The Retirement Loophole Every Late-Starter Federal Employee is Raving About

Recently, an intriguing query landed in my inbox. It was from someone who had embarked on their federal career journey much later than most. They sought guidance with only a decade or so of service by their minimum retirement age (MRA) and an annual income ranging between $50,000 to $55,000. This prompted me to revisit and refresh some insights I shared in July 2021 about the choices available to such individuals.

MRA+10: A Glimpse into Reduced Retirement

For those who step into federal service later in their careers or approach their retirement age with limited national employment years, there’s the MRA+10 retirement option. This allows employees to retire at their MRA (57 for those born in 1970 or later) with a minimum of 10 years of creditable service.

Under the Federal Employees Retirement System (FERS), a standard benefit requires you to be at least 57 with 30 years of service. Of this, a minimum of five years should be civilian federal employment. However, if you fall short of these benchmarks, you still have multiple paths to consider.

Option 1: Embrace the Reduction

Employees can opt for retirement at their MRA with a minimum of 10 years of service. The catch? They must accept a 5% reduction in their benefit every year they’re below 62.

Let’s illustrate Melissa’s case. At 57, with 12 years of service and an average highest salary of $52,000 annually, her benefit would be:

12 years x $52,000 x 1% = $6,240 annually. But since she’s five years shy of 62, her benefit has reduced by 25%, amounting to $4,680 annually.

Option 2: Delay and Reap

Melissa has another choice. She can resign at 57 and delay her retirement benefit application. This move can minimize or even nullify the age-related reduction. With her service years under 20, she’d need to apply for a postponed retirement roughly two months before turning 62 to sidestep the age reduction completely. This would mean kickstarting her retirement a month before her 62nd birthday.

However, a word of caution: most federal employee insurance perks, including health and life insurance, cease once an employee departs without opting for immediate retirement benefits. But those who exit national service post their MRA with a decade or more of service can re-enroll in these programs, provided they were active participants during the five years leading up to their departure.

Option 3: Extend and Enhance

Retirement eligibility doesn’t mandate immediate action. If Melissa chooses to work till 62, she can avail of an unreduced, immediate retirement. Her retirement calculation would then be:

17 years x $52,000 x 1% = $8,840 annually.

Tailoring Your Retirement Path

Every federal employee’s journey is unique, especially for those who start late. The MRA+10 option offers flexibility, but weighing the pros and cons of each path is essential. Whether considering an early exit with reductions, postponing benefits, or extending your service years, ensure your decision aligns with your long-term goals and financial well-being.