With agencies downsizing, more federal employees are hearing two terms around the office: VERA and VSIP. An early out and a buyout check can sound like a gift. Sometimes they are. But I’ve seen people take one and lose more than they gained.
In my work as a financial planner for federal employees, I always start by asking people to slow down and run the numbers. Here’s how I’d evaluate an offer before you sign anything.
Two different things
VERA, or Voluntary Early Retirement Authority, lets you retire sooner than you otherwise could. VSIP, or Voluntary Separation Incentive Payment, is a cash payment to encourage you to leave. An agency can offer one, the other or both.
Do you qualify for VERA?
To be eligible for VERA, you generally need to be age 50 with at least 20 years of service, or any age with at least 25 years of service. Your position also has to be covered by the agency’s authority, and you usually need to have been in it for at least 30 days before the agency’s request to OPM.
Being eligible doesn’t guarantee you’ll get it. You apply, and your agency decides whether to approve it.
The pension math
Under FERS, a VERA retirement has no age reduction. But you’re leaving with fewer years of service, and your pension reflects that.
Here’s a simple example with a $100,000 High-3:
- Retire at 57 with 30 years: $100,000 × 1% × 30 = $30,000 a year.
- Take VERA at 52 with 25 years: $100,000 × 1% × 25 = $25,000 a year.
That’s $5,000 a year less, for the rest of your life. In reality the gap is usually bigger, because your salary, and with it your High-3, would likely have kept rising if you’d stayed.
The Supplement catch
The FERS Supplement doesn’t start right away under VERA. It begins at your Minimum Retirement Age, which is 57 for most people still working today. If you leave at 52, that’s five years without it.
The COLA catch
Regular FERS retirees don’t receive cost-of-living adjustments until age 62. Leave at 52 and your pension stays flat for 10 years before COLAs begin. That’s a long time for prices to keep rising while your check doesn’t.
How much the VSIP really pays
VSIP is the lesser of your severance pay formula or $25,000, and that $25,000 cap applies at DoD too. More importantly, $25,000 gross is not $25,000 in your pocket. It’s taxed as supplemental wages, so expect 22% federal withholding plus 7.65% for Social Security and Medicare, which leaves about $17,600 before state taxes. Depending on your bracket and state, it’s common to lose 30% to 40% of the payment to taxes.
And if you take a VSIP and come back to work for the federal government within five years, including as a personal-services contractor, you have to repay the full amount first.
Can you keep your health insurance?
To carry FEHB into retirement, you generally need to have been covered for the five years right before you retire. You can switch plans during that time, but you need continuous coverage. People who were on a spouse’s private plan sometimes find out too late that they don’t qualify.
OPM has granted waivers of the five-year rule for some VERA and VSIP takers, but don’t assume one applies to you. Check with your agency before you sign.
The five questions I’d ask
- What is my pension with and without the extra years?
- When does my FERS Supplement start?
- How will I cover the years until 62 with no COLA?
- Do I meet the FEHB five-year rule, or is there a waiver?
- Will I ever want to come back to federal work?
Final thoughts
A buyout is a one-time check. Your pension is for life. Neither one is good or bad on its own, but you should know exactly what you’re trading before you sign. Run the numbers first.
If you’re a federal employee within 5 years of retirement and want a plan built around your FERS benefits, book a free call to see if we’re a fit.
Dallen Haws, CFP®, is the founder of Haws Federal Advisors, which helps federal employees plan their retirement. This article is educational only and is not tax, investment or legal advice. HawsFederalAdvisors.com