I recently received this interesting question from a subscriber:
Should I retire at 60 versus 62? I know I would receive the IRS supplement if I retired at 60, but I would receive the 10% retirement bonus if I retired at 62. How do I do the math to find out which one would be better?
Well I did the math and the difference is way bigger than I ever thought.
Let’s make things clear
Before we can truly understand the mathematical difference between these two choices, we need to understand who is even eligible for either option.
Who receives the IRS supplement?
The IRS supplement is an additional monthly payment that some federal retirees receive in the early part of retirement.
But the only people eligible for this additional payment must meet one of the following criteria:
- Have at least 30 years of service and be at least their MRA (minimum retirement age).
- Have at least 20 years of service and be at least 60 years old.
If you are eligible for the IRS supplement, you will continue to receive it until age 62, when payments stop.
Here is the ultimate guide to the IRONS supplement. if you want to know more.
However, the rules relating to special provisions (firefighters, air traffic controllers, law enforcement, etc.) are different and this article explains how the IRONS supplement works for you.
Who receives the 10% retirement bonus?
All traditional FERS employees who retire after 62 years with at least 20 years of service get a 10% increase in their pension when they retire. If you retire before 62 or under 20, you will not be entitled to this bonus.
This 10% increase will last as long as your pension.
You can find more details on how your pension is calculated and how the 10% bonus works here.
What is the best?
So now that we understand the basics of both options, which one is better in the long run?
Let’s take a look at the numbers together to find out.
Retire at age 60 for the IRS supplement
For our example, let’s say you are 60 years old and have 20 years of service. You earn $ 100,000 a year and try to decide whether you should retire today to get the IRS supplement for 2 years or retire at 62 to get the 10% bonus.
If you retired today, your gross pension would be calculated as follows:
20 years x 100,000 x 1% multiplier = $ 20,000 / year or $ 1,666 / month
To better understand how your pension is calculated, check out this article.
But as we know, by retiring at age 60 with at least 20 years of service, you would also be entitled to the FERS supplement, and to calculate your FERS supplement, we will need to know what your age of 62 would be in matters. social security. .
For this example, let’s say your Social Security benefit at age 62 would be around $ 2,000 / month.
Your gross IRS supplement would be calculated as follows:
20 years of service / 40 X $ 2,000 = $ 1,000 / month
Since your IRS supplement payment would stop at 62, that means you would get 24 months of payments that would total $ 24,000 over that period.
To learn more about the calculation of the FERS supplement, check out this article.
Retire at 62 for the 10% bonus
Now let’s look at the numbers if you continued to work until 62 to compare.
We know that retiring at or after 62 would mean you wouldn’t get the IRS supplement, but because (in this example) you will have 22 years of service at 62, that would mean you would get the 10% markup. of your pension.
Your gross pension would be calculated as follows:
22 years x 100,000 x 1.1% multiplier = $ 24,200 / year or $ 2,016 / month
This means that your gross pension would be $ 4,200 per year higher because you worked the extra 2 years.
But how long would it take for our higher pension to compensate for the fact that we did not receive the FERS supplement for 2 years?
We calculate it by dividing the amount we would get from the FERS supplement by the supplement we would receive from our higher pension.
$ 24,000 (2 years of FERS supplement) / $ 4,200 (pension increase) = 5.7 years
So, as the math shows, it would only take 5.7 years to fully recover all that you missed out on by not getting the extra IRS, and then you would continue to receive the extra $ 4,200 for the rest of your life. !
This is a guaranteed 17.5% return on your investment for the rest of your life.
When you just look at the numbers, it’s clear that working up to age 62 is better, and on top of that, we haven’t even talked about how much extra you would have saved in your TSP or whether your adjustments. cost of living pension would be based on the higher amount of your pension!
But that said, the major cost of working to age 62 is having to work 2 more years! For some people (especially those who enjoy their jobs) it might not be a big deal, but for others, working 2 more years can seem absolutely terrible.
Ultimately, you’ll need to decide when you’re comfortable enough with your retirement numbers to unplug and retire. Your retirement numbers would always improve by working longer, but at some point, it just isn’t worth it anymore.
You have to decide where this point is.
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