Last week I promised you that I’d begin cataloging some of the things that could get in the way of your making a good retirement decision. While some of them may come a little late in the year for those of you who have already decided to leave around the end of this year, they will really help any of you who are planning to retire in 2021 and beyond.
Failing to attend a pre-retirement counseling seminar
Because the federal retirement system is more complicated than it looks, attending a pre-retirement is essential. Many agencies provide them for their retirement-eligible employees. If yours doesn’t, it may be willing to pay the enrollment fee for one offered by an outside vendor. If it isn’t willing, you should consider taking the money out of your own pocket to attend one.
Failing to be sure you can carry your health insurance into retirement
The Federal Employees Health Benefits program is one of the most valuable benefits offered to federal employees. And you don’t want to lose that coverage when you retire. As a rule, you have to have been enrolled in the FEHB program for the five years immediately before you retire to carry that coverage into retirement. However, there are three exceptions. First, if you are covered by your spouse’s FEHB enrollment when you retire. Second, if you enrolled in the program at your first opportunity and retire in fewer than five years. Third, if you accept an offer to retire early but before you’ve been covered for a full five years.
Failing to consider the effect of withdrawing your retirement contributions
It’s a familiar story. People resign from the government to take a job in the private sector and take a refund of their retirement contributions. Then years later they come back to work for the government and have to decide whether to redeposit that money, plus interest, or accept a reduction in your annuity when you retire. It’s a matter of dollars and cents. You’ll have to figure out whether the cost of buying back that time will be offset by the increase in your annuity.
Failing to get credit for military service – Part I
Periods of active duty service can be added to your actual federal service and not only shorten the years you have to work as a civilian but result in a larger annuity when you retire. But that can only happen for FERS employees if they make a deposit to get credit for that time.
The rules are different for CSRS employees. If you were hired before October 1, 1982, you don’t have to make a deposit; however, your annuity will be actuarially reduced if you don’t. If you were hired after that date, you’ll only get credit for that time if you make a deposit. Note: If you are either receiving or eligible for military retired pay, you’ll not only have to make a deposit to get credit for that time but you’ll have to waive that pay when you retire. That waiver of pay requirement doesn’t apply if you’re receiving reserve retired pay.
Failing to get credit for military service – Part II
If you are a CSRS employee who served in the military and will be eligible for a Social Security benefit at age 62, you’ll have to make a deposit to the retirement fund to get credit for that time in your civilian annuity computation. If you don’t, your annuity will be reduced by 2 percent for each year of military service. If you don’t make the deposit, retire before age 62, and are eligible for a Social Security benefit at age 62, those years of service will be eliminated and your annuity recomputed without them. If you retire after age 62, the reduction will take place on the day you retire.
Note: Technically, this applies only for military service after December 31, 1956 but if you served before that, you almost certainly retired years ago.
Failing to get credit for all your federal service
If you ever worked as a substitute carrier for the post office, served with Peace Corps or VISTA, performed volunteer service under the Economic Opportunity Act of 1964, been employed as a U.S. Capitol guide, etc., that time may qualify as creditable civilian service. However, it will only do so if you claim it and, in certain cases, make a deposit to the civil service retirement fund. The more creditable service you have, the sooner you’ll be eligible to retire and, when you do, the larger your annuity will be.
Over-estimating the value of COLAs
If you retire under CSRS under any of the age and service combinations, you’ll be entitled to any cost-of-living adjustment (COLA) that occurs in the year after you retire.
If you are a FERS employee, with rare exception you won’t be entitled to a COLA on your annuity until you reach age 62. And when you do start receiving a COLA it may be less than the value of an inflation catch-up—if the inflation figure is between 2 and 3 percent, you’ll get only 2 percent, and if it’s above 3 percent, you’ll get 1 percentage point less. You will, however, get the full COLA on your Social Security benefits.
Also note that under both systems, if you retire with immediate eligibility for a COLA, the first adjustment will be prorated according to the number of months you have been on the retirement rolls.
Failing to account for the Windfall Elimination Provision
FERS employees can skip this item. It only applies to CSRS employees who have enough Social Security credits—through work before, after, or on the side during their federal career—to qualify for a benefit under that program, but less than 30 years of “substantial” earnings under Social Security. If they don’t, that benefit will be subject to a reduction that can go as high as about $500 a month.
And “substantial” earnings really means substantial. For example, in 2020, you’d only have to earn $5,640 to receive four Social Security credits; however, you’d have to earn $25,575 for those earnings to be considered “substantial.”
Failing to account for the Government Pension Offset
FERS employees can skip this item, too, because it also only applies to CSRS employees. If you’ll be getting a CSRS annuity and would be entitled to a Social Security spousal or survivor benefit, that benefit will likely be wiped out. That’s because the GPO will reduce that Social Security benefit by $2 for every $3 you’ll be getting in your CSRS annuity.
Next week I’ll conclude this series by warning against some lifestyle-related retirement mistakes.