Being approved for Federal Disability Retirement is a big accomplishment. But the payments you receive may not be enough to support you or your family. The good news is that on Federal Disability Retirement you can find a new job in the private sector and continue earning money. There are a few rules to follow, but ultimately, you can earn more money than what you were making in your federal job.
Let’s cover everything you need to know.
How Much Can You Earn?
While on Federal Disability Retirement, you can earn up to 80% of your federal position’s current salary while working in the private sector. Remember, Disability Retirement lets you continue gaining years of service while you’re on the benefit. Even if you’re not working for the federal government, you’ll continue to receive creditable years of service each year you’re on the benefit just as if you were still employed with the federal government.
The Office of Personnel Management (OPM) will not tell you exactly how much you can earn in the private sector, but they do post the federal pay scales on their website every year for you to reference. You’ll have to do some math here, but once you find the grade and step of the position you retired from, you can find the current salary for that position and then stay under 80% of that.
Note: Once you turn 60, the income cap is lifted, and you can make as much money as you want to.
This is an important distinction to make as your previous position could receive annual raises that would increase the amount you are able to earn in the private sector.
For example, looking at the general schedule annual salary for 2024, if you were grade 7 step 9 when you retired, that salary is currently $53,158. You could make up to 80% of that, which is $42,526.
This opportunity will give you the chance to potentially earn more in your Disability Retirement than you would have made while working in your position for the federal government.
For example, if your High 3 is $100,000 then you would receive $60,000 for the first 12 months on Federal Disability Retirement and then $40,000 every year thereafter until 62. If you choose to work in the private sector, you can earn up to $80,000 a year. This would allow you a total potential income of $140,000 for year 1 and $120,000 for year 2+.
Earned Income vs Passive Income
When looking for a job within your 80% income cap range, take into consideration your earned income and passive income.
Earned Income
This type of income would apply to your 80% earning limit.
Earned income is any money you make through:
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- Wages, salaries, bonuses, tips
- Any money you make from work, self-employment, or providing a service is counted as earned income
- Other income like alimony, retirement pensions, and 401K distributions can also count as earned income. While you aren’t actively working for this money, it’s still taxed the same.
Passive Income
This type of income would NOT apply to your 80% earning limit.
Passive income, on the other hand, does not count towards your 80% limit. This is any money you’re not actively working to earn, like:
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- Investments and dividends
- Income from limited partnerships (businesses you’re invested in but don’t play an active role)
- Certain types of tax-sheltered investments
- Real estate investments, including actual properties and dividend income received from REITs
This passive income is not included in your 80% private sector income cap, which gives you the opportunity to earn more than you were making at your federal job.
It’s highly recommended to reach out to a financial advisor to figure out how your income is taxed so you can maximize your income.
What Jobs Can You Get?
Because of the opportunity to work in the private sector, Disability Retirement doesn’t mark the end of your career. Whether you want to pursue a passion or just pick up a few shifts at a local store, go for it.
Just remember these two rules of thumb:
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- It’s not recommended to return to work in the federal government, as you can lose your Disability Retirement benefits.
- You also can’t work in any job that has similar duties to the federal role you retired from. Keep in mind that your private sector job must be within the restrictions listed under your Federal Disability Retirement. Basically, If your medical restrictions state that you are not able to stand for more than 4 hours, then you shouldn’t be standing for more than 4 hours at a time as part of your private sector job.
Annual Income Reviews
Each year on Disability Retirement while you’re under the age of 60, you must submit an income survey to the OPM. They’ll just check to make sure you’re not earning more than that 80% earning cap.
It’s important to be thorough and careful with this, which is why we recommend working with a financial advisor or tax professional to ensure you’re not breaking any rules the OPM sets.
If you do earn too much money in the private sector, you’ll be considered administratively recovered. At this point, your Disability Retirement benefits will stop:
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- You’ll no longer receive your monthly payments
- You won’t be eligible for your federal health insurance
- You’ll lose any creditable years of service you’ve gained on Disability Retirement
But What If You Can’t Work While on Federal Disability Retirement?
While this annuity can provide a safety net to explore the next stage of life, many federal employees are unable to continue working, even in the private sector, due to their disability. This annuity gives them the freedom to retire and still receive a consistent and secure income stream until their regular retirement kicks in.
Making Informed Decisions
The Federal Disability Retirement benefit is a nuanced and confusing topic. It is critical to understand the long-term impacts on you and your family.
Don’t risk your benefits– knowing your earning limits and job restrictions can help you make the most of your income and stay on track for a secure retirement.
We’re here to help guide you toward a future where your income is maximized, and you have the flexibility you need to address your medical condition. If you are a federal employee that needs to apply for Federal Disability Retirement or if you have any questions on your specific case, then contact us today to set up a FREE consultation.
