Understanding the FERS Deferred Retirement

Every federal employee knows that the FERS pension is a great benefit, but many are unaware of the several ways they can be eligible to receive that pension. For instance, federal employees can retire under the immediate, postponed, or deferred retirement option, to name a few. And since retiring after 20 or 30 years of service doesn’t work for everyone, the deferred retirement is an important option to understand since it gives federal employees who aren’t eligible for immediate or postponed retirement an option to still receive their FERS pension. So, in this article, we’ll review the deferred retirement option and how it works.

What is the Deferred Retirement Option?

Unlike an immediate retirement that starts the first full month after you separate from service, a deferred retirement begins later when you reach a certain age. So, if you leave federal service before you meet the age and service requirements for immediate or postponed retirement, you may still be eligible for a deferred retirement.

Don’t confuse the deferred with the postponed retirement, which requires you to have reached your minimum retirement age (MRA). Learn more about the postponed retirement here.

Eligibility

Unlike the other retirement options, the deferred retirement does not have an age requirement that must be met before separation. Meaning you can leave federal service at any age and, if you meet the following minimum requirements, will be eligible for a deferred retirement:

  • Have at least 5 years of creditable civilian service before separating.
  • Not take a refund of your FERS contributions.
  • Be under age 62 when you separate (if you’re 62 at separation with 5 years of service, you would be eligible for an immediate retirement).

Note: If you have at least 10 of service and you have reached your MRA, you would be eligible for the postponed retirement option (known as the MRA +10), which is preferred.

When Does Your Pension Start?

The age that your pension will start depends on your years of service. For instance, you’re eligible for an unreduced deferred annuity at age 62 with five years of service, age 60 with 20 years of service, or eligible at your minimum retirement age (MRA) with 30 years of service.

For example, if you have 5 years of service, the earliest you can start drawing your deferred pension is age 62. On the other hand, if you have 30 years of service, you can begin drawing at your MRA.

You’re also eligible for a reduced pension at your MRA with at least 10 years of service. However, your pension will be permanently reduced by 5 percent for each year you’re under age 62. This reduction can be avoided if you deferred your pension until age 62.

How is Your Pension Calculated?

The calculation for the deferred pension is identical to that of the immediate pension. Meaning it’s based on the average of your highest-paid consecutive 3 years of service (“high-3”), multiplied by your years of creditable service at separation, and by a 1 percent multiplier. The “high-3” salary is time-weighted and includes basic pay, locality pay adjustments, and shift differentials, but not overtime, bonuses, or payments for unused annual leave. The following is the formula used to compute the pension:

Disadvantages

Although separating from federal service whenever you want sounds like a great deal, there are some significant disadvantages to the deferred retirement option. First, those federal employees receiving a deferred pension are not eligible for the FERS Special Retirement Supplement (SRS), also known as the FERS Supplement. The SRS is an additional benefit paid to certain federal employees who retire before age 62. Learn more about the FERS supplement here.

The second drawback of the deferred retirement is that you will not be able to re-enroll in Federal Employees’ Group Life Insurance (FEGLI) when you apply for your pension. Though many don’t need their FEGLI into retirement, it’s worth noting the loss of this coverage.

The last and most significant disadvantage of retiring under the deferred retirement option is that you will lose your Federal Employees Health Benefits (FEHB) coverage upon separation and not regain the health insurance coverage when you apply for your pension.

Final Thoughts

Although the deferred retirement allows you to draw your pension with fewer years of service and separate at any age, losing access to the FERS supplement, FEGLI, and FEHB is a considerable sacrifice. So, it’s critical that when deciding whether the FERS deferred retirement is the right choice, you include several factors in your analysis, such as your current age, years of creditable service, and access to an affordable health insurance alternative to name a few. It is often helpful to also calculate your pension under different scenarios to compare your options. As always, if you don’t feel confident in creating your financial plan, consult with a qualified financial planner who understands your federal benefits.


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Author: Jose Armenta, MsBA, CFP®, ChFC®, EA

Jose Armenta is a CERTIFIED FINANCIAL PLANNER professional who specializes in helping federal employees get the most out of their federal benefits. Jose's experience serving federal employees provides him with valuable insight into the unique financial planning needs of federal employees.