Issue 03 | July

THIS MONTH IN FEDERAL BENEFITS ADVISORS

The Hidden Traps of FERS Early Retirement and Why Your C Fund Is More Concentrated Than You Think

Two things happened this week that every federal employee nearing retirement should pay attention to. First, a wave of articles about FERS early retirement reminded us that eligibility is not the same as readiness. Second, Morningstar released its Q3 market outlook and the numbers should make any TSP investor within five years of retirement stop and think.

Let's walk through both.

01 • RETIREMENT OPERATIONS

The FERS Early Retirement Decision Is Bigger Than You Think

A lot of federal employees circle their Minimum Retirement Age on a calendar and treat it like a finish line. You hit 57 with 30 years in and you're done, right?

Technically, yes. But the math tells a different story.

The 10% Pension Penalty You Might Not Know About

If you retire at your MRA with 30 years of service, your pension uses a 1.0% multiplier. If you work until age 62 with 20+ years of service, that multiplier permanently increases to 1.1%. That might sound like a rounding error. It is not. It is a permanent 10% raise on your pension for the rest of your life.

WHAT THE NUMBERS MEAN

Retiring at 57 with a $120k High-3 and 30 years: $36,000/year pension

Retiring at 62 with a $130k High-3 and 35 years at 1.1%: $50,050/year pension

Over a 30-year retirement, that gap adds up to more than $420,000 in lifetime pension income. And that does not include the extra five years of TSP compound growth you would lose by leaving early.

The FERS Special Supplement Earnings Trap

The FERS Special Annuity Supplement is designed to bridge the gap between your retirement date and age 62, when Social Security kicks in. The formula is straightforward:

(Years of Creditable Service ÷ 40) × Projected Social Security at Age 62

Example: 30 years of service, $2,000/mo projected SS = $1,500/month supplement

Here is the trap: if you earn more than $24,480 in 2026 from any job, consulting gig, or side business after retirement, your supplement gets clawed back. For every $2 you earn over the limit, you lose $1 from the supplement.

So if you take a $40,000 consulting gig, your supplement gets reduced by $7,760 the following year, potentially wiping it out entirely. You are effectively working for free once the penalty kicks in. And the supplement has no COLA. It never increases. Inflation eats it every year until it stops at age 62.

MRA+10: The Health Insurance Desert

If you have at least 10 years of service and reach your MRA, you can retire under the MRA+10 provision. But if you take your pension immediately, it is permanently reduced by 5% for every year you are under age 62. That is a 25% haircut at age 57.

You can avoid that penalty by postponing your pension until 62. But during those gap years:

• You receive no pension income

• You receive no FERS Special Supplement

• You lose your FEHB health insurance entirely until age 62

And if you choose a Deferred Retirement instead (leaving before MRA with 5+ years of service), your FEHB coverage is gone forever. You cannot restart it. Ever.

Sources: FedSmith — “Retiring Early as a FERS Employee: The Decision Is Bigger Than You Think” (Aug 3,

2026); “FERS Annuity Supplement Guide” (Jul 29, 2026); “Early Retirement for Federal Employees: How to

Leave Without Losing Benefits” (Jun 12, 2026)

02 • POLICY AND COMPLIANCE

Market Outlook: Your C Fund Gained 15% But 9 Stocks Did Most of the Work

Morningstar released its Q3 2026 North America Market Outlook this month. The headline numbers look strong. But when you dig into where the growth came from, the picture gets more complicated for anyone relying on their TSP for retirement income.

The Concentration Problem

Here is the number that matters most for federal employees: just 9 AI-related stocks accounted for over 70% of large-cap gains in Q2. Market concentration has climbed to historic highs over the past two years. Your C Fund tracks the S&P 500.

That means your TSP is more concentrated in a handful of tech companies than at any point in modern history. If those 9 stocks correct and Morningstar says several are significantly overvalued, comparable to mid-2021 levels right before the 2022 correction your C Fund takes the hit.

If you are within five years of retirement, that is not diversification. That is concentration risk disguised as an index fund.

Your TSP Growth Is Mostly Market Gains, Not New Money

A separate Morningstar report on global fund flows showed that fund assets jumped $230 billion in Q2. But net new investor inflows were only $3.7 billion. That means roughly 98% of the growth was market appreciation, not fresh contributions.

The same dynamic applies to your TSP. Your balance looks healthy right now, but most of that recent growth is paper gains. What happens to your retirement income plan if the market gives back those gains in the first two years after you retire?

That is the sequence-of-returns risk conversation. And it matters more than your current balance.

Interest Rates: Lock In Before They Drop?

Morningstar forecasts no rate cuts in 2026, but expects two cuts in 2027 and two more in 2028, bringing the fed-funds rate down to 2.50–2.75%. The 10-year Treasury yield is forecast to drop from 4.5% to 3.5% by 2029.

For federal employees, this has two implications:

• G Fund yields will decline as Treasury rates come down, making the “safety” of the G Fund less attractive for income

• Guaranteed income rates are currently favorable, if you are considering locking in retirement income, the rate environment right now is historically strong, and it may not last

Inflation at 3.4% and Your FERS COLA

Inflation is running at 3.4% in 2026, driven by oil prices from the Iran conflict. Your FERS COLA is capped at 2% when inflation exceeds 3%. That means your pension is losing purchasing power every year the gap persists.

Combined with a TSP balance that is growing on paper but vulnerable to a correction, and a G Fund yield that may decline, the question is whether your retirement income plan accounts for all of this, or just your current balance.

Sources: Morningstar Q3 2026 North America Market Outlook (Dave Sekera, Preston Caldwell, Jul 9, 2026); Morningstar Global Sustainable Fund Flows Q2 2026

03 • BENEFITS STRATEGY

TSP Market Snapshot

04 • MARKET DYNAMICS

What Is Your Gap Plan?

Whether you are thinking about early retirement, trying to figure out your TSP drawdown strategy, or just want to see what your pension, FEGLI, and Social Security look like side by side, we can build a comprehensive Federal Benefits Report that shows you exactly where the gaps are and how to close them.

This newsletter is for informational purposes only and does not constitute investment, tax, or legal advice. Consult a qualified professional before making financial decisions. Past performance does not guarantee future results.

PREPARED BY JOE AND THOM GLEASON