years of service.

I will be writing future posts (with math!!) where I look at what benefits you might be able to expect with various early retirement scenarios.  Leave a comment if you want a specific case study.

Footnotes

*There may be a few readers out there who are still under the CSRS system.  However, “early” retirement doesn’t really apply to them as CSRS was phased out over 30 years ago!!

**Until about 3 months ago, I had only heard of the 50-20 rule.  I’ll have 25 years of creditable service in June of 2030 when I’m 47.  So that was a nice surprise!

***Just a general disclaimer that this is my understanding of the retirement system. Please consult an expert before making any permanent or irreversible decisions about your retirement benefits.