The Unknown Alternative to Phased Retirement

The author says that the loss of the annuity supplement under phased retirement is a big disadvantage. However, he outlines a comparable alternative that could help offset this loss.

It appears that many users do not like phased retirement. Most of the comments in response to FedSmith’s August 8 article were negative.

There is a great deal to not like in phased retirement, but my” favorite” is the loss of the annuity supplement. Depending on salary and service time, the supplement is usually about $600 to $1,500 monthly. To give this up, in the last months/years before reaching 62, is quite a sacrifice!

Is there another, less costly way to ease into retirement? I think there is. Chapter 55 of the CSRS & FERS Handbook discusses how annuities are calculated when the employee has part-time work in his record. Here’s how it works:

  1. Proration factor. This is the key. Divide actual hours worked during all creditable FERS service, including military, by the total hours that would have been worked if there had been no part-time service.
  2. Calculate the annuity in the usual way.
  3. Multiply the annuity by the proration factor. The result is the annuity as corrected for the employee’s part-time service.

Doesn’t sound overly complicated, does it? To illustrate, let’s do a simplified example.

John and Mary each retired recently, after 30 years service. Their salaries and other stats were identical except Mary worked half-time her final three years. Their salaries the last three years were $60,000, with a high-three of $60,000. (In Mary’s case her she was paid $30,000, but her salary was “deemed” at the $60,000 level for the high-three calculation.)

John’s annuity was 30% of $60.000, or $18,000.

Mary’s total hours worked were (27 * 2,087) plus (3 * (half of 2,087), amounting to a total of 59,479.5. Absent the part-time, her hours would have been (30 * 2,087), or 62,610. Dividing the 59,479.5 by 62,610 yields a proration factor of 0.95. Multiply 0.95 by 18,000, and the result is Mary’s annuity, adjusted for the three years of half-time work, is $17,100.

(For one year of part-time work, instead of three, her adjusted annuity would be $17,640.)

So, in return for working half-time her final three years, Mary will take a “loss” of $900 annually in her annuity. Is it worth it? When you consider she will NOT lose her annuity supplement, it does not look like a bad deal. Still, this is a personal decision, but at least the numbers are fairly clear and straightforward.

The list of advantages to the existing part-time option is almost as long as the list of disadvantages to phased retirement. One of the major benefits is that, unlike with phased retirement, it is not necessary for the employee to be eligible for retirement. An older employee approaching retirement eligibility can, accordingly, go on a part-time schedule for a year or three, until he/she becomes eligible, then retire. This, to me, is an attractive, plausible way of easing into retirement.

Compared to the phased retirement scenario, the above is, in my opinion, a marvel of simplicity and fairness. Of course, it does not save hundreds of millions for the Government, as does phased retirement, per the CBO estimate, but I like it anyway!

(For CSRS employees, and for VHA (Veterans Health Administration) employees, the rules are different. Please see the Handbook for details.)

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