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Should You Take an Early Out
The Environmental Protection Agency (EPA) announced that they will begin offering employees buyouts and early retirement incentives in 2017. Since then, I have been getting emails from employees debating on whether or not they should take the early out, so I thought it would be a good idea to visit.
First, we need to understand what an early out is. For federal employees, early buyouts are offered through Voluntary Early Retirement Authority (VERA) and Voluntary Separation Incentive Payment (VSIP). The two are often combined together.
For an employee to qualify for a VERA, the employee must be at least age 50 with 20 years of service in, or any age with 25 years of service in. Retirement is calculated the same as normal retirement for FERS employees, with one exception – FERS employees will not receive the FERS supplement until they reach Minimum Retirement Age (MRA).
The VSIP, or buyout, is the lump sum payment that the agency offers employees. Most agencies can offer up to $25,000, except the Department of Defense who can offer up to $40,000.
Now that you know what VERA and VSIP are, you need to decide if you are taking the offer. Employees normally have a couple of weeks to decide if they want to take the offer, and then they have to be off the payroll by the time the early out period closes.
Should you take it?
I am always amazed by the number of questions I get every time a VERA comes around. Why? Because these offers get people that aren’t even close to retirement, thinking about retiring.
In my opinion, there are only four types of employees that should consider taking the offer.
1. You are financially ready to retire and biding your time so you can carry health benefits in to retirement.
A VERA offer for this type of employee is like hitting the lotto. You can now retire without taking a penalty on your FERS annuity and keep your benefits. Pass go and collect your $200!
2. You can get another job paying a similar type of wage.
Employees in this situation likely already have an offer for another position and have already considered it. Some employees that work in fields, or for agencies in high demand such as healthcare, the IRS, or DOD, may have a relatively easy path to finding a new job. If you find yourself in this position, then you may want to look at taking the offer and seeking other employment.
If you choose to go this route, please be aware that your FERS supplement (not the FERS annuity) will be affected by earnings when you reach Minimum Retirement Age.
3. You have been on the fence about retirement.
This situation is similar to number one, but a little different. For those that are relatively financially secure and have been considering retirement, a $25,000 offer to retire may help get you out the door.
4. You plan to retire this year anyway.
Can you say JACKPOT?! This is going to depend on exactly when the offer is in comparison to your retirement date, but if they are close… you just got a fantastic retirement gift! Take the money and don’t look back!
Each of these situations still require careful consideration before taking the plunge. If you are not in one of the above situations, I want to caution you not to let a payment of $25,000, or even $40,000, encourage you to make a bad decision. Also remember that you have to pay income taxes on the above amounts which could turn your $25,000 into $17,000.
Brad Bobb, CFP® is the owner of Bobb Financial Inc, and an expert in retirement planning for federal employees.