Many federal employees plan to work at least part-time in retirement. Some make this decision for the extra income, a desire to stay active, maintain a sense of purpose, or some combination thereof. Whatever your reason might be, it’s essential that you’re aware of how working in retirement can affect your other income.
While continuing to work can and often does have many advantages, there are certain costs that must be considered. So, to ensure you’re in the know, we’re covering the 2 things every federal employee needs to know if they plan on working in retirement.
The FERS Supplement’s Earnings Test
If you’re a FERS federal employee and retire before age 62, you may be eligible for a pension supplement called the Special Retirement Supplement (SRS), also known as the FERS Supplement.
Because Social Security is a critical component of your FERS pension, the SRS is designed to bridge the gap between when you retire and when you become eligible for Social Security (age 62).
As great as the SRS is, it does have a major drawback; it is subject to an earnings test. Meaning, if you have earnings from wages or self-employment that exceed the Social Security annual earnings limit, your SRS will be reduced or stopped until your earnings fall below the threshold.
The earnings limit for 2022 is $19,560, and for every $2 that exceeds this limit, your SRS will be reduced by $1. Keep in mind that the earnings test does not include investment income, rental income, or TSP and IRA distributions.
Note: If you’re a special category employee, you do not have a wage limit. Meaning regardless of how much you earn, your supplement will not be reduced or stopped until you reach your Minimum Retirement Age (MRA). Once you reach your MRA, you’ll be subject to the earnings limit, just like any other FERS retiree.
Learn more about the FERS Supplement here.
Social Security’s Earnings Test
Like the FERS Supplement, your Social Security benefits will be subject to an earnings test if you claim them before your full retirement age (FRA). Your FRA ranges between ages 66 and 67 and is based on your birth year. You can find your FRA by checking the table below:
If your earnings exceed the Social Security annual earnings limit, your benefits will be reduced or stopped until your earnings fall below the threshold. Remember the earnings limit for 2022 is $19,560, and for every $2 that exceeds this limit, your benefits will be reduced by $1. Now let’s look at an example of how this threshold works:
Let’s say Bob is under his full retirement age all year and receives a monthly Social Security benefit of $1,600 ($19,200 for the year).
He also earned $29,560 ($10,000 over the $19,560 limit) during the year. In this case, his Social Security benefits would be reduced by $5,000 ($1 for every $2 earned over the limit). Therefore, his annual benefits would now total $14,200 ($19,200 – $5,000) and his monthly benefit would be $1,183 ($14,200/12).
Keep in mind that there is no earnings limit after you reach your FRA, so you can work and earn any amount while receiving your full benefits.
Read this article to learn more about your Social Security benefits.
While the benefits of staying active in retirement far outweigh any disadvantages, it’s essential that you understand how working in retirement can impact your other sources of income.
Since retiring from the federal government doesn’t always mean you’ll no longer work, planning ahead to weigh your options and the impact of your earnings on your benefits can go a long way.
Remember if you don’t feel confident creating your financial plan, consult a fee-only Certified Financial Planner™.
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2023 Legislative Change Notice
The SECURE ACT 2.0 passed and impacted many of the articles on this website. While the articles were correct when written, it’s impossible to re-write every article. Please consult a qualified professional (i.e., CFP®, CPA, or attorney) before implementing any strategy.