Key Takeaways
-
Making the wrong elections in your federal retirement package can permanently reduce your pension and benefits, often far more than you expect.
-
Understanding the lasting financial effects of decisions like early retirement, survivor benefits, and withdrawal timing is crucial to preserving your retirement income.
Small Retirement Mistakes Can Create Big Financial Gaps
When planning your federal retirement, every decision matters. Many choices are final, and even small errors can cost you thousands of dollars over the course of your retirement. In 2025, with ongoing changes to government benefits
- Also Read: Law Enforcement Retires Early—But Not Without These Rarely Mentioned Tradeoffs
- Also Read: Why the FERS Supplement Is Still a Lifeline for Early Retirees—But a Risky One
- Also Read: You May Be Eligible for Medicare Soon—Here’s How It Affects Your Other Coverage
Early Retirement Could Cut Your Pension by 30% or More
Taking early retirement through options like MRA+10 may seem attractive if you want to leave federal service sooner. However, it comes with steep penalties:
-
If you retire before your Minimum Retirement Age (MRA) with less than 30 years of service, your FERS basic annuity could be permanently reduced by 5% for every year you are under age 62.
-
Retiring at 57 instead of 62 could slash your pension by 25% immediately.
-
Even delaying your annuity until you reach 62 doesn’t fully erase earlier mistakes if you have already left service without immediate eligibility.
Before choosing early retirement, you should carefully calculate the lifetime cost of the reduced annuity.
Survivor Benefits Are an Irreversible Choice
At the time of retirement, you must elect whether to provide a survivor benefit for your spouse. This decision has long-term consequences:
-
If you decline survivor benefits at retirement, your spouse will not have access to your pension if you die first.
-
Electing full or partial survivor benefits means a reduction to your own annuity (typically 10% for a full benefit).
-
Changes later are extremely limited and usually only permitted with strict qualifying events.
Given life expectancy trends and inflation pressures in 2025, it is wise to model different scenarios to ensure your spouse’s financial security.
Not Factoring in COLA Can Create Gaps Later
Cost-of-Living Adjustments (COLAs) protect your annuity from inflation. However, they differ between retirement systems:
-
FERS retirees receive a diet COLA: if inflation is 2% or less, you get the full amount; if inflation is higher, you get inflation minus 1%.
-
CSRS retirees (fewer today, but still present) receive full COLAs matching inflation.
Choosing when you retire affects how soon you qualify for COLAs. Retiring too early without COLA protection kicking in can cause your purchasing power to decline sharply within a few years.
High-Three Average Miscalculations Can Cost Thousands
Your FERS annuity is based on your “high-three” average salary—the average of your highest three consecutive years of basic pay. Common pitfalls include:
-
Retiring just before receiving a scheduled promotion or pay raise.
-
Switching to a lower-paying job near the end of your career.
In 2025, some public sector employees face pressures like locality pay changes and cost-saving restructuring, making it even more important to time your retirement carefully to maximize your high-three calculation.
Poorly Timed TSP Withdrawals Trigger Heavy Taxation
Your Thrift Savings Plan (TSP) is a major pillar of your retirement income. Improper withdrawals can severely reduce its value:
-
Withdrawals before age 59½ typically trigger a 10% early withdrawal penalty.
-
Large lump-sum withdrawals can push you into a higher income tax bracket for the year.
-
Required Minimum Distributions (RMDs) now start at age 73, but failing to plan ahead can result in forced large distributions, causing tax spikes.
Strategic, phased withdrawals can protect your balance and limit unnecessary taxes.
Misunderstanding the FERS Supplement Rules
The FERS Annuity Supplement is available if you retire before age 62 and meet certain service requirements. However, many retirees overestimate its duration and amount:
-
The supplement ends at age 62, even if you do not start claiming Social Security.
-
Earnings above the annual Social Security earnings limit ($23,480 in 2025) will reduce your supplement.
Failing to account for the loss of this supplement at 62 could leave you with an unexpected income gap.
Underestimating Healthcare Costs Post-Retirement
Your Federal Employees Health Benefits (FEHB) coverage can continue into retirement if you meet eligibility rules. But mistakes can be costly:
-
You must have been continuously enrolled for the five years immediately before retirement.
-
Dropping FEHB coverage in retirement usually means you cannot re-enroll later.
-
Medicare coordination becomes important at age 65; misunderstanding the interaction between FEHB and Medicare Part B can lead to higher out-of-pocket costs.
In 2025, healthcare costs continue to rise, and FEHB premiums increased by over 11% from 2024. Choosing the right coverage strategy is critical.
Mismanaging Sick Leave Can Reduce Your Final Pension
Unused sick leave can boost your retirement pension:
-
Under FERS, every 2087 hours of sick leave equals one additional year of service credit.
-
If you retire without using or properly converting accumulated sick leave, you may lose out on a larger annuity.
Timing your departure to maximize your accrued sick leave can significantly improve your pension.
Ignoring the Impact of Divorce Orders
Court orders related to divorce can affect your retirement benefits, including your FERS annuity and TSP.
-
A court can award a portion of your annuity or TSP to a former spouse.
-
Without proper documentation and proactive handling, your retirement plan could be upended unexpectedly.
Reviewing all court orders before finalizing your retirement paperwork ensures you understand how much of your pension remains under your control.
Overlooking the Financial Impact of Inflation
Even moderate inflation erodes purchasing power over time. For example, at just 3% inflation, your income would lose half its value over 24 years. As retirees today can easily spend 30 years in retirement, failing to account for inflation could leave you struggling later.
Ensuring access to COLA-adjusted income streams, balanced investments, and healthcare protections is vital.
Believing Social Security Will Solve Everything
While Social Security is a vital retirement income source, overreliance is dangerous:
-
The average monthly Social Security benefit in 2025 is approximately $1,900—often not enough to cover basic expenses.
-
Delaying Social Security to age 70 boosts your benefit by 8% per year after Full Retirement Age, but requires alternative income sources in the meantime.
Understanding how Social Security fits into your broader retirement plan is key to long-term stability.
How to Protect Your Federal Retirement Income
Given the complexity and long-term impact of your decisions, it is crucial to approach federal retirement planning methodically:
-
Analyze different retirement dates and their effects on your pension.
-
Model survivor benefit elections and healthcare costs.
-
Coordinate TSP withdrawals carefully to limit taxes.
-
Account for inflation and COLA rules.
-
Consult a licensed professional who understands public sector retirement systems.
Mistakes made today could result in permanently reduced income for decades to come.
Securing a Stronger Retirement Future
Your federal retirement package is one of the most valuable assets you will ever own. However, it is fragile in the sense that a few wrong moves can cost you greatly. As you move closer to your planned retirement date, spend the time necessary to review every election, timing, and benefit option thoroughly.
If you need help understanding your options or want a professional review of your retirement strategy, reach out to a licensed professional listed on this website. The right guidance today could preserve decades of retirement income tomorrow.
