By Mike Miles
July 25th, 2012 | Uncategorized
Q. I qualify for a buyout with 25-plus years of service. If I take the buyout, it is my understanding that I must wait until my normal minimum retirement age of 56 to begin receiving the Social Security supplement. Would this prevent me from receiving increases in Social Security supplemental benefits that I would have received had I waited until 56 to retire? I believe I would get the increases at 62, in any event, when I could first draw reduced SS benefits.
Also, what happens to my Thrift Savings Plan account? May I purchase an immediate annuity and/or take a lump sum at the time even though I am below the MRA? Would this cause me to have to wait until I was 59½ to begin being able to access TSP if I took an early-out? Do you believe the $25,000 buyout and the extra six or so years of retirement payments I would receive with an early-out would make up for the growth in my TSP and the loss of the extra 1 percent a year I would have received for staying until my MRA? I am at about the top of the GS-12 scale. I have been contributing the maximum allowed to my TSP and will be eligible to make catch-up contributions soon. I know you may not want to make a prediction, but I would love your opinion based on what you have observed with others in this situation.
Mike: Once you retire, you are free to access your TSP in any way usually allowed for retirees. The MRA does not apply to the TSP. You do not have to wait until you reach age 59½ to take money from your TSP once you are retired, but withdrawals taken before reaching age 59½ might be subject to the early withdrawal penalty if you retire before the calendar year in which you reach age 55. It’s impossible to say whether the early-out income will be enough to offset the potential TSP gains in the future without knowing how you’ll invest the TSP money along the way.
I think that accepting the buyout/early-out offer will substantially reduce your maximum standard of living in retirement if you don’t continue to work, though. I think it’s reckless to make such a big, irreversible decision without a clear understanding of the financial implications. Based on your questions, I suggest that you keep working and skip the buyout offer. This is the safer bet without the right decision analysis and support.
Reg: You can estimate what your special retirement supplement would be at age 62 by multiplying your estimated Social Security benefit at age 62 by your years of FERS service (rounded up to the next higher year) and dividing the product by 40. Your actual Social Security benefit at age 62 would be determined by the Social Security Administration based on such factors as your average indexed monthly earnings.