If you are a federal employee getting the itch to retire and wanting to leave as soon as possible, you might be wondering how to retire early without losing all of your hard-earned benefits. Things like keeping your health insurance and getting a healthy, unreduced pension right away do not automatically apply to everyone who has worked for the federal government. You must meet specific criteria, and certain types of early retirement simply do not qualify for these benefits. Let’s dive into what it means to retire early and how to protect your future.
Normal Retirement vs. Early Retirement
To understand early retirement, we first need to define a normal retirement. For a normal, full retirement, you must meet one of the following criteria: reach your Minimum Retirement Age (MRA)—which is around age 57 for most—with 30 years of service; reach age 60 with 20 years of service; or reach age 62 with five years of service. If you meet one of these milestones, you are eligible for a full retirement.
Early retirement options, on the other hand, allow you to leave sooner but often come with trade-offs. The main types of early retirement are VERA/VSIP, MRA+10, and Deferred Retirement.
VERA and VSIP: The Agency Offer
A Voluntary Early Retirement Authority (VERA) or Voluntary Separation Incentive Payment (VSIP) is an option your agency can offer, typically when they are trying to reduce their workforce. Under a VERA, you can retire at age 50 with at least 20 years of service, or at any age with 25 years of service. A VSIP may also be offered as a lump-sum payout to incentivize you to leave.
With a VERA, you can receive your pension right away and keep your Federal Employees Health Benefits (FEHB), assuming you have been enrolled for the five years immediately preceding retirement. The main downside is simply that by leaving early, your pension and Thrift Savings Plan (TSP) balances will be smaller than if you had worked until a normal retirement age.
MRA+10 and Postponed Retirement
Another early retirement option is the MRA+10. To qualify, you must reach your Minimum Retirement Age (around 57) and have at least 10 years of creditable service. While this allows you to retire earlier than a normal retirement, there is a significant catch: for every year you retire before age 62, your pension is permanently reduced by 5%. For example, if you retire at 57, you are five years away from 62, resulting in a permanent 25% cut to your pension for the rest of your life.
To avoid this penalty, you can choose a Postponed Retirement. This means you leave federal service at your MRA but delay starting your pension until age 62. By doing this, you avoid the 25% reduction. However, during the years you are postponing your pension, you will not receive any pension income and you will not have FEHB coverage, so you must have an alternative plan for health insurance and income during that gap.
Deferred Retirement: The Last Resort
A Deferred Retirement is generally the least advantageous option, but it may be the only choice for those who want to leave federal service long before they are eligible for other types of retirement. To qualify, you only need five years of federal service.
When you take a Deferred Retirement, you resign and leave your money in the retirement system, but you cannot start receiving your pension until age 62 (or earlier if you had 20 or 30 years of service when you left). The major downsides are that your FEHB coverage is gone forever—you cannot restart it when your pension begins—and your “High-3” salary is frozen at the time you resign. This means inflation will significantly erode the value of your pension over the decades before you can finally claim it.
The FERS Supplement and Final Planning Tips
It is crucial to understand how early retirement affects the FERS Annuity Supplement. Generally, the FERS supplement is not available for early retirements like MRA+10 or Deferred Retirement. The only exception is if you retire under a VERA; in that case, you will receive the FERS supplement to help bridge the gap until you are eligible for Social Security at age 62.
As you plan your exit, keep these common mistakes in mind:
- The Five-Year Rule: You must be covered under FEHB for the five consecutive years before you retire to carry it into retirement.
- Cash Reserves: OPM can take three to six months (or longer) to process your retirement. Ensure you have enough cash savings to cover your living expenses during this gap.
- TSP Access: The default age to access your TSP without a 10% early withdrawal penalty is 59½. There is an exception if you separate from service in the year you turn 55 or later, allowing you to access your TSP without the penalty. However, if you leave at age 50 under a VERA, you cannot automatically tap into your TSP without penalty unless you are a special provisions employee (like law enforcement or firefighters).