Buyout or keep working: You must weigh both ‘deals’


Buyouts. Career feds anywhere near retirement eligibility can rival Indiana Jones in their determination, skill and daring in hunting this treasure.

But, in reality, buyout offers are more like “Let’s Make A Deal” than “Raiders of the Lost Ark.”

This game show is actually instructive in some of the fundamentals of probability and decision-making.

In playing the game, contestants face a series of decisions in which they must choose to keep or trade a “bird-in-the-hand” for another prize hidden behind a curtain or in a box — a “bird-in-the-bush.”

When you are offered the opportunity to retire with incentives, like cash, you are faced with this decision. Your bird-in-the-hand is your current retirement plan. For example, you might have worked out a plan to work three more years and then retire on your annuity and accumulated savings. Then, your employer comes along and offers you new options: birds-in-the-bush. Your task is to decide whether those birds-in-the-bush are worth more than the one you already have in your hand.

Obviously, if you were ready to retire anyway, retiring with an extra cash payment is a nice bonus. Retirement with an extra $17,000 — don’t forget that you’ll owe taxes on that $25,000 Voluntary Separation Incentive Payment — in your pocket is clearly worth more than the same retirement plan without the extra money.

However, it can be a much tougher decision, if accepting the buyout requires you to retire significantly earlier than you had otherwise planned.

I have conducted analyses and advised many federal employees considering early retirement over the years. Many of my clients are surprised to learn how much private-sector income from a post-retirement job is required to make up for the loss of federal retirement income that goes along with an earlier-than-planned retirement. In a recent case, we determined that it would take a 25 percent increase in pay over nine years to recover the retirement standard of living lost by leaving federal service five years early.

In my experience, people tend to let emotion drive the decision. Maybe they want to leave their job, so they focus on finding arguments that support this decision — a kind of “shoot now, ask questions later” approach. This approach brings with it bias in favor of accepting the buyout. The bias makes an incentive payment seem larger and the sacrifices smaller than they really are. Couple this emotional bias with a dearth of the analysis needed to support informed decision-making, and you wind up with decisions that seem good today, but mean disaster down the road.

Remember that retiring early is trading one plan for another. If you’ve done it right, your current retirement plan will support a standard of living that you find attractive. In deciding whether to trade this plan for another, you need to consider how the new plan will affect that standard of living. Leaving early may improve your standard of living for the next few years, while you enjoy a different job or not working at all, but what about the effects in 10, 20 or 30 years?

The primary price for retiring early is usually a reduction in annuity income. Whether you’re covered by the Federal Employees Retirement System or Civil Service Retirement System, a federal annuity is hard to beat, and you should be reluctant to give up each and every dollar of it. Based on my experience, it takes at least $16 in properly managed investment assets to replace each annuity income dollar. This means that the $25,000 buyout you receive, after you pay about $8,000 in taxes, can only be expected to replace, at most, about $1,000 per year in inflation-adjusted, annuity income.

There are situations where taking an early out, with or without a buyout, makes sense. There are no reliable rules of thumb for making this decision, however, and my advice is that, unless you are ready to retire without the incentives, you should decline the offer unless and until a thorough and competent analysis proves it to be in your best interests.


About Author

Mike Miles is a Certified Financial Planner licensee and principal adviser for Variplan LLC, an independent fiduciary in Vienna, Virginia. Email your financial questions to and view his blog at


  1. My advice — run the numbers! I was offered a buyout at age 49 with 27 years of service. My college education was that of a “number cruncher”, so I crunched the numbers. If I had retired at 49 with 27 years of service, my annual retirement payments would have been half of what my annual retirement payments would be if I waited 6 more years until I was 55. I worked 27 years for half of my retirement. I needed to work only 6 more years for the other half. That is a “no brainer”. As it turned out, I worked 7-1/2 more years, until I was almost 57 and, with a promotion and step increases, my retirement ended up three times what I would have gotten had I taken the $25K buy-out and retired early at age 49. Run the numbers! If you don’t have the skills to run the numbers yourself, find someone who does. You will thank yourself for the next 30+ years of your expected life.

  2. Also take into account – if you are close to MRA and will have 30 years you will get a FERS supplement until age 62 (approximately the amount that you will get at 62 for social security) and if you take the buyout you do not get the supplement – so if you are anywhere near your MRA and close to 30 I would seriously consider waiting and taking the supplement instead (56-62 – 6 years – 72 months – if you plan on more than $350/month from social security – you will lose a lot of money – 350×72=25200 and isn’t taxed all at once) My supplement is close to 1200 x72 months(max) is $86,400 – much better than a $25000 buyout.

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