Should You Take an Early Out or Buyout?

Early outs and buyouts are in the air, and federal employees are scrambling to make their retirement decisions.  Below are some technical details about early outs and buyouts.  Those who know the technical details can skip to the very end of the article where I deal with the pressing question of “Should you do it?”

First, let’s get familiar with the terms:

Early outs = Voluntary Early Retirement Authority (VERA)

Buyouts = Voluntary Separation Incentive Pay (VSIP)

Both VERA and VSIP are permissions granted by OPM to federal agencies, to allow and encourage their employees to retire and receive an immediate annuity years before ordinary eligibility.

VERA and VSIP are not always available to all agencies and employees.  An agency must request, and be granted VERA and/or VSIP authority from OPM before offering early retirement to its employees.  If OPM grants authority, the agency may use this authority at its discretion.  The agency will have to develop a VERA-VSIP plan to explain why the authority is needed, how it will be implemented, and which employees will be eligible.

Why would they want you to leave early?

Assuming your agency likes you, they may still want you to leave early because they may be struggling financially (yes, agencies have financial troubles too!) and they can’t afford to keep you on board. In fact, VERA & VSIP do not apply to people who are being let go because of misconduct or poor performance.  So if you’re eligible for VERA or VSIP, don’t take it harshly. OPM and the agencies prefer employees leaving under voluntary separations, without having to force involuntary separations through discontinuation of service or RIFs and being forced to fork over severance pay.

Note: An agency is prohibited from coercing an employee to consider or apply for VERA or VSIP.

Who can retire under VERA & VSIP?

Eligibility for VERA is very similar, but not the same as VSIP.  As such you can receive VERA together with VSIP, VERA without VSIP, VSIP without VERA.

For VERA Eligibility an employee must:

1. Meet the minimum age and service requirements –
   • At least age 50 with at least 20 years creditable federal service, OR
   • Any age with at least 25 years creditable federal service;
2. Have served in a position covered by the OPM authorization for the minimum time specified by OPM (usually 30 days prior to the date of the agency request);
3. Serve in a position covered by the agency’s VERA plan; and
4. Separate by the close of the early-out period.

For VSIP Eligibility an employee must:

1. Be serving on an appointment without time limit;
2. Be currently employed by the executive branch of the federal government for a continuous period of at least 3 years;
3. Be serving in a position covered by an agency VSIP plan (i.e., in the specific geographic area, organization, series, and grade);
4. Separate by the close of the VSIP period.

As mentioned above, even if an employee is not eligible for VERA, they may still be VSIP eligible.

For example: If they can retire without VERA – i.e. regular retirement or MRA+10 for FERS – they can still receive VSIP.

OR if not eligible for any type of retirement, the employee may resign and receive VSIP if he fits the above eligibility list. This is called resigning, NOT retiring. (More on this below).

Dollars and Cents, how much is the VSIP?

VSIP will be the lesser of:

1. the amount of severance pay the employee would be entitled to receive,
2. An amount determined by the agency, not to exceed $25,000.  (Although, the Department of Defense has recently been approved to offer a $40,000 VSIP).

Whatever amount you are entitled to, don’t forget you will likely not receive all of it because of taxes (i.e. federal, state, social security, and Medicare).

Limited time and Limited Money

Just because VERA and VSIP authority is granted and you meet the above eligibility requirements, doesn’t mean you will get it!

The authority is only granted for a limited time and sometimes for a limited amount of money.  In situations where the agency needs to limit the number of employees who are approved for VERA or VSIP, you will need to decide and act FAST. Precedent may be given on a first-come-first-serve basis or other criteria such as:

• Total creditable federal civilian service;
• Total creditable federal civilian service in the agency or in the organizational component offering the VSIP;
• Whoever saves the agency the most money by leaving

Whatever the criteria are, it should be clearly communicated in the agency’s notice announcing the VERA-VSIP plan.

Will your pension be reduced if you take an early out or buyout?  Will you lose any benefits?

First let me clarify– retiring and resigning are NOT the same. VERA is a form of retirement, and as such, a VERA retiree is entitled to an immediate annuity and can continue insurances if they meet the 5-year rule requirement. VSIP is not always retirement. Often VSIP coincides with VERA but some VSIP recipients are not eligible to retire with VERA. They instead take their VSIP with a resignation. The employee resigning will not receive an immediate annuity and may not be eligible to continue insurances.

If you are a VERA retiree:

• For FERS there will be no pension reduction however the Special Annuity supplement will not be provided before MRA.
• For CSRS (or Trans-FERS with a CSRS component in their annuity) there will be a reduction in the CSRS pension.  There will be a 1/6 percent reduction per month (or 2 percent reduction per year) that the employee is under age 55.

Employment after VERA or VSIP:

Non-federal employment: Employees who take VERA or VSIP can accept non-federal employment without compromising their retirement pay. Earnings test rules will apply to social security and the Special Annuity Supplement (FERS).

Federal employment: Employees who take VERA or VSIP can return to federal work but then need to be aware of the following:

• A VERA retiree who is hired under a federal appointment will be considered a “reemployed annuitant.” This means that the retirement annuity will continue, and the new federal salary will be reduced by the annuity amount.  If the reemployed annuitant works full time for at least five years, the annuitant may be able to receive a second, supplemental annuity in addition to their original federal pension annuity.
• A VSIP recipient who is hired under federal appointment (including work under a personal services contract or other direct contract) within 5 years of the VSIP separation date, must repay the entire amount of the VSIP to the agency that paid it.

Should you do it?

What are your options?

You can do one of the following:

1. Stay at work and let the VERA-VSIP opportunity pass
2. Accept VERA-VSIP and continue to work elsewhere
3. Accept VERA-VSIP and stop working completely and be fully retired

I haven’t seen a case where the VSIP buyout money made all the difference in a successful retirement.  You will want to plan your retirement, regardless of whether you receive a buyout.  That being said, here are some basic retirement planning questions you will want to answer:

• Is there a benefit to staying at work (both financial and non-financial)?
• Will retirement open new chapters of your life?
• Can you afford to retire?
• Do you plan on working elsewhere?
• If you plan on working elsewhere, will you have enough to help you through the transition?
• Which accounts should you dip into to fund a transition period?
• How will having the TSP and TSP match benefit you?
• Do you qualify to keep FEHB?
• When will you take Social Security?
• Should you elect a survivor annuity?

These and more, are considerations which you will need to address.  If you haven’t already, you will want to do the worksheets in my retirement readiness book “Ready, Aim, Retire!”  The above questions and the financial exercises in my book will help you get a sense of how realistic your retirement is.  My field of specialty is retirement planning for federal employees.  I’d be happy to take a holistic look at all your financial goals and resources and help you plan your retirement.

To help you define your retirement and calculate whether you can afford it, you can use my free retirement readiness workbook “Ready, Aim, Retire!”  Click here to download.