Before You Leap into Early Retirement, Here’s What Federal Workers Should Really Consider

Erica Giles
October 31, 2024

Key Takeaways:

Early retirement may sound appealing, but federal workers should fully understand the financial trade-offs before making the leap.
Retirement decisions can impact your long-term benefits, health insurance options, and overall financial security, so it’s crucial to plan thoroughly.

Ready to Call It Quits Early? Let’s Talk About the Financial Realities

Let’s face it, the idea of leaving your federal job before your full retirement age is pretty tempting. Who wouldn’t want to escape the daily grind and start enjoying life while you’re still young enough to do so? But before you hand in that resignation letter, there are some serious financial factors you need to consider. Retiring early might feel like the ultimate freedom, but it can come with long-lasting financial consequences. And in 2024, with inflation pressures and healthcare costs on the rise, those consequences may be even bigger than they seem at first glance.

Your Pension Could Take a Hit—Is It Worth It?

The first thing to keep in mind is that retiring early usually means you’ll be collecting a smaller pension than if you stuck it out until full retirement age. If you’re part of FERS (Federal Employees Retirement System), you already know that your pension is calculated based on a formula that takes into account your years of service and your highest three years of salary, or your “high-3.” Walking away early means you could be leaving money on the table—potentially a lot of it. The formula doesn’t change just because you’re eager to leave.

Let’s break it down. If you retire under the Minimum Retirement Age (MRA) + 10 provision, your annuity will be reduced by 5% for each year you retire before the age of 62. That’s right—a full 5%. For example, if you’re 57 and decide to retire under this option, your pension could be reduced by a whopping 25%. Over time, that reduction can add up to tens of thousands of dollars. Think about how that will impact your long-term financial security.

Health Insurance: Don’t Assume It’s All Covered

One of the biggest perks of staying employed as a federal worker is your access to Federal Employee Health Benefits (FEHB). Retirees have the luxury of keeping these benefits, but if you retire early, it’s important to know what happens to those health benefits. The rule for FEHB is straightforward: You must have been continuously covered under FEHB for at least five years before retiring to continue coverage into retirement.

However, here’s the kicker—if you’re planning on retiring before age 65, you won’t be eligible for Medicare yet, and your FEHB premiums will stay the same. That might sound fine until you realize that healthcare costs rise as you age. The real burden hits when you eventually become Medicare-eligible at 65, because that’s when you’ll need to decide whether you want to enroll in Medicare Part B.

Bridging the Gap: The Cost of Filling In the Years Before Medicare

If you plan to retire in your 50s or early 60s, there’s a significant gap between the time you leave the workforce and the time Medicare kicks in at age 65. You’ll have to rely on your FEHB plan to cover those years. The problem? Premiums for health insurance are expected to rise by about 13.5% in 2025. That means even though you’ll still have access to your FEHB plan, it’s going to cost you more, and you’ll have fewer options to shop around if you’re on a tighter budget due to a reduced pension.

To put it simply, those years between early retirement and Medicare eligibility can be financially daunting if you’re not prepared. It’s essential to factor in those rising healthcare costs before deciding to leave your job early.

The Social Security Factor: Timing is Everything

Let’s talk Social Security. You may be eager to start collecting benefits, but like your pension, the timing of when you start matters—a lot. If you begin claiming Social Security at age 62 (the earliest age you can start receiving it), your monthly benefit will be reduced. In fact, you could see your benefit reduced by up to 30% if you don’t wait until your full retirement age, which is between 66 and 67, depending on when you were born.

Yes, it’s tempting to start receiving that monthly check, but a reduced benefit means less money for the rest of your life. If you plan on a long retirement, those extra years with a reduced income can make a huge difference.

Your TSP: Withdrawal Penalties Could Be Lurking

Another factor federal workers must think about when considering early retirement is their Thrift Savings Plan (TSP). Your TSP is a crucial part of your overall retirement package, but tapping into it too soon can come with penalties.

If you withdraw money from your TSP before age 59½, you might face a 10% early withdrawal penalty, on top of the taxes you’ll already owe on the money. The one exception to this rule is if you retire during the year in which you turn 55 or later. In that case, you can withdraw from your TSP without penalties, but that still leaves a gap for those who retire before 55. And don’t forget—every dollar you withdraw early is one less dollar working for you in the long term through compounding interest.

Inflation and the Long Haul: Why Every Dollar Counts

2024 is here, and inflation is still eating away at the buying power of retirees. When you retire early, you need to plan for a longer period of time where you are living off your savings, pension, and benefits. In retirement, inflation will likely reduce the value of your income, and if you’re relying on a reduced pension and lower Social Security benefits, the impact of inflation will be felt even more.

Cost-of-living adjustments (COLAs) for federal retirees might help, but they often lag behind actual inflation rates. While COLAs help keep up with inflation, they are typically modest—around 3%—which might not fully offset rising costs in areas like healthcare and housing.

Is Early Retirement Really Worth the Sacrifice?

Early retirement sounds like the dream, but for federal workers, there are significant financial considerations that come with it. You’ll face reduced pensions, potential Social Security penalties, rising healthcare costs, and the very real threat of inflation cutting into your purchasing power. It’s not all doom and gloom—there are ways to make early retirement work, but they require detailed planning, and you need to be prepared for the trade-offs.

Whether you’re weighing the option of leaving your job at the MRA or a few years shy of full retirement age, the most important thing to do is run the numbers. Figure out how much income you’ll need to live comfortably, account for healthcare costs, and make sure you understand how early retirement will affect your TSP, pension, and Social Security.

Thinking About Early Retirement? Don’t Rush It

Deciding whether to retire early is one of the most important financial decisions you’ll ever make. It’s not something to jump into without doing your homework. By taking the time to consider the impact on your pension, health insurance, TSP, and Social Security, you’ll have a clearer picture of what early retirement really means for your future. The key is making sure you’re financially prepared for the long haul and not just for the first few years after you leave work.