Although retiring after 20 or 30 years of uninterrupted service is usually uncomplicated, for federal employees who want to retire early, there is often confusion between two options: the postponed and deferred retirements. And while both involve separating from service early and receiving the FERS pension later, there are significant differences between the two that must be understood before making an election. So, in this article, we’ll review the major differences between the two options and why you might choose one over the other.
The FERS Postponed Retirement
First, let’s review the FERS postponed retirement. For this retirement option, you must separate from service with at least 10 years of creditable service and have at least reached your Minimum Retirement Age (MRA). However, instead of drawing your pension immediately, you postpone it.
Why Postpone?
Although you’d be eligible to start drawing your pension immediately upon separation, your pension would be subject to permanent reduction. This reduction is 5 percent a year for each year under age 62 or 5/12ths of 1 percent per month. To avoid the reduction, you can postpone receiving your pension until you have 20 years of service and have reached age 60 or until you are age 62.
Eligibility
To be eligible for the Postponed retirement:
- You must have reached your minimum retirement age (MRA),
- Have at least 10 years of service before separation (at least 5 years of civilian service), and
- Not have taken a refund of your FERS contributions.
When Does Your Pension Start?
Your pension will commence once you have met the requirements for the regular FERS retirement. Meaning the age at which your pension will start depends on your years of service completed upon separation.
For example, you’re eligible for an unreduced annuity at age 62 with five years of service or age 60 with 20 years of service. Since most federal employees retiring under the Postponed retirement option have less than 20 years of service, they usually must wait until age 62.
Bob’s Case
Now let’s look at Bob’s case to gain some insight into why you might choose this retirement option:
Bob has 16 years of creditable service and has reached his MRA. After working with a financial planner, Bob has realized that he has enough saved to retire early. So, he decides to leave federal service.
Although he could retire and start collecting his pension immediately, he is 57 and doesn’t want to take the 25% early reduction penalty (5yrs x 5%= 25% reduction), which for a $50,000 pension would amount to a permanent reduction of $12,500! Needless to say, this is a significant pay cut that Bob wants to avoid. So, he decides to postpone his pension until age 62. Bob will use his spouse’s employer-sponsored healthcare coverage during the healthcare gap between ages 57 to 62. Once he reaches 62, Bob can apply for his pension and reenroll in Federal Employee Health Benefits (FEHB) and Federal Employees’ Group Life Insurance (FEGLI).
The FERS Deferred Retirement
Now let’s do a quick review of the FERS Deferred retirement. Like the Postponed, Deferred retirement allows you to separate from service before meeting the eligibility for normal retirement and still collect your pension once you meet the age requirement for your years of service.
Eligibility
Unlike the other FERS retirement options, 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).
When Does Your Pension Start?
Similar to the Postponed option, the age that your pension will start depends on your years of service. So, if you have 5 years of service, you’ll have to wait until age 62; if you have 20 years of service, you’ll wait until age 60, or if you have 30 years of service, your pension can commence at your MRA.
You can also begin to draw your pension at your MRA with 10 years of service, but as mentioned before, your pension will be subject to a permanent reduction of 5 percent a year for each year under age 62 or 5/12ths of 1 percent per month.
Bob’s Case Continued
Let’s continue the example from above to see when a Deferred retirement might make sense.
Bob now has 10 years of service and is only 48 years old. He has decided that he wants to leave federal service for a private-sector position. Since he likes the idea of a guaranteed income stream for the rest of his life, he doesn’t take a refund of his FERS contributions and elects to take a deferred annuity at age 62.
Because Bob will receive health benefits at his new position and already has private life insurance, losing FEHB and FEGLI coverage would not adversely affect him.
What’s The Difference?
Although you might have already noticed the differences between the two retirement options, we’ll review them to be sure. The first significant difference is that you can take a Deferred retirement at any age, unlike the Postponed option, which requires that you have reached your MRA before separating.
The second difference is that only 5 years of service are required to be eligible for the Deferred retirement option, whereas 10 years are needed for the Postponed.
Another difference between the two retirements and the most significant is that with the Deferred option, you will not be eligible to reinstate your FEHB or FEGLI coverage when you apply for your pension. However, with the Postponed, if you met the eligibility requirements when you separated, you can resume your FEHB and FEGLI coverages when you begin to draw your pension.
Learn more about the requirements to maintain your FEHB coverage in retirement here.
Note: An important point to make here is that with both options, you 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.
Which Option Is Better?
Postponing retirement can make a lot of sense when you reach your MRA and want to avoid the reduction. This option allows you to maximize your pension while remaining eligible for the FEHB and FEGLI. Since maintaining your FEHB coverage in retirement can help keep your medical cost from skyrocketing during a period when you’ll likely need more health care services, this is a major benefit of the Postponed retirement. If you’re close to your MRA and to having 10 years of service, it might make the most sense to stay until you’re eligible for a Postponed Retirement.
But if you aren’t close to your MRA, it might not be worth it for you to stay. For example, if you started working for the federal government at an early age and now have 20 years of service but are only 42, staying 15 more years to be eligible for a Postponed retirement might not be in the cards.
Final Thoughts
If you’re thinking about leaving federal service early, it’s essential to understand your options to make an informed decision. Like most things in financial planning, there is no one right choice for everyone. The right retirement for you will depend on several factors, such as your current age, years of creditable service, and access to an affordable health insurance alternative. It is often helpful to calculate your pension under different scenarios to compare your options. Since financial planning involves many variables and your FERS benefits are only a part of your overall financial picture, consider consulting with a qualified financial planner if you’re not confident in creating your financial plan.
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The SECURE ACT 2.0 passed and impacted many of the articles on this website. While the articles were correct when written, it’s impossible to re-write every article. Please consult a qualified professional (i.e., CFP®, CPA, or attorney) before implementing any strategy.
