Navigating the Gap Years: Can I Retire at 57 (Minimum Retirement Age)
Can I Retire at 57 (Minimum Retirement Age)?
"I am a federal employee age 48 with 18 years of service. I would like to retire at the age of 57 if at all possible. I know I won’t meet the MRA as I will only have 27 years of service at that point.
I have taken a few retirement seminars and I think I’ve picked up that my pension would be reduced by 15% - 5% per year for the 3 years I would give up by not working until I was 60.
I am currently a GS-12 and contribute 16% of salary to my TSP and have a TSP balance of around 460k. I would tap Social Security at age 62.
My biggest concern is the years between 57 and 62. Would I be eligible for the SS supplement for all 5 of those years?
My home will be paid off this year and I don’t have much other debt. I’m married and the spouse also has a 401K with about 300K currently. Just trying to gauge what retirement income will look like if I go at 57."
This is a great question and perfect timing for this family to plan ahead.
Understanding how the FERS annuity calculation works is essential before making your decision on when to go out. The numbers aren’t the only decision, but it is important to have all the information.
First, to be eligible for an immediate unreduced annuity you must meet one of the following requirements:
- Retire at MRA with 30 or more years of service
- Retire at 60 or older with 20 or more years of service.
- Retire at 62 or older with 5 or more years of service.
(If you are a Special Category Employee, you can retire at any age with 25 years of service or age 50 with 20 years of service.)
If you don’t fall into one of those categories, the FERS basic annuity is reduced by 5% for every year you are under age 62. This is a permanent reduction.
However, if eligible you may also elect to postpone your annuity until age 62 to avoid the reduction.
In this case the federal employee’s annuity would be reduced by 25% by going out at age 57 on an immediate annuity.
For illustration, let's say their annuity calculation comes out something like this:
27 years x 1% x $150,000 hi-3 = $40,500 annual annuity
25% reduction x $40,500 = $30,375
After a significant 25% reduction the annuity will equal $30,375 per year. It’s also important to keep in mind that cost of living adjustments do not begin until age 62. If inflation averages 3% between age 57 and 62, the annuity's purchasing power is further reduced by age 62 to around $26,000 – the actual annuity amount remains at $30,375 it just doesn’t buy as much in goods or services because of rising prices.
What about the Special Retirement Supplement?
To be eligible for the FERS Special Retirement Supplement (SRS) you must retire on an immediate annuity with the following requirements:
- Retire at MRA with 30 or more years of service
- Retire at 60 or older with 20 or more years of service.
Those who are not eligible include:
- MRA +10
- Disability
- Those only eligible for a deferred annuity
- Age 62 or older
Our employee would only be eligible for the SRS if waiting to retire until age 60 – and the benefit would last until turning age 62.
Retirement Accounts
Lastly, let's look at those retirement accounts and project what they may look like 9 years down the road at age 57.
Employee TSP: $460,000 balance + $18,000 annual contribution @ 8% return for 9 years = $1,162,300
Spouse 401k: $300,000 balance + $10,000 annual contribution @ 8% return for 9 years = $734,567
This gives us $1,896,867 in retirement assets. If we take a simplified 4% annual withdrawal this projects to $75,875 year or $6,322 month at age 57. While the spouse’s 401(k) wouldn’t typically be eligible for withdrawal until 59.5, there are work arounds such as a 72t distribution strategy.
Putting It All Together
Summarizing our hypothetical retirement income at 57:
- $30,375 - Reduced FERS basic annuity
- $75,875 - Income from retirement and other investments.
Going out at 57 could work for this family but it presents some challenges that could become easier with extra time.
- Permanent reduction to FERS basic annuity
- No COLA’s until 62
- Not eligible for SRS
- Increased risk of drawing down TSP and other retirement accounts
- Permanent reduction for taking social security early at 62 (up to a 30% reduction)
Of course, we understand that the numbers aren’t the only factor in a retirement decision. The most important part is what you are comfortable with and want your situation to look like. Retirement decisions are personal.
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Do you have a question about retirement or financial planning? If so please send them my way, I'd be happy to take a look and provide some insight like this.
Don’t be afraid to ask questions. I’m here to help.
-Justin
*The content is developed from sources believed to be providing accurate information.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material
