The FERS Supplement:Special Benefit for Some FERS Who Retire Before Age 62Have you heard about the FERS Supplement? It's an important benefit for FERS planning to retire before age 62 - but it's so unknown, it’s practically a secret. The FERS Supplement is also called the Special Retirement Supplement or SRS. It is designed to help bridge the money gap for certain FERS who retire before age 62. It will supplement your missing Social Security income until you reach age 62. But not all FERS are eligible to receive the Supplement. Rules of Eligibility for FERS SupplementThe first rule might sound obvious - but people really do ask... Yes, you must be in the FERS Retirement system to get the FERS Supplement.And the Supplement is unique to FERS - there is no counterpart to the Supplement in the Civil Service Retirement System (CSRS). The second requirement is that you must have a normal immediate retirement, not an early retirement (MRA+10). This means you must have 30 years of creditable service and meet your MRA. Or you can have 20 years of creditable service and be age 60. And while you can seek a normal immediate retirement at age 62 with 5 years in service – the FERS Supplement is only paid until age 62. So if you retired at 62 with 5 years of service, you would not get this benefit. Special Rules for Special ProvisionsI want to note here that Special Provisions FERS (ATC, LEO or FF) have some different rules for the Supplement. Click here if you are Special ProvisionsCalculating the FERS SupplementThe Supplement is calculated as a percentage of your Age 62 Social Security benefit.In order to calculate your Supplement amount, you’ll want to have your annual Social Security statement handy. You’ll also need to know how many years of creditable service you would have at your estimated retirement. The formula is:
40: this is a fixed number and does not change Your Age 62 SS Benefit: You’ll find this number on page 2 of your Social Security statement. And it doesn’t matter what age you plan to start receiving Social Security – for this formula, you must use the age 62 Social Security benefit amount. You can see that almost by design, the Supplement will be less than your Age 62 Social Security benefit. Unless, of course, you have 40 years of service. Let’s walk through an example together…Say Jane is a FERS, and she will retire with 30 years of creditable service. She has reached her MRA, which is 57. And her age 62 Social Security benefit will be $1,200 a month.How much will her FERS Supplement be? 
Well, we take 30 years of service divided by 40 (30/40) = .75 Now take .75 times $1,200 (her age 62 SS benefit) = $900. So Jane’s Supplement will be $900 a month. And she’ll receive this supplement once she retires and up until the month she turns 62. But we’re not done quite yet. That is the gross amount, but what is the net amount Jane will receive? Will Jane’s Supplement be subject to any reductions? And will it be subject to taxes? Very likely. The government giveth, and the government taketh away. Reduction in FERS SupplementThe Supplement is treated much like Social Security Income.And if you take any Social Security income before your full Social Security Age (which varies from 65 to 67 depending on the year you were born) your Supplement is subject to a reduction and possibly taxes. If you will have earned income (ex: a part-time job) after you retire from Federal service, your Supplement may be reduced. The reduction is significant and because the income threshold is so low, it will impact many FERS retirees. Especially FERS who plan to get another job, even a part-time job, after they retire from Federal service. Back in the 1990’s, there were some big changes to the way Social Security was taxed. The government decided that they would reduce the amount of Social Security (and FERS Supplement) someone could receive before they reached their full SS age and if they earned more than a certain amount. These changes continue to impact the FERS Supplement today. In 2009 the earnings limit was $14,160. What counts toward that limit? Earned income – which is essentially any income you receive as a W-2 wage. So if you earn more than $14,160, your FERS Supplement will be reduced. For every $2 you earn above the limit, your FERS Supplement will be reduced by $1. Here’s How the Reduction Works –Let’s go back to our example with Jane. Say Jane gets a part-time job after her federal retirement. That job pays her $20,000 a year, which is $5,840 over the income limit.Half of $5,840 is $2,920, which is her annual reduction. Divide that by 12, and we get a reduction of $243 a month. Earlier, we calculated Jane’s FERS Supplement to be $900 a month. Once we factor in her reduction, we see that Jane’s Supplement will really be $657 a month. But we have one more hurdle before we really know what Jane’s net amount will be. Taxes… Taxes and the FERS SupplementWhen we discuss the Supplement in the Federal Retirement classes I teach, some people say, “If the government already reduced my FERS Supplement – surely they can’t tax it too.”Well, sorry – they can – and they do. But this tax is only for the so-called “wealthy”. When I mention this in class, a lot of people in the class sit back and relax – but then sit straight up in their chair when I tell them who the IRS considers to be “wealthy”. The IRS defines wealthy as having a combined income over $32,000. Yes, $32,000. And combined income includes the sum of your adjusted gross income from your 1040 plus non-taxable interest plus one-half of your Social Security benefits. So now it’s not only your earned income that is considered – it is all of your income – including your regular FERS pension, any TSP withdrawals, investment earnings, Alaska PFD, alimony, etc. etc. etc. If you’re combined income is over $32,000, but below $44,000 – 50% of your FERS Supplement is subject to Federal income taxes. If you have a combined income greater than $44,000, then 85% of your Supplement will be subject to Federal income taxes. Looking at Our Example…Going back to our example with Jane – she has a part time job that pays her $20,000 a year. In our example, her Reduced Supplement was $657 a month – or $7,884 a year.Let’s say Jane’s FERS pension is $1,500 a month – or $18,000 a year. So let’s just stop right there - $20,000 of earned income + $18,000 of FERS Pension = $38,000. Without even considering any other aspects of Jane’s income, we know that at least 50% of her FERS Supplement will be subject to Federal Income taxes. And if she has additional income, perhaps money from her TSP, of more than $6,000 a year – 85% of her Supplement will be subject to Federal Income taxes. Mind the Gap: FERS Supplement to Regular Social SecurityThe FERS Supplement will stop the month you turn age 62. And it stops whether or not you have started drawing Social Security at age 62.Some people may choose to start drawing Social Security at age 62 – but others will want to delay until later. Why delay? The longer you wait, the higher your benefit will be. That is, up until age 70. The amount will not increase if you wait any longer than age 70 to draw Social Security. But if you delay drawing Social Security to get a larger benefit – it means you have to go that many more years without the monthly benefit. This can create a money gap – and it’s important to plan ahead for it. Everyone’s personal financial situation is unique – so you’ll want to carefully weigh your financial plans to see when it makes the most sense for you to start drawing Social Security. A good financial planner can help you understand your options and help you make the best choice for your personal situation. Want to Retire Before Age 62?If you’re planning on retiring before age 62, you’ll want to calculate your FERS Supplement, including the possible reductions and taxes it might bring.And while the Supplement can seem tricky, because of all the possible reductions and taxes – many people find the FERS Supplement can help make early retirement a reality. Most people who are really serious about retiring before age 62 are working with a good financial planner. Could You Be Eligible to Retire Sooner Than You Think? Or Later?Many federal employees plan their retirement based on their SCD (Service Computation Date). And they are often surprised to learn this is not the correct date to use for retirement planning.This means they may be eligible for retirement sooner – or later – than they had planned. Could you be making a mistake in your retirement planning - and not even know it? What if you’ve forgotten to consider an important aspect of your federal retirement benefits? Could it really ruin your retirement? When I talk to Federal Employees about their retirement, I’ve seen seven particular mistakes that seem to come up again and again. In addition to teaching federal retirement classes, I’m also a
Financial Planner for Federal Employees.
I’ve created a special report just for you, because I want to help Federal Employees avoid costly retirement mistakes. What are the most common retirement mistakes that federal employees make? Register to get access to my FREE Special Report on The 7 Classic Retirement Mistakes Federal Employees Mistake… and How to Avoid Them. I will also send you my monthly Newsletter (e-zine) Federal Retirement Planning. I am providing this Special Report totally free to subscribers of Federal Retirement Planning. Just complete the form below, and click on the “Subscribe” button. You will then receive a confirmation email asking you to confirm your request. Don’t let these 7 classic mistakes ruin your federal retirement. Register for my monthly Newsletter (e-zine) Federal Retirement Planning and get your copy of my FREE Special Report today. Click here to return from FERS Supplement to the FERS Retirement Page
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