Author Topic: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance  (Read 12507 times)

drtownhouse

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The topic is specifically focused on the Federal Employees Retirement System (FERS), but the lessons likely apply to pensions generally. I would wager a guess that most federal employees here will end up opting for the deferred retirement. My questions revolve around this.

The Basics
- 10 years service = eligible for deferred annuity at Minimum Retirement Age (57)
- If you have 10 years service at MRA, benefit reduced by 5% per year that you were under age 62 on date annuity began.
- Payout: 1% of highest average 3-year salary for each year of service
- Annuity increased for cost-of-living adjustments if over 62
- Can skip annuity and receive lump sum pay out

Questions
1) Can someone verify that the annuity is paid out until you die? I've read that this is standard for annuities, but the website does not say so in plain English.

2) Each paycheck has a government contribution to the FERS annuity. Does anyone know if this is included in your lump sum payout if you choose this route?

3) I understand that for social security,  you get paid more if you wait longer to receive it. And I note that FERS pays less if you receive your payout at 57. Does the penalty for FERS go away after you are 62?

4) Lump sum vs Annuity using simple example
30 year old employee earns $100k for 10 years and retires at 40. Based on the formula above, it seems that if this employee starts annuity at 62, she would receive $10,000 per year ($100k x 10 years x 1%). If she lives to 82, she received $200,000 in overall benefits.

New FERS required contribution is 4.4% So employee contributed $44,000 over ten years. If that grows for 22 years at 7%, it turns into $195,000. If she lives to 82, she received an effective $9,750 per year.

The cost-of-living adjustment in FERS seems generous. I wonder how that factors in.

If this is a reasonable approach to comparing, both choices seem okay, though the annuity would be safer and possibly more profitable. Is there a better way to compare the two?

Thank you.

randommadness

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Re: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance
« Reply #1 on: December 21, 2014, 04:44:11 PM »

Questions


2) I can't provide a source but I remember reading somewhere that you do NOT get the Government contribution.

3) As I understand it, there is no penalty to FERS at age 57 if you have 30 years of service, and yes, the penalty for having less years goes away at 62.

Eligibility Information
Age   Years of Service
62    5
60    20
MRA    30
MRA    10

If you retire at the MRA with at least 10, but less than 30 years of service, your benefit will be reduced by 5 percent a year for each year you are under 62, unless you have 20 years of service and your benefit starts when you reach age 60 or later.

- also, if you wait until 62 your benefit goes from 1% to 1.1% of your high-3 provided you have 20+ years.

It's nuts that FERS (will be going? Isn't it 3.4% right now) to 4.4%. Thankful to be under the 0.8%.

drtownhouse

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Re: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance
« Reply #2 on: December 21, 2014, 07:53:50 PM »
3) That sounds good. So if you retire at 43 (after 10 years service), you would have the penalty from 57 until 62, and then the penalty would go away at 62.

4) I just started and my fers contribution is 4.4%. Enjoy that 0.8%!


GoldenStache

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Re: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance
« Reply #3 on: December 22, 2014, 07:19:35 AM »
Yes it is paid until you die, or if you want to pass it on to your spouse you can take a 10% penalty on your payment and your spouse will get 50% of your payment for their life.  You can also do a 5% penalty and they would get 25%. 

So if you are getting $100 a month (easy numbers) and you want your spouse to get half when you die, you would give up 10% so you would only be getting $90 a month until you die.  Once you die they will get $50, or you give up $5  a month (5%) and they will get $25 when you die. 

http://www.myfederalretirement.com/public/385.cfm

If you retire before you have 30 years of service before 62, you keep the penalty for life, it does not go away when you turn 62.  It is like taking SS early, you do not go back to the higher amount once you hit the higher age.

I ran the numbers years ago and for me it was much better to take the penalty than to wait.

Assume the payment is $1,000 a month (12 years of service with a high-3 of $100,000) at 62
If you take it at 57 (MRA if you were born after 1969) you would get 5 year penalty or 25%
$12K*.25=3K  12k-3k = 9k a year.  So to give up $3k a year forever I am willing to take 45K (5 years * 9k) now. 
 
Keeping it simple (or trying too) you got a lump sum payment of $9k at the end of the year, you invest that and get 7% after 4 years, that 9k is now worth $11,797.12.  (It would be slightly higher if I did it as a monthly payment instead of the lump sum, KISS)

If you do it the other way and just deposit the $750 ($9k/12=$750) at 7% it will be worth $54,007.90 when you turn 62.  For me, making the extra $3k a year would not be worth it compared to $45k paid-out or $54K in value. 








cowstash

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Re: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance
« Reply #4 on: December 22, 2014, 07:38:28 AM »
I just started and my fers contribution is 4.4%. Enjoy that 0.8%!

I was 6 months away from vesting with the 0.8% withholding before I separated from service in 2011. Now that I'm back in, it skyrocketed to 4.4% and it will stay there perpetually (Congress knows that federal employees are an easy target in tightening budget cycles). It pains me to see my wife pay a tiny fraction of what I do for FERS every PP, even though she makes like 40% more than I do...

DoubleDown

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Re: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance
« Reply #5 on: December 22, 2014, 08:49:36 AM »
Unless you die early, taking the annuity will be superior to taking the lump sum payout.

I also intend to take the annuity at MRA rather than waiting until age 62, in part because of the effect of inflation on your high-3 salary (your salary will be frozen in the years between resigning and taking your annuity, but cost of goods will continue to rise). Everyone's circumstances will vary, but I want to get that guaranteed income stream early as a hedge against dying early and to stop the erosion of salary. In the meantime, I'll let my higher Social Security benefits increase by deferring until later age (67 - 70), and those always increase with inflation. Same with other investments -- tapping the FERS annuity early will decrease the amount I have to withdraw from outside investments.

drtownhouse

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Re: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance
« Reply #6 on: December 22, 2014, 04:03:19 PM »
Unless you die early, taking the annuity will be superior to taking the lump sum payout.

I also intend to take the annuity at MRA rather than waiting until age 62, in part because of the effect of inflation on your high-3 salary (your salary will be frozen in the years between resigning and taking your annuity, but cost of goods will continue to rise). Everyone's circumstances will vary, but I want to get that guaranteed income stream early as a hedge against dying early and to stop the erosion of salary. In the meantime, I'll let my higher Social Security benefits increase by deferring until later age (67 - 70), and those always increase with inflation. Same with other investments -- tapping the FERS annuity early will decrease the amount I have to withdraw from outside investments.

Ouch. Seems odd that there would be such a disparity in contributions with identical payouts.

Left

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Re: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance
« Reply #7 on: December 23, 2014, 08:05:40 AM »
hm, seeing that I'll likely be starting as a fed employee early 2015, this has been bugging me as well

I got confused a bit, i thought the vesting was 3-5 years? not 10 years like in first post? Second question is, can I retire after 10 years at age 38 and defer it until 57? From how I read it, it sounds like I can but I wanted to make sure.

and lastly, it doesn't seem like FERS pays out much :S other pensions pay around 60-70% of the 3 highest years, or it does for my parents on state pensions (and they won't be working 60 years, more like 20). Is FERS worth it for someone as youngish as me (namely, I want to retire at 40). Would I be better off not doing FERS (is it an option) and just saving it in a taxable investment account (assuming I max TSP/roths first).

And except for simple math of using $100k, how likely is it to be getting that much, average in government? My position [waiting on background check :(] is listed as GS-7 with a salary range of $42,327.00 to $62,297.00 / Per Year. Maybe you guys can't help with this question, just asking on the off chance someone might know, I don't anticipate it, but would be nice to hit the top range after a while. I doubt I'll start out that high, I'm hoping I stay at the same rate I am now, $50k but they haven't even told me how much I'd be making since they want to wait for background check before proceeding (is this part normal as well?). Well, if pay is comparable, I see no reason not to stick with it. If not, I would probably get out before the 10 years anyhow.
« Last Edit: December 23, 2014, 08:21:11 AM by eyem »

DoubleDown

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Re: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance
« Reply #8 on: December 23, 2014, 09:48:46 AM »
Unless you die early, taking the annuity will be superior to taking the lump sum payout.

I also intend to take the annuity at MRA rather than waiting until age 62, in part because of the effect of inflation on your high-3 salary (your salary will be frozen in the years between resigning and taking your annuity, but cost of goods will continue to rise). Everyone's circumstances will vary, but I want to get that guaranteed income stream early as a hedge against dying early and to stop the erosion of salary. In the meantime, I'll let my higher Social Security benefits increase by deferring until later age (67 - 70), and those always increase with inflation. Same with other investments -- tapping the FERS annuity early will decrease the amount I have to withdraw from outside investments.

Ouch. Seems odd that there would be such a disparity in contributions with identical payouts.

I'm not sure which contributions or payouts you're referring to, but if it's between FERS and SS, there's an important difference between the two. SS payments are indexed to go up with inflation every year between now and when you start your withdrawal (and throughout your withdrawal years). On the other hand, your FERS annuity is based on your "high 3 salary" which will not go up in the intervening years between resigning and starting your annuity withdrawals. You could have years (or decades) of inflation eroding your high 3 salary, since you will no longer be getting pay increases.

Since SS will be higher for me than FERS, it's superior to let that payment go up until I hit full SS retirement age. You could do the same thing with FERS, but I'd like to offset the risk of dying early by taking that one ASAP and stopping the salary erosion.

DoubleDown

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Re: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance
« Reply #9 on: December 23, 2014, 10:13:47 AM »
I got confused a bit, i thought the vesting was 3-5 years? not 10 years like in first post?

You'll be vested after 5 years (verify this, but I believe it's 5). The 10 years refers to taking your annuity at Minimum Retirement Age (MRA), at a penalty. With less than 10 years, you cannot retire at MRA -- you have to wait until age 62. There are various other milestones along the way that increase the benefits or lower the withdrawal ages, like 20 years of service (retire at 60) or 30 years (retire at MRA with full benefits).

Second question is, can I retire after 10 years at age 38 and defer it until 57? From how I read it, it sounds like I can but I wanted to make sure.

Technically, you cannot retire at age 38. You can resign and defer your annuity until you reach retirement age. Retirement from the federal government, in the proper sense of the word, means reaching retirement age and drawing benefits immediately upon leaving, including an annuity, health care benefits, social security supplement, life insurance, etc.

and lastly, it doesn't seem like FERS pays out much :S other pensions pay around 60-70% of the 3 highest years, or it does for my parents on state pensions (and they won't be working 60 years, more like 20). Is FERS worth it for someone as youngish as me (namely, I want to retire at 40). Would I be better off not doing FERS (is it an option) and just saving it in a taxable investment account (assuming I max TSP/roths first).

Yup, the days of 60-70% pensions are long gone in the federal government. Those ceased somewhere around 1984 (although everyone who started in that plan was grandfathered for life). Under FERS, the annuity is seen as just one pillar of retirement, with SS and TSP making up the balance.

You don't opt out of FERS, it's a benefit that's given to you no matter what (and they'll withhold a portion of your pay for it no matter what). It's a sweet and rare benefit, make sure you go through all the details to maximize your benefits when the time comes. It doesn't just include a retirement annuity one day, it also includes a generous short and long term disability coverage while you're working, death benefits to survivors, etc.

And except for simple math of using $100k, how likely is it to be getting that much, average in government? My position [waiting on background check :(] is listed as GS-7 with a salary range of $42,327.00 to $62,297.00 / Per Year. Maybe you guys can't help with this question, just asking on the off chance someone might know, I don't anticipate it, but would be nice to hit the top range after a while. I doubt I'll start out that high, I'm hoping I stay at the same rate I am now, $50k but they haven't even told me how much I'd be making since they want to wait for background check before proceeding (is this part normal as well?). Well, if pay is comparable, I see no reason not to stick with it. If not, I would probably get out before the 10 years anyhow.

Yes, waiting for the background check before making an offer is normal. The pay they will offer you is very much dependent on the agency and job in question. They'll likely minimally match or increase your salary slightly beyond what you're earning now, but no guarantees. But don't scoff at just a matching salary, because the additional benefits and job security are significant. And your position may come with automatic grade increases, so check into this. For example, a lot of federal law enforcement positions have an automatic GS7/10/12 path after only a couple of years.

When you're on the GS scale, you'll have a combination of "grade" (range 1 - 15) and "step" (range 1-10). Your pay will be determined by the combination of the two. Step increases happen automatically on a set schedule (more frequently on the lower end -- every year) and less frequently on the higher end (every 3 years). Sometimes step increases can be awarded outside of the normal schedule for exceptional performance, but this is fairly rare. Depending on how much Congress continues to fuck with federal employees, you may also get an annual cost of living raise.

Increases in grade also happen pretty regularly (as long as you're not a screw-up), but it depends on your agency and job classification. In some agencies and jobs, promotion up to GS-13 tends to be pretty standard, but after that it's much more selective and restricted to management or "expert" positions.

GoldenStache

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Re: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance
« Reply #10 on: December 23, 2014, 10:43:10 AM »
@Eyem

3 years locks in your rate (the amount you have to pay into retirement)
5 years entitles you to the pension - vested
10 years for MRA

Soooo...
If you work 5 years  - you have to wait until you are 62 to get your pension - 5% of your high 3
If you work 10 years - you can get your pension at MRA (57) 10% high 3 - 25% deduction
If you work 20 years - you get your full 20% at age 60
If you work 20 years & quit at 62 you get 1.1% for 20 years so 22%
If you work 30 years - you get your full 30% at MRA (57)
If you work 30 years & quit at 62 you get 1.1% for 30 years  so 33%

Those 60%-70% pensions are why many pensions are going under/underfunded, look at Detriot, Illinois, CA.  If a state offered me a 60% pension after 20 years I would worry.  The FED has cut back on benefits by creating the FERS system compared to CSRS, and has raised the cost to contribute.   

Your pay depends on where you live and what you do.  The lowest starting GS level in my building is a 9 (DC), most are 13 and above (this is not true for all agencies).  Making $100k with several years in the gov is the norm here.   

Depending on the announcement, you might be able to start with a salary match.  You do not have a job offer until you pass the background check, after that you will get the offer in writing.   


randommadness

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Re: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance
« Reply #11 on: December 23, 2014, 01:47:06 PM »
@Eyem

Your pay depends on where you live and what you do.  The lowest starting GS level in my building is a 9 (DC), most are 13 and above (this is not true for all agencies).  Making $100k with several years in the gov is the norm here.   

Depending on the announcement, you might be able to start with a salary match.  You do not have a job offer until you pass the background check, after that you will get the offer in writing.

DC is it's own animal for sure.

Just wanted to add that 3 years is the vesting period for TSP.

Left

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Re: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance
« Reply #12 on: December 23, 2014, 06:31:10 PM »
ah thanks for the info guys. I've been reading the FERS link that I got in the forms they gave me but it wasn't very clear, to me at least.
The job I'm at has a promotion potential up to 9 so I guess it's a short ladder. Still better than what I've been getting now so that's nice. I can always go for a different job once I'm there and decide I like government.

Looking it over, if I stuck it out for 10 years and making it up to $60,000 (Seems to be the "cap" for my field in area, without going into management so I don't expect more than this anyhow), at 10% when I'm 62, that's still $500/month, not bad by mustachian standards. Lets see what inflation does to it though :S, maybe it'll buy me a coffee then? :D

DoubleDown

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Re: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance
« Reply #13 on: December 24, 2014, 08:07:10 AM »

Looking it over, if I stuck it out for 10 years and making it up to $60,000 (Seems to be the "cap" for my field in area, without going into management so I don't expect more than this anyhow), at 10% when I'm 62, that's still $500/month, not bad by mustachian standards. Lets see what inflation does to it though :S, maybe it'll buy me a coffee then? :D

Maybe! But at least once you start taking the annuity, it will go up with inflation forever. So, you can continue to buy good coffee, and won't be stuck drinking Maxwell House when you're 80 (sorry Maxwell House).

It will definitely depend on how much pension + SS you can get, but I think these things can fill a super important role for an early retiree, which is as a rock solid, inflation-adjusted annuity for life that will hopefully cover at least your basic (non-discretionary) expenses. If you can get your basic budget covered by these things, then it takes so much of the risk and guesswork out of retiring early (at least for the old age part at a minimum).

I've got 18 years (so 18%), and that plus SS will completely cover me in old age. Makes me feel a lot more secure about pulling the plug so early, and lets me continue to invest in higher-return vehicles (like stocks) without worry.

CheapskateWife

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Re: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance
« Reply #14 on: December 24, 2014, 08:28:01 AM »
I had the benefits center run a similar scenario for me and it was pretty enlightening...but not in a good way.

When my annuity calculations were returned to me, I discovered that the High-3 calculation does not include the locality adjustment.  So when you are looking at your LES and daydreaming about taking your 10 years/10% and going to do something else, make sure you are paying attention to that base pay because that is what your pension will be based on.

Grumblecakes!

That being said, I am a firm believer in taking care of my own darn self, and so am working really hard to put everything into my TSP that I am allowed.  The pension will be modest but a guarantee, SS might still be around in 25 years when its my turn to take back my donations to the cause and that will be predictable too...which means I can be a little more risky with my external investment strategies.

« Last Edit: December 24, 2014, 08:38:21 AM by CheapskateWife »

DoubleDown

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Re: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance
« Reply #15 on: December 24, 2014, 10:37:47 AM »
I had the benefits center run a similar scenario for me and it was pretty enlightening...but not in a good way.

When my annuity calculations were returned to me, I discovered that the High-3 calculation does not include the locality adjustment.  So when you are looking at your LES and daydreaming about taking your 10 years/10% and going to do something else, make sure you are paying attention to that base pay because that is what your pension will be based on.


Assuming you're talking about U.S. federal pensions (since you mentioned TSP), you were given bad advice. Your high-3 salary DOES include locality pay:

http://www.opm.gov/retirement-services/calculators/fegli-calculator/basic-pay/

http://www.plan-your-federal-retirement.com/high-3-salary.html

forummm

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Re: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance
« Reply #16 on: December 26, 2014, 11:50:14 AM »
Unless you die early, taking the annuity will be superior to taking the lump sum payout.

I also intend to take the annuity at MRA rather than waiting until age 62, in part because of the effect of inflation on your high-3 salary (your salary will be frozen in the years between resigning and taking your annuity, but cost of goods will continue to rise). Everyone's circumstances will vary, but I want to get that guaranteed income stream early as a hedge against dying early and to stop the erosion of salary.

It looks like your strategy won't help you avoid inflation until you are 62 anyway. FERS annuities are not adjusted for cost of living until age 62 (unless other exceptions apply).

http://www.opm.gov/retirement-services/fers-information/computation/#cola

Monkey Uncle

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Re: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance
« Reply #17 on: December 29, 2014, 09:25:17 AM »
Increases in grade also happen pretty regularly (as long as you're not a screw-up), but it depends on your agency and job classification. In some agencies and jobs, promotion up to GS-13 tends to be pretty standard, but after that it's much more selective and restricted to management or "expert" positions.

This is only true if the position is a career ladder position (i.e., it was advertised as a 7/8/9 or something like that).  If it's a one grade position, you'll have to compete for another position to get a grade increase.  Not sure how it is in other agencies, but in mine it would be pretty much impossible to go from a 7 or 9 to a 12 or 13 without having to compete.

CheapskateWife

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Re: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance
« Reply #18 on: December 30, 2014, 07:45:57 AM »
Assuming you're talking about U.S. federal pensions (since you mentioned TSP), you were given bad advice. Your high-3 salary DOES include locality pay:

Wait a second...are you telling me that the gubmit misled me?  Shocked!

In all seriousness, thank you, I will review these links and go back to the benefits center armed with some facts!

Imustacheyouaquestion

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Re: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance
« Reply #19 on: December 30, 2014, 09:08:56 AM »

It looks like your strategy won't help you avoid inflation until you are 62 anyway.

Another problem with deferred retirement for FERS is there's no inflation adjustment until your MRA. So if you retire at 40 with an MRA of 57, the FERS annuity is calculated based on your high-three salary from 17 years before (with no COLA). So the amount you draw  when you reach your MRA has considerably reduced purchasing power 17 years later. One strategy I've seen floated on a few forums is to potentially return for three years at age 55-57 in hopes of increasing your high-3.

civil

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Re: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance
« Reply #20 on: December 31, 2014, 08:44:55 AM »

Your pay depends on where you live and what you do.  The lowest starting GS level in my building is a 9 (DC), most are 13 and above (this is not true for all agencies).  Making $100k with several years in the gov is the norm here.   

Depending on the announcement, you might be able to start with a salary match.  You do not have a job offer until you pass the background check, after that you will get the offer in writing.

YMMV. I am also in the DC area, but my agency generally hires at 7. Promotions are few and far between, so most people quit and go private sector to roughly double their pay after their commitment is up, or when they are done waiting for the vesting periods. We also have a bunch of GS 2-5s running around - those aren't even on most of the pay charts! A friend of mine is a 2 and she spends much of her time explaining that her pay grade does, in fact, exist.

CheapskateWife

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Re: What the FERS? Federal Employee Pension Plan ("Annuity") at a Glance
« Reply #21 on: January 02, 2015, 11:12:37 AM »

It looks like your strategy won't help you avoid inflation until you are 62 anyway.

Another problem with deferred retirement for FERS is there's no inflation adjustment until your MRA. So if you retire at 40 with an MRA of 57, the FERS annuity is calculated based on your high-three salary from 17 years before (with no COLA). So the amount you draw  when you reach your MRA has considerably reduced purchasing power 17 years later. One strategy I've seen floated on a few forums is to potentially return for three years at age 55-57 in hopes of increasing your high-3.

Oh God, the idea of coming back after earning my freedom just makes my skin crawl....Sound logic, but I would have to budget more for mental health expenses.