Tammy Flanagan conducts training seminars for NITP. She lectures and consults with Federal employees in all aspects of employee benefits, specializing in the concerns of pre-retirement planning, mid-career planning, and new employee training. to see a listing of upcoming NITP seminars and to register for a seminar, click here.
Are you planning your retirement for this year? Should you wait until January 3, 2005? This might be a good time to set the record straight. There is some common sense reasoning behind choosing the best retirement date for you. It may not be January 3!
Lesson 1: Why is the end of the year better than March or September?
Many people retire at the end of the year to maximize their lump sum annual leave payment and their “high-three” average salary.
By retiring before the “use or lose” deadline (the end of the last leave period of the year), employees may “cash out” as much as 448 hours of annual leave. This is accomplished by “carrying over” the maximum 240 hours of annual leave from one year to the next… say from 2003 into 2004. Some employees carry over even more because they have a higher limit of carry over and/or they may have some restored annual leave that was not forfeited. Then, during the planned retirement year, these soon-to-be retired employees deliberately try not to use any annual leave. As long as the employee is retired before the end of the last leave period (usually leave period 26 ends within the first 2 weeks of January), this accumulated leave is included in the final lump sum payment. This could be as much as 208 additional hours on top of the leave “carried over.” It’s a good thing these employees are retiring… they sure need a vacation!
The end of the year retirement also “maximizes” the high-three calculation. Both CSRS and FERS employees have their basic retirement benefit computed on their “high-three” average salary. This is generally an average of basic pay over the last three years of an employee’s career. For example, if your retirement date is June 30, 2004; your high-three period would be June 30, 2001 – June 30, 2004. This would include 6 months of the 2001 pay rate, all of 2002 and 2003 and 6 months of 2004. But… if you retire at the end of 2004, you could eliminate the year 2001 pay rate and use only 2002, 2003, and 2004!
Lesson 2: Why January 3 instead of January 8, 2005? Or… why not December 31, 2004?
Actually, the “magic” date for this year is December 31, 2004! Here are the rules, straight out of the CSRS and FERS Handbook for Personnel and Payroll offices:
CSRS: Voluntary retirement annuities commence the first day of the month after the employee separates from service and meets the age and service requirements. Exception: Three-Day Rule: The annuities of employees who serve in pay status for 3 days (or fewer) in the month of retirement commence on the day after separation or the day after pay ceases and the age and service requirements are met. For purposes of applying the 3 day rule, all days–including non-work days–are used to determine how many days an employee is in a pay status during a month.
FERS: Unlike CSRS there is no special provision in FERS for employees who serve three days or less in the month of retirement or any provision allowing a voluntary retirement annuity to begin on the day after the last day of pay.
Huh? OK… here it is in plain English:
CSRS: Friday, December 31 is not the end of leave period 26, but it is the end of the month. Retirements effective December 31 would be entitled to the full January retirement benefit. If you retire on Monday January 3, 2005, you would receive 27/30 of the January retirement check, but you would only be paid your salary for the 3rd of January (1st and 2nd are Saturday and Sunday). Why give up 3 days of retirement pay for 1 day of salary? What is wrong with the end of leave period 26 which is January 8, 2005? Retirements effective on January 8 would not be entitled to a retirement benefit for January. Since most CSRS employees have lengthy careers, giving up a full retirement check for 5 days of salary makes very little sense. The only benefit to retiring on January 3 is the accrual of 3 more days of service. For most employees, these three additional days of service would not add another month onto the retirement computation.
If you are a FERS employee, you have to decide between December 31, 2004 and Friday January 8, 2005. The benefit of December 31 would be to accrue 25 annual leave accruals and receive a January FERS retirement check. The benefit of January 8, 2005 is to receive the last annual leave accrual before the “use or lose” deadline as well as salary for January 1 – 8 (which includes the TSP matching contribution). The question for you is this: How much is five days of salary worth compared to the value of the January FERS retirement check. If you do not have a lot of Federal service, the 5 days of salary could be worth more than a month of FERS retirement benefit. If you are under FERS without a CSRS component and you have less than 20 years of service, consider January 8, 2005.
If you are planning to apply for Social Security benefits, you should also consider your entitlement to the first Social Security check as well (contact SSA at 1-800-772-1213 if you will be at least age 62 when you retire). Withdrawals from the Thrift Savings Plan may begin after you are off of the agency payroll, although many employees postpone this election until they are certain that they will need this income right away.
Lesson 3: If it is not that important to maximize your lump sum annual leave payment, consider a less busy time of the year!
According to the Office of Personnel Management, approximately 20% of all non-disability retirements occur at the end of the year. Along with overloading the claims examiners at OPM as well as your agency’s personnel and payroll departments, this is also right in the midst of many employees taking extended holidays – not to mention just finishing TSP and health benefits open seasons. Things may not happen as quickly and efficiently as they might at other times of the year. But, just like the retail industry that gears up by preparing for more shoppers around the holiday season, OPM knows you might be planning an end of the year retirement – they are ready for you!