I’ve been writing a lot about early retirement options for federal retirees. One great thing about the FERS retirement system is that you can keep the pension benefits you’ve already earned as the so called “deferred retirement”. You have options on when to collect your deferred retirement. Which is best? Let’s take a look!
What is deferred retirement?
Taking a “deferred retirement” is what happens if you leave the federal government before your minimum retirement age (MRA). If you are vested in the FERS retirement system, you can collect your pension benefits at either your MRA or age 62. You need to have worked for at least 10 years to have choice on when to start collecting your annuity. If you’ve worked for between 5 and 10 years, you can only collect it age age 62.
The size of the deferred retirement annuity is calculated by the formula
(years of service) × 0.01 × (average of 3 highest yearly salaries)
You can use the same formula to calculate full pension benefits. However, when you take a deferred retirement, the annuity is reduced if you collect it before age 62.
Options for collecting deferred retirement
If you are eligible for a deferred retirement, you can collect it any time between your MRA and age 62. If you start collecting before age 62 there is a reduction of 5% per year. For example if you take your pension at age 57, there is a 25% reduction in benefits.
When to collect deferred retirement?
** UPDATE ** A reader has pointed out that if you have 20 years of service you can collect your full retirement at age 60 instead of 62. If that applies to you, then the math is different than below.!
If you start collecting your deferred retirement at age 57, you will have earned a significant amount of money before you even turn 62. However, if you wait until 62, you’ll earn more per year (see figure). It turns out that at age 73 is the break-even point for collecting at age 57. If you live longer than 73, you will have collected more money over your lifetime by waiting to 62. If you pass away on or before age 73, you’re better off if you start collecting at 57 from a strictly monetary basis.
The break even age remains the same no matter when you start collecting your deferred retirement benefit. The math is suprisingly simple. Starting collecting benefits between MRA and age 62 gives you some middle ground- if you die before age 73, you’ll have gotten more benefits than if you waiting until age 62 to start collecting whereas if you die after 73, you’ll have gotten more than if you started collecting at MRA.
Factors to consider
Maximizing benefits
I’m a little too far away from FI right now to have a complete plan of how I want to handle deferred retirement benefits. On one hand, when you do retirement calculations, you plan to make sure you don’t run out of money even if you live for a really super long time. But on the other hand, can I realistically expect to live to 100?
I had 2 uncles die at 76 or younger, and all of my mom siblings have had a heart attack or stroke by the time they were in their mid 70’s. My dad’s sister died at 83 of COPD (lifelong smoker). As my parent’s generation of the family passes away, I get a scatter plot of my expected life expectancy. It doesn’t look great.
I’m in great shape and medicine is continuously advancing. But I’m also fighting some crap genetics. While I need to make sure I’ll have some money if I live until 90+, I don’t envision myself living much past 80.
From that standpoint, I don’t think I’d be leaving much money on the table if I started collecting it at 57.
What will you spend it on?
If I’m taking a deferred retirement, it’ll be because I reached FI. By definition, I’ll be able to live off my investments and won’t need to earn another penny. That means that my deferred retirement will be extra, bonus money, since we don’t include it in our FI calculations.
Even while I may leave money on the table, I currently want to collect the deferred retirement at MRA. That way, I’m getting this extra, bonus money, when I’m the youngest and have the most energy to enjoy spending it. Assuming we achieve FI, then the pension is superfluous to sustaining our living and in some ways, is “fun money”. Because we don’t need it, I don’t see any reason to hoard it just to maximize my returns.
Social Security
Social security is another annuity that will hopefully exist when I reach 62. Like the FERS pension, social security benefits increase the longer you delay taking them. Most financial planners suggest waiting until the latest possible date to begin receiving social security to maximize the monthly benefit.
Knowing that I could collect both the FERS pension and Social Security, (and potentially not need either), I could see drawing the FERS pension as early as possible but waiting to withdrawal social security. That way, if I die young, I’ll have gotten a better deal on the FERS pension and if I don’t, I’ll have a larger social security check as a backstop.
I haven’t done any calculations on this, but my gut feeling is that have 2 annuities with flexibible starting dates is better than having 1. And perhaps approaching them differently may be a good option.
Financial need
My thoughts right now are based on a deferred retirement where we’ve achieved FI and don’t need the money. It could be that I get RIF’ed or have to leave the government before I achieve FI. If that were the case, it’d completely change how I approached the deferred retirement benefits.
Summary
In short, the break even point for collecting your deferred retirement benefit happens at age 73. Maximizing the total lifetime value of the pension depends on your expected date of passing. I tried to discuss my reasoning about when I might take my deferred pension. I’m leaning towards taking it as soon as possible.
What would you do? Leave a comment below!!
Do you know if you get cost of living increases if you start taking the FERS at minimum retirement age?
Here’s another data set to figure in, for someone who has 20 or more years of creditable service they can apply for un-reduced benefits at age 60:
“If you completed at least 10 years, but less than 30 years of creditable service before you left Federal service years, your annuity will be reduced if it begins before age 62. The only exception to this is if you had at least 20 years of service and your annuity begins when you reach age 60.”
https://www.opm.gov/retirement-services/fers-information/types-of-retirement/#url=reduction
(this is under Age Reduction just under the MRA table)
As for COLAs, FERS employees generally don’t get them until 62:
“FERS and FERS Specials Cost-of-Living Adjustments are not provided until age 62, except for disability, survivor benefits, and other special provision retirements.”
https://www.opm.gov/retirement-services/my-annuity-and-benefits/annuity-payments/#url=Cost-of-Living
I don’t have deferred retirement as an option, but I do think it’s an interesting question to struggle with — as you pointed out, one akin to when to take Social Security. My mom wants to wait until the maximum retirement age before drawing SS benefits. I want her to relax a little in her older age and, since she doesn’t need a lot of money to live, maybe take an earlier retirement. Not 62, but before age 70.
And I’m not sure how I’ll decide when to take Social Security. The people on my maternal grandfather’s side of the family live a pretty long time (my grandfather is in his 80s and his mom lived to be 90-something). My maternal grandmother’s side of the family is more of a crapshoot with cancer being relatively common. And I don’t know my biological father so it’s one big question mark. In short, it’s anyone’s guess how long I live.
So I think I’ll just have to see how I feel about work at age 67 (the earliest I’d take Social Security if I have any say in the matter) and decide whether to ride it out til 70. I think that’s all most of us non-government workers can do.
Good data about the break-even point. I’m not sure how long I’ll live. The data is skewed. My uncles passed away young because they smoked and drink a lot. My dad is still pretty healthy at 72. I live a pretty healthy lifestyle, but who knows how long I’ll last.
Yeah, I agree that aunt/uncle death rates aren’t super predictive. But it’s the only data I have and it made me realize that I could go a lot younger than I was previously thinking. I still think that by drawing FERS early and SS late you kind of have a hedge. But will examine it more closely when I get ready to FIRE.
Being in a similar situation (Fed who is FI and considers FERS and SS as a “bonus”), I struggle with the question of when to begin both FERS and SS. My feeling is that I should elect to take both as early as possible (57 and 62 respectively) because both FERS and SS are a “limited” asset in the fact that I can’t pass them on to my kids. It seems it would be better to use the annuity (FERS and SS) money to replace what I would have been withdrawing from my savings (TSP, 401k, IRA, Roth, etc…) in order to preserve that capital as an asset I can then pass to my kids.
Hi Drew
That’s a super interesting take! I hadn’t really considered legacy/estate issues with when to collect deferred retirement. You bring up a great point. Thanks for weighing in.