With all the news lately about the upcoming phased retirement option for federal employees, many people are considering whether it makes sense for them. To help clarify the issues at stake, let’s look at a couple of case studies, one for an employee under the Federal Employees Retirement System and another for someone covered by the Civil Service Retirement System.

FERS

Let’s say Jim is 66 and still loving his federal job. He has 30 years of service and a high-three average salary of $100,000. His retirement would be computed as 1.1 percent of $100,000, or $33,000 per year (before any reductions for survivor benefits). He would love an extra day or two a week to play golf. Under phased retirement, he can collect half of his salary ($50,000) and half of his FERS retirement ($16,500).

Here are some factors Jim should consider as he weighs phased retirement:

Social Security: Because Jim is over the full retirement age for Social Security and is no longer subject to the earnings limit, he could begin to draw benefits (let’s say $20,000 a year). That brings his total phased retirement income to $86,500. But he also could choose to delay his application for Social Security until he turns 70, when it would increase by 32 percent, to $26,400 (or more, since he would be adding additional income to his lifetime average earnings).

Medicare: Jim may choose to delay Medicare Part B enrollment without a penalty, because he’s still working and health insurance payments are still being deducted from his salary. The Medicare Part B premium is $104.90 per month (or more depending on total income), so Jim would be saving at least $1,258.80 a year by not enrolling in Part B. If Jim’s wife also is 65 and covered under Jim’s federal health insurance, she can also delay Part B enrollment without a penalty until Jim fully retirees. (By the way, Jim could have enrolled in Medicare Part A — hospital insurance — at 65 since there is no premium for it.)

Survivor Benefits: This option is delayed during phased retirement. Eventually, to provide a survivor’s annuity for his wife, Jim would need to take a 10 percent reduction to his FERS annuity. This would provide 50 percent of his unreduced FERS benefit to his wife in the event he dies before her. But the $3,300 (10 percent of $33,000) reduction to his retirement will be delayed until he enters full retirement. If Jim should die during phased retirement, his wife would be entitled to the basic FERS death benefit — in this case, a lump sum payment of about $32,000, plus half his final salary. She also would be entitled to receive the full survivor annuity of 50 percent of his FERS retirement, which would be computed on Jim’s full retirement, crediting the phased retirement period as part-time service. The survivor annuity is paid if the employee had a minimum of 10 years of federal service at the time of death.

Thrift Savings Plan: Jim is able to continue to contribute $23,000 per year to his TSP account if he wants to, and will continue to receive matching agency contributions of $2,500 based on his salary. Of course, if he continued to work full-time, his matching would be $5,000. The other thing he could do is take advantage of the age-based in-service withdrawal option, transferring a portion of his TSP to an IRA and then taking withdrawals from the IRA.

Income During Phased Retirement: If Jim applies for his Social Security retirement benefit he would receive more money during phased retirement than he would if he fully retired. His income during phased retirement would be $86,500. But if he fully retired, his income would be $53,000 ($33,000 in a FERS benefit plus $20,000 in Social Security). And if Jim provides survivor benefits for his wife, his retirement benefit would be reduced to $29,700.

Final Payment: If Jim works in phased retirement for four years, he will earn another 4.4 percent of his high-three average salary ($100,000 x 4.4 percent = $4,400 / 2 = $2,200 per year). In addition, if his salary increased during this time, he would benefit from a new high-three average for the phased retirement portion of his retirement benefit. He also would have received annual cost of living adjustments on his phased retirement annuity. His total retirement income would be his FERS retirement benefit computed at approximately $35,200, plus any COLAs received during phased retirement and pay raises that might have affected his high-three, plus Social Security retirement (for Jim and his spouse), plus TSP monthly payments (if necessary for additional monthly income or to meet IRS rules for required minimum distributions).

CSRS

Let’s say Sarah is 56, still loves her federal job, and has 35 years of service with a high-three average salary of $65,000. Her retirement would be computed as 66.25 percent of $65,000, or $43,062 per year (before any reductions for survivor benefits). She would love an extra day or two a week to spend with her new granddaughter and begin to pursue interests that she can develop for her years of full retirement.

Under phased retirement, Sarah can collect half of her salary ($32,500) and half of her CSRS retirement benefit ($21,531). So her total income would be $54,031.

Here are some factors Sarah should consider:

Survivor Benefits: This option is delayed during phased retirement. Eventually, Sarah can take a little less than a 10 percent reduction to her CSRS annuity to provide 55 percent of her unreduced CSRS benefit to her husband in the event she dies before him. But this $4,036 reduction to her retirement for survivor benefits is delayed until she enters full retirement. If Sarah should die during phased retirement, her husband would be entitled to receive the full survivor annuity of 55 percent of her CSRS retirement, which would be computed on Sarah’s full retirement (with the retirement period credited as part-time service).

Thrift Savings Plan: Sarah is able to continue to contribute up to $23,000 a year (the $17,500 normal elective deferral limit, plus $5,500 in catch-up contributions for participants who are 50 or older) to her TSP account.

Other Reductions: If Sarah owes a deposit for pre-Oct. 1, 1982 “nondeduction” service (temporary federal service that was not covered by CSRS), her retirement would be reduced by 10 percent of the unpaid deposit at the time she enters phased retirement. She would have the option of paying the amount due before entering phased retirement to avoid this reduction. If Sarah owes a redeposit of a refund of retirement contributions for service that ended before March 1, 1991, her retirement would be reduced when she entered phased retirement. The amount of the actuarial reduction for an unpaid redeposit will be updated when she enters full retirement. If Sarah wants to repay some or all of her redeposit, she would have to decide this before entering phased retirement.

Final Payment: If Sarah works in phased retirement for four years, she will earn another 8 percent of her high-three average salary ($65,000 x 8 percent = $5,200 / 2 = $2,600 a year). In addition, if her salary increased during this time, she would benefit from a new high-three average for the phased retirement portion of her retirement benefit. She also would have received annual cost of living adjustments on her phased retirement annuity.

(Image via Juriah Mosin /Shutterstock.com)

Clearly, a lot of federal employees are interested in the idea of stepping gently into retirement using the new phased retirement option being unveiled this fall. I’ve received quite a few questions from employees about how phased retirement will work. The answers to some of them will have to wait until agencies issue their individual guidance for implementing the program. The Office of Personnel Management will be issuing separate guidance here to assist agencies and employees with administrative and procedural matters.

For now, let’s look at some of the questions that already have answers.

How will my retirement benefit be computed before and after I enter phased retirement?

Here’s the answer from OPM: “Upon entry into phased retirement, OPM will compute the employee’s ‘phased retirement annuity’ using the three highest consecutive average pay years the employee had accrued up until that point. During phased retirement, if a new high-three average pay were to accrue, it would be reflected in the computation of the composite annuity. At full retirement, the ‘phased retirement annuity’ portion of the employee’s annuity would not change; but, the ‘fully retired phased component’ portion would take the new average pay into account. Therefore, a new high-three average pay achieved during phased retirement would only affect the portion of the total annuity, but not the portion of the composite annuity consisting of the ‘phased retirement annuity.’ ”

How will my Thrift Savings Plan be affected?

Phased retirees continue their eligibility to participate in the TSP. They are eligible to contribute to the plan and are subject to the normal restrictions regarding loans, financial hardship withdrawals and age-based in-service withdrawals. Phased retirees are not eligible for post-employment withdrawals, and they will not be subject to required minimum distributions or the TSP withdrawal deadline.

All sources of contributions (employee contributions, agency automatic contributions, and agency matching contributions) to phased retirees’ TSP accounts will be calculated on basic pay received each pay period and will not consider Civil Service Retirement System or Federal Employees Retirement System annuity payments.

More information on the TSP and phased retirement is available here.

What about leave issues?

Those in phased retirement status will accrue half the leave they would previously have earned each leave period because they will be on a 50 percent time schedule. Employees who enter phased retirement must have a minimum of 20 years of federal service, so they will earn four hours of annual leave and two hours of sick leave each leave period.

A phased retiree’s lump sum payment for annual leave is paid at the time he or she enters full retirement.

Phased retirees will not ordinarily earn compensatory leave since they are usually going to be working 40 hours per pay period. However, a phased retiree could potentially earn overtime or compensatory time off if he or she worked in excess of their scheduled tour of duty.

How does phased retirement affect Federal Employees Health Benefits Program and Federal Employees Group Life Insurance benefits?

Here are the basics:

• Premiums for FEHBP and FEGLI will continue to be deducted from the phased retiree’s salary.
• The FEHBP employer contribution will be the same as for full-time employees.
• FEGLI coverage amounts will be based on the full time salary for the position.
• FEHBP and FEGLI coverage will be transferred to retirement when full retirement begins.

I have a colleague who might be interested in phased retirement but has been working part time for several years. Is there anything in the rule regarding the transition from part time to phased retirement?

Unfortunately, to enter phased retirement, you must have been working full time for the three years before phased retirement begins.

Here are some other important facts to remember about phased retirement:

• Deposits, redeposits and military service deposits to the retirement fund, under either CSRS or FERS, must be paid prior to entering phased retirement.
• Death-in-service benefits are payable to a spouse or former spouse if a phased retiree dies before full retirement. Survivor elections are made at full retirement. Phased retirement annuities and pay are subject to the same court orders and decrees for child support and alimony as regular annuities and federal pay.
• Phased employees are only permitted to work 50 percent of their full-time work schedule. This is subject to change at OPM’s discretion.
• Agencies are allowed to establish time limits on phased retirements.

(Image via Maridav/Shutterstock.com)

Last week, the Office of Personnel Management finally issued regulations implementing a phased retirement option for federal employees. Under the rules, eligible employees will be able to draw half of their retirement annuities while working half time at federal agencies. Employees will be able to begin submitting applications for phased retirement on Nov. 6.

So what has to happen between now and then? OPM has put the ball in the court of individual agencies to provide specific direction on how they will implement the option. This will be the key to the success of this program.

Agencies have a lot of work ahead of them. In their written plans for implementing phased retirement, they must do the following:

• Identify the types of positions eligible to participate in the option.
• Set clear criteria for approving or denying an employee’s request to enter phased retirement.
• Define the requirement in the regulations that those in phased retirement status must spend 20 percent of their 20 hours a week on the job mentoring those coming up in the ranks behind them.
• Determine if employees entering phased retirement will be required to fully retire at a certain time.
• Set any restrictions or limitations on phased retirees’ return to full-time federal employment.

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