Key Takeaways:
- Leaving federal service before age 62 impacts both your pension and benefits eligibility, and knowing these details is key to making informed choices.
- Your eligibility for healthcare coverage and your retirement income may change significantly if you retire early as a federal employee.
What Happens If You Retire Early?
If you’re considering early retirement as a federal employee, there are some things you need to know. Retiring before age 62 means your pension and benefits will look a little different than if you waited longer. Depending on your years of service, your pension might be lower, and your eligibility for certain benefits could change. That doesn’t mean early retirement isn’t possible—it just requires some planning to make sure you have all the facts.
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Years of Service and Retirement Eligibility
For most federal employees under the Federal Employees Retirement System (FERS), the standard retirement age is 62. However, if you’ve worked at least 30 years and reached your Minimum Retirement Age (MRA), which ranges from 55 to 57, you can retire earlier. If you don’t have 30 years of service, but you’ve reached your MRA, you can still retire with at least 10 years of service, though your pension will be reduced by 5% for each year under 62. That reduction can add up quickly, so it’s important to calculate whether that’s something you’re comfortable with.
Another option is if you’re 60 with 20 years of service, you can retire with no reduction. For those who leave before reaching those milestones, deferred retirement may be an option. This means you stop working but don’t start collecting your pension until later—often at age 62. However, you won’t have health or life insurance coverage during that waiting period.
How Does Early Retirement Affect Your Pension?
One of the most significant factors to consider when retiring early is how it will affect your pension. Under FERS, your pension is calculated based on your highest three consecutive years of salary (known as your “high-3”) and your years of service. For example, if you retire at age 57 with 30 years of service, your pension would be based on those 30 years. However, if you retire with only 10 years of service, your pension will be much smaller, and you’ll face the 5% reduction per year under 62.
If you leave before reaching your MRA and have fewer than 10 years of service, you won’t be eligible for a pension immediately. You may still be eligible for a deferred retirement, but as mentioned earlier, that comes with delays and some missing benefits.
If you’re part of the Civil Service Retirement System (CSRS), the formula is slightly different, but the key takeaway is the same—retiring early reduces the amount you’ll receive each month.
What Happens to Your Health Insurance?
One of the biggest concerns for federal employees considering early retirement is health insurance. If you retire before age 62, maintaining your health insurance through the Federal Employees Health Benefits (FEHB) Program can become tricky.
To continue your FEHB coverage into retirement, you need to have been enrolled in the program for at least five years before retiring. If you meet this requirement, your coverage can continue, but you’ll need to pay the same premiums that active employees pay. If you’re retiring before age 62 and you’re not yet eligible for Medicare, FEHB is an essential benefit to hang on to.
However, if you leave federal service before reaching your MRA or before having at least 10 years of service, you lose your eligibility to keep FEHB coverage in retirement. This could mean looking for alternative health insurance options, which can be costly.
What About Life Insurance?
Life insurance is another benefit that can change with early retirement. The Federal Employees’ Group Life Insurance (FEGLI) Program offers life insurance coverage to federal employees, but continuing it into retirement requires planning. If you’re eligible for immediate retirement (such as MRA with 30 years of service or 60 with 20 years), you can usually carry your FEGLI coverage into retirement.
Like health insurance, you must have had life insurance for five years before retiring to continue your coverage. If you meet the requirement, you’ll pay premiums based on the amount of coverage you choose to keep. The costs can increase as you get older, so it’s important to decide whether keeping your life insurance is necessary or if other options might be more affordable.
Social Security Considerations
Social Security is another important piece of the retirement puzzle. If you retire early, you might need to rely on your FERS pension until you’re eligible to start collecting Social Security benefits. Under Social Security, you can start receiving reduced benefits as early as age 62. If you wait until your full retirement age (66 to 67, depending on when you were born), you’ll receive full benefits.
For federal employees who retire before 62, the FERS annuity supplement can bridge the gap. This supplement is designed to replace the Social Security benefits you’d get if you were eligible for Social Security. However, this supplement stops when you turn 62, whether or not you choose to start receiving Social Security.
Should You Consider a Deferred Retirement?
If you’re thinking about leaving federal service before reaching the standard retirement age, you might want to consider deferred retirement. This option lets you leave federal service and collect your pension later, often at age 62. The catch is that you won’t have access to certain benefits, like health insurance, during the waiting period. Once you reach the eligible age, you can start collecting your pension, but it won’t include any cost-of-living adjustments (COLAs) for the years you were out of federal service.
Deferred retirement can be a good option for people who want to leave the federal workforce but aren’t ready to retire fully. However, it requires careful planning, particularly around healthcare and income needs during the gap years.
Final Thoughts on Early Retirement as a Federal Employee
If you’re thinking about retiring early, understanding how your benefits and pension will be affected is crucial. Leaving before age 62 has its downsides, especially when it comes to pension reductions and healthcare coverage. However, with careful planning, you can make it work.
Keep in mind the importance of knowing your eligibility for continuing key benefits like health insurance and life insurance. Being aware of potential gaps in coverage, reduced income, and alternative options, such as deferred retirement, can help you navigate the decision-making process. Early retirement can be rewarding if it aligns with your long-term financial goals and personal situation.
