In the midst of all that wrangling over the debt limit, there was a lot of talk about reducing the size of government, which would mean eliminating jobs and even cutting benefits. Because that threat hasn’t gone away, federal employees have been peppering me with questions about early retirement.

Recently agencies including Education, Army, Agriculture, GPO and the postal service have made limited early retirement offers and there’s a general expectation of more to come.

While I don’t know if and when other early retirement offers will be made or which agencies or parts of agencies will offer them, I’m positive that some of you will get them and be faced with a decision. Should I retire or stay? To make that decision, you need to understand the advantages and disadvantages of early retirement.

The advantages are fairly obvious. You won’t have to go to work and you’ll still receive an income, only this time it will be an annuity rather than a paycheck. Also, you’ll be free to do what you want with your free time, of which you’ll have lots. You’ll be able to sit around, play golf, do volunteer work, travel, turn your hobby into a business or get another job. However, be aware that if you get another job with the federal government, in most cases the salary of your new position will be reduced by the amount of your annuity.

The disadvantages are equally obvious. The income you’ll be receiving won’t even come close to what you got when you were working. This could require a little – or a lot – of belt tightening. And, at least at first, time may hang heavy on your hands. If you are married, you might not be either the full or main bread winner. And if your spouse isn’t working and you plan to spend most of your time at home, you may turn out to be more of an encumbrance than a helpmate. Don’t forget the old saying, "I married you for love but not for lunch."

The financial effects of early retirement can be summed up as follows. The fewer years of service you have, the smaller your annuity will be. For example, if you are a CSRS employee who retires with 30 years of service, you will have an annuity that equals 56.25 percent of your high-3. For every year less than that, you can deduct 2 percent. Further, if you are under age 55 when you retire, your annuity will be permanently reduced by 2 percent for every year you are under 55.

If you are a FERS employee who retires with 30 years of service, your annuity will be 30 percent of your high-3. Deduct 1 percent for every year less than that. Fortunately, there won’t be any age penalty for retiring early. On the other hand, you won’t be eligible for the special retirement supplement until you reach you minimum retirement age, which ranges between 55 and 57, depending on your year of birth—currently it’s 56.

The SRS approximates the Social Security benefit you earned while employed under FERS. However, be aware that if you have earnings from either wages or self-employment that exceed the annual Social Security earnings limit, your SRS will be reduced or eliminated. In 2011 that limit is $14,100.

One last thing to consider. While CSRS retirees begin receiving annual cost-of-living adjustments to their annuities regardless of the age at which they retire, FERS retirees don’t get them until they reach age 62. Because there haven’t been any COLAs for the past two years, that difference hasn’t meant much lately. However, it has been a big deal in the past and may play a bigger role in the future.

Next time, I’ll explain the rules governing early retirement.