What is the retirement age for federal employees?
Retirement involves making many decisions including deciding when to retire.
For federal employees who were hired before 1984, it was easy, they were under the single benefit, Civil Service Retirement System. The retirement age was 55. It was common for a typical federal employee to be recruited after high school or college graduation or upon discharge from a four-year stint in the military.
If an employee was hired before age 25, they would become eligible to retire at age 55. For those who entered federal service after spending time in the private sector or if they stayed in the military for a full career or stayed home with the kids for 10 to 20 years or so, they could retire at age 60 if they had completed 20 years of civilian federal employment.
For the somewhat rare federal employee who came into federal service later in life in those days, the immediate retirement was payable at age 62 with as little as five years of civilian federal employment.
The only real downside to CSRS was that this service wasn't covered by FICA tax withholding and if an employee worked long enough under FICA outside of their federal civilian career to become eligible for Social Security retirement benefits, their benefit would be calculated under the modified Windfall Elimination Provision which reduced their benefit by as much as 55% and if they became eligible for spousal or widows benefits under Social Security, this benefit would be reduced by two-thirds of their federal CSRS retirement benefit due to the second "evil twin" called the Government Pension Offset.
There is a possibility of some relief from these provisions since according to the National Active and Retired Federal Employees Association, the House Ways and Means Committee's markup of H.R. 82, the Social Security Fairness Act, would represent a significant stride towards providing equitable relief to those whose retirement benefits have been unfairly diminished.
Other than the one onerous negative, the CSRS retirement benefit provided enough replacement of pre-retirement income that employees who retired with 30 or more years of service generally didn't need to supplement this income with Social Security retirement benefits or personal retirement savings to retire comfortably. There was little incentive to stay longer than 42 years since the CSRS benefit maxed out at 80% of the high-three average salary with 41 years and 11 months of full-time employment covered by CSRS retirement deductions.
The Federal Employees Retirement System
For employees covered by the FERS, determining the age for retirement is more complicated.
That's because determining eligibility for the FERS basic benefit – your government pension – is only part of your retirement. The other two parts, Social Security and the Thrift Savings Plan, have a different set of rules.
Like many things related to retirement, understanding your eligibility for benefits and deciding when it makes sense to start claiming them isn't quite that simple. It is also important to note that it is less likely for federal employees under FERS to have 30-plus years of service at retirement.
OPM Statistical Abstract from 2022 showed that the mean number of years of service for a federal employee retiring in 2022 was 32.1 years for CSRS and 22.0 years for a FERS retiree. According to the Bureau of Labor Statistics, demographic characteristics show that in January 2022, median employee tenure (the point at which half of all workers had more tenure and half had less tenure) for men held at 4.3 years. For women, median tenure was 3.8 years in January 2022, little changed from the median of 3.9 years in January 2020. Federal employees are no exception, and it is less common for someone to enter federal service after graduation or discharge and spend 30 years working at the same job.
The FERS Basic Retirement Benefit
Eligibility for the FERS Basic Retirement Benefit is based on similar rules to CSRS, but with some unique differences. First, the "age" isn't 55 anymore, it's the FERS Minimum Retirement Age (MRA is 57, for those born in 1970 and later)! If an employee separates after reaching their MRA with 10 or more years of creditable service, they are eligible for a reduced, immediate retirement benefit that wasn't available under the older CSRS program. Under this provision, if you have at least 10 years of service but less than 30, your retirement benefit will be reduced by 5% for every year you are under age 62 (prorated by the month).
To qualify for an unreduced retirement at the MRA, you must have reached your MRA with 30 or more years of creditable service. If you came into federal service a little later in life or you had a break in service during your career, then you may need to wait until age 60 with 20 years or more of creditable service or age 62 with five or more years of creditable service to qualify for an immediate retirement that is not subject to an age reduction. Employees who leave with eligibility for the MRA + 10 retirement may postpone their application to avoid some or all the age reduction.
There are other age and service requirements for early retirement for:
- Voluntary Early Retirement Authority (VERA),
- Discontinued Service Retirement (DSR),
- Disability retirement,
- Deferred retirement for employees who leave before their MRA or those who don't meet the minimum age and service requirements listed above.
- Special category employees such as law enforcement officers, firefighters, and others who are subject to mandatory retirement due to the nature of their work.
Social Security Retirement
You're eligible for the unreduced Social Security benefit (referred to as your Primary Insurance Amount) once you reach your Full Retirement Age. If you were born in 1960 or later, your full retirement age is 67. You can start taking Social Security retirement benefits as early as 62, but the benefit is reduced by 30% (or less if born before 1960) from the amount payable by waiting until the FRA to claim it. In fact, every year you delay past your FRA boosts your monthly benefit by 8% thanks to delayed retirement credits — up until age 70, at which point you'll receive your maximum Social Security benefit.
Taking Social Security at 70 increases your monthly benefit by about 77% compared to starting at 62. Of course, you'll get fewer checks over your lifetime. Whether you will receive more money by waiting until age 70 depends on how long you live. Waiting until age 70 to claim can be a hedge against the risk of living too long or what's known as "longevity risk" by providing a larger monthly benefit in your later years when your retirement savings might become depleted. Whether that tradeoff makes sense for you depends on a host of factors, such as your health, the kind of work you do, and your spouse's situation if you're married.
Thrift Savings Plan
To make a penalty-free withdrawal from your TSP, 401(k) — or 403(b) if you work for a tax-exempt organization — you'll typically need to wait until the age of 59½ to avoid a 10% early withdrawal penalty. However, there is an exception to this penalty for payments made after you separate from service during or after the year you reach age 55. For retired public safety officers, the exception applies to payments made after separate from service during or after the year you reach age 50 or have 25 years of service under the TSP. There are other exceptions, including if you become permanently disabled. You should check TSP Book 26, Tax Rules about TSP Payments for additional information.
If you have a Roth TSP or 401(k): When you withdraw Roth 401(k) money early, you'll pay income tax and a 10% penalty on only the amount you earned from your contributions. Roth earnings become qualified (not subject to tax) when you meet the following two conditions:
- 5 years have passed since January 1 of the calendar year in which you made your first Roth contribution and
- You have reached age 59½, have a permanent disability, or are deceased.
Qualified distributions of Roth money are not taxed under any circumstances. The earnings portion of a nonqualified distribution is taxed and may be subject to the early withdrawal penalty unless you transfer or roll over the payment. Remember that You've already paid income tax on the Roth money you've contributed to your account.
You should also be aware of the age when you must take Required Minimum Distributions from your TSP and other retirement accounts when you turn 73. The RMD age will increase to 75 in 2033. This year, Roth 401(k) distributions will no longer be subject to RMDs.
Individual Retirement Arrangements
Remember that the retirement age for IRA withdrawals is usually 59½. You'll owe ordinary income taxes on any distributions, whether you're taking this money early or you've reached 59½. A 10% early withdrawal penalty usually applies when you take out your money before retirement age.
If you have a Roth IRA, withdrawals are tax- and penalty-free once you're at least 59½ and you've had the account for five years. However, you can withdraw the contributions (but not the earnings) any time without paying taxes or a penalty. Any withdrawals are treated as contributions first, which is a key difference between Roth IRAs and Roth TSP and 401(k) distributions.
RMD rules for 401(k)s also apply to traditional IRAs. You'll need to begin the RMDs the year you turn 73 if you turn 72 in 2023 or later. The RMD age will increase to 75 by 2033.
Other Investments: Brokerage accounts, home equity, rental property
You can withdraw money from a brokerage account at any time without penalty. You could instead keep your investments and use dividend income to subsidize your retirement. Or you could sell your investments and use your gains for income. Though there are no tax breaks associated with a standard brokerage account, your profits are taxed at favorable long-term capital gains tax rates if you hold them for more than a year.
If you have significant equity in your home or own it outright, you could sell it and move to a smaller residence, then use your profits as retirement income.
Buying residential real estate to earn rental income is a popular way to supplement retirement income. If being a landlord isn't appealing, you could hire a management company to handle day-to-day tasks.
Final Words
Retirement involves making many decisions including deciding when to retire. Some folks retire the day they become eligible and may pursue other interests and vocations. Others find ways to supplement their federal retirement benefits by working part-time or by doing contract work or becoming self-employed. Doing this may allow you to delay claiming Social Security early and avoid taking too much too soon from your TSP.
Others, even though they may be able to afford retirement, continue to work because they love the work or the people that they work with. Continuing to work after retiring or after becoming eligible to retire can help you pay for critical expenses such as housing, food, utilities and health care without using retirement savings. This could give you more freedom to use your retirement savings for your wants rather than your needs and allow you to invest more aggressively since you can choose whether to take a withdrawal now or wait till later.
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