Quick Takeaways
- The first year on Federal Disability Retirement pays 60%, then 40%: You receive 60% of your high-three salary in year one, then 40% every year after until age 62.
- You can earn up to 80% in private sector work: Earned income from outside employment is capped at 80% of your former federal position’s current salary (gross pay).
- Every year on the benefit counts toward regular retirement: All years spent on Federal Disability Retirement accumulate as creditable service, increasing your regular retirement annuity at age 62.
- Passive income doesn’t count toward the 80% cap: Real estate, dividends, and tax-sheltered investments are not factored into your earning limit.
- Annual income reviews are mandatory: OPM verifies your employment and earnings each year—exceeding the 80% cap results in administrative recovery and loss of all benefits.
Common Questions
Q: What happens to my Disability Retirement at age 62?
A: It automatically converts to regular retirement. All years on Disability Retirement count as creditable service and combine with your working years to calculate your regular retirement annuity.
Q: Can I receive both VA disability and Federal Disability Retirement?
A: Yes, you can receive your full VA disability payment and your full Federal Disability Retirement annuity with no offset between the two benefits.
Q: What’s the difference between earned and passive income?
A: Earned income (salary, wages, bonuses, self-employment) counts toward your 80% cap. Passive income (real estate, dividends, tax-sheltered investments) does not count toward the cap.
Q: What happens if I exceed the 80% earning cap?
A: OPM will deem you administratively recovered. You’ll lose your monthly annuity payments and all creditable years of service accrued since approval. This is why it’s so important to make sure you’re staying within that 80% earning cap.
Q: Can I receive both Social Security Disability and Federal Disability Retirement?
A: Yes, but there’s an offset reducing one of the payments, and Social Security Disability has much stricter earning limits than the 80% cap for Federal Disability Retirement alone.
Full Webinar Transcript
Understanding Federal Disability Retirement
Kyleigh Adams (Disability Consultant): Hi, I’m Kyleigh. I’m a disability consultant here at Harris Federal. You may have spoken with me on the phone if you’ve had a consultation with us. I look forward to speaking with you guys today.
Rose (Still) McFarland (Case Manager Supervisor): And my name is Rose. I’m a senior disability case manager here at the firm. I’ve been here several years and I’m excited to get to talk to you guys today about the Federal Disability Retirement benefit and how much you’re able to make on it.
So first off, we’ll go into what Federal Disability Retirement is. This is an early retirement option for federal employees who are struggling in their job due to a medical condition. It is offered by the Office of Personnel Management [OPM], and this is a retirement that will last you only until the age of 62. At age 62 it automatically converts to your regular retirement.
What We’ll Cover Today
Kyleigh: Here’s what we’re going to be going over today in this webinar:
- Your monthly annuity payment
- How creditable years of service factor into your retirement
- Work in the private sector
- Your health and life insurance
Your Monthly Annuity Payments
Rose: As far as your monthly annuity payments go, let’s look at how much money you will receive when you are approved for this benefit. This is meant to be a supplemental income. The first year you’re going to make 60% of your high-three salary. Every year after that you’re going to make 40% of your high-three salary until you reach the age of 62.
Key Point: Your high-three average is the average of the highest 36 consecutive months of basic pay.
Now one thing to keep in mind is this is a taxable income. It’s federally taxed across the board and most of the time its state taxed depending on your state. However, you do get the option to keep your health insurance benefits as well as your life insurance benefits. They also actually have a surviving spouse benefit which allows you to leave a portion of your Disability Retirement and your regular retirement to your current spouse.
Breaking Down the Numbers
Kyleigh: We have provided a picture that kind of breaks down what you would be receiving while you’re on Disability Retirement:
The first pile of coins represents your high-three average Year 1: you’re going to be receiving 60% of that high-three. Year 2 and beyond: you’ll be receiving 40% of your high-three until you are age 62.
Creditable Years of Service
Rose: As far as creditable years of service go, every year on the Disability Retirement benefit will count as a creditable year of service. Once you reach the age of 62, all of the years accumulated on Disability Retirement as well as the years that you worked will be added together to factor into your regular retirement annuity payments.
This is very important when you’re considering what your retirement pension is going to look like because those extra years of creditable service can play a huge factor in your income once you reach that regular retirement age.
Understanding Your Disability Status
Kyleigh: It’s important to keep in mind that Federal Disability Retirement proves that you have an occupational disability. We’re not saying you are totally disabled, and you can’t work again a day in your life.
With this benefit you are able to earn up to 80% of your most previous salary within the federal government as long as you are not doing anything related to your previous federal government job and you are within your medical restrictions.
In fact, many of our clients go on to pursue a different type of employment and start a new chapter with their life. They could be a delivery driver, a customer service assistant, an office assistant, or even a teacher.
Maintaining Your Benefits While Working
Rose: One good thing to remember about this benefit is that you are able to get a job in the private sector. The Disability Retirement benefit actually allows you to maintain your health insurance and life insurance, which is a big benefit because then you’re not having to worry about that with any other job that you choose to take in the future.
Maximizing Your Earning Capabilities
Let’s dive into understanding work in the private sector a little more. As I said earlier, many of our clients have gone and found another job once they are approved for Disability Retirement. This next slide is going to explain how you can maximize your earning capabilities.
Kyleigh: To elaborate on what Rose was talking about, you are able to work in the private sector, and you’re able to earn up to 80% of what your position in which you retired from is currently making.
Rose: One important thing to keep in mind—it’s going to be 80% gross income pay. That is a question that I get often when it comes to looking at your taxes, if they’re referring to net pay or gross pay. The answer is gross pay.
Typically, I will tell my clients to always err on the side of caution with that, because in my opinion after doing this for several years, you don’t want to get to a point where you get too close and lose the benefit. So just always be mindful of how much you’re making.
The Benefit as Supplemental Income
Rose: And I believe I said this earlier, but again—this benefit, although it has many perks to it and it’s a great and very liberal benefit, one thing to keep in mind is that this is a supplemental income. Their intent is not to provide this benefit to live off of. This is one of the main reasons they allow you to work in the private sector.
Truthfully, if you do get the correct job, you can even end up making up to 140% or even 120% of what you are making in your federal job alone. So again, this is a very liberal benefit, but it’s also a great benefit for federal employees who can no longer perform all of the essential duties of their position.
Earned vs. Passive Income
Kyleigh: Elaborating a little bit more on what Rose was saying—only earned income is counted toward your 80% earning cap. This means passive income is not factored into the 80% that you are able to earn in the private sector.
Earned income includes:
-
- Salary
- Wages
- Bonuses
- Self-employment income
- 401k distributions
- Pensions
Passive income includes:
-
- Real estate investments
- Dividend income
- Tax-sheltered investments
And again, passive income does not account toward the 80% that you’re able to earn in the private sector.
Rose: And it’s also really important, in my opinion, to always speak with your CPA or a tax attorney if you’re unsure or unclear. I know for many people this subject – they’re not well-versed on, so again always err on the side of caution. It would never hurt to speak to a professional on this because you do not want to risk losing any of your benefits.
Annual Income Reviews
Rose: That takes me into income reviews. Every year the OPM is going to reach out and ask you what jobs you’ve held, and they’re going to ask you to provide proof of how much money that you have made. They do this to ensure that you do not exceed the earnings limit—that 80% earnings cap.
If you go over the 80% earnings cap, they will deem you as administratively recovered. That means that you will no longer receive those monthly annuity checks, and you’re also going to lose all the creditable years of service that you have accrued on the benefit since approval.
Personally, I don’t believe it’s worth it to risk losing those benefits, so always keep in mind that OPM is going to reach out to verify income as well as what positions that you’ve held in the private sector.
Real-Life Example: Angela’s Story
Kyleigh: Let’s talk about Angela. She’s a nurse at the VA with 10 years of service and married with three kids. Right now, she’s currently making $81,000 at the VA and her high-three average is $72,000.
Unfortunately, Angela has suffered a leg injury while trying to catch a patient at the VA. Luckily, she’s at the VA so she was able to get treatment and underwent surgery, but because of this injury she’s not able to stand for extended periods of time. Because of her position description and her request for reasonable accommodations, the VA deemed that they were unable to accommodate her.
This would make Angela a perfect candidate for Federal Disability Retirement.
Angela’s Benefit Calculations
Rose: So, at her current age of 52, if she were to go out on the Disability Retirement benefit—remember they would average your high-three, your highest three consecutive years of earnings. In Angela’s case, her high-three average is going to be $72,000.
So, the first year on the Disability Retirement benefit she’s going to receive 60% of that, which is going to equal out to $43,200. And then from the second year up until she’s age 62, she’s going to receive that $28,800 annuity every year.
If you factor in working in the private sector and working a private sector job, she could come out doing pretty well for herself even though she’s unable to perform those essential duties in her federal government job as a VA nurse.
Angela’s Private Sector Employment
Kyleigh: Luckily Angela was able to find a job in the private sector. She is still able to earn up to 80% of her most previous salary with the federal government.
At this point, the first year that she’s approved for Disability Retirement, she’s receiving 60% of her high-three average. She’s earning the maximum 80% that she can earn. Her 80% cap is a little under $65,000, and her annuity is around $43,000. With all of this combined, she’s making $108,000.
Year two, she’s still able to earn a little under $65,000 in the private sector, but her annuity would be going down, earning 40% of her high-three average. She’s getting $28,800 from the OPM but still earning her $64,800 for a combined total from ages 54 to 62: $93,600.
Maximizing Income with Other Benefits
Rose: One thing I’m sure we could all agree on is that we would all want to maximize our income. With this benefit there may be some other benefits that you would be entitled to or qualified for that would help you be able to do this.
With that being said, it is very important to be aware of how each benefit will interact with your Disability Retirement benefit because you do not want to lose out on any of your income or there be any issues with eligibility for your Disability Retirement down the road.
As you’ll see here, we do have some examples for you of what those other benefits may be that you could qualify for.
There’s the Workers’ Compensation benefit, the Veterans Affairs Disability benefit, and the Social Security Disability benefit.
Workers’ Compensation (OWCP)
Kyleigh: If you were injured on the job, you may be eligible for a workers’ compensation claim. Now you cannot receive OWCP [Office of Workers’ Compensation Programs] payments at the same time as Federal Disability Retirement. However, you can receive a schedule award or have medical coverage while you are approved for Disability Retirement.
VA Disability Benefits
Kyleigh: Next, if you’re a veteran who was injured in the line of duty you may be eligible for VA disability. You will be able to receive your full VA disability and your full Federal Disability Retirement annuity. There are no offsets between the two.
Social Security Disability
Kyleigh: Next is Social Security Disability. If your injury or disabling condition is permanent, you might be eligible for this benefit. If you are approved for both Social Security Disability and Federal Disability Retirement, there is an offset to the amount of money that you will be receiving from both.
It’s also important to keep in mind that if you are approved for both Social Security Disability and Federal Disability Retirement, there is a limit on how much you can earn in the private sector and it is much less than the 80% that you can earn while on Federal Disability Retirement.
Rose: I find that the offset between Disability Retirement and Social Security Disability is very confusing for many of my clients, which is understandable. I believe we’ve actually done past webinars regarding or going over the Social Security Disability and Disability Retirement offset. It would be a great tool and a great resource to watch and really understand that benefit before you dive into if it’s right for you.
Quick Recap
Kyleigh: I know Rose and I just discussed a lot, so here’s a quick little recap:
One of the great benefits of Federal Disability Retirement is the ability to work in the private sector and earn money. Although it may not be practical for everyone, please remember that there is a limit to how much you can earn. And you can also explore other benefits such as Social Security Disability to maximize your overall income.
Don’t Risk Your Future
Rose: With all of that being said, Kyleigh and I would agree that we do not want you to risk your future. Here at Harris Federal, we’re here to help you. We’ve worked with thousands of federal employees. We’ve worked with them through the application process. It will take a burden off of your shoulders.
Again, this can be a very stressful time in your life—I totally understand that. But we’re here to walk with you through that and hopefully gain your confidence that we will be successful and obtain that approval in the end.
This concludes our webinar for today. I’ve had a great time with Rose discussing this information and hopefully providing you with tools to make the appropriate decision for you and your family.
Thank you for being here with me today, Kyleigh.
Kyleigh: Of course, Rose. Thank you for being here with me as well.
Everyone’s story is a little different. If you’re ready to see how much you could make on Disability Retirement, give us a call today to schedule a free consultation.