The Best Day to Retire From Now Until 2020
by John Grobe |
Last December, we determined that the “best” day to retire in 2011 was December 31, 2011, regardless of whether you are in the CSRS or FERS retirement systems. The concept of “best” is related to financial considerations, specifically maximizing your lump-sum annual leave payment. If you do not carry over a lot of A/L from year to year, or if you just want to retire absolutely as soon as you can, your “best” day may very well be different from the ones we mention in this article.
Using 2011 as an example, let’s look at the lump-sum leave payment. One of the biggest reasons that employees choose to retire around the end of the year is to cash in a large amount of use or lose leave. Assume we have an employee who earns 8 hours of A/L per pay period and carried over 240 hours of annual leave into the 2011 leave year. If that employee manages not to use a single hour of the 208 hours of annual leave they will have earned by 12/31/2011, they will have a balance of 448 hours of annual leave for which they will be paid in a lump sum shortly after they retire. (Shortly generally means two to six weeks).
The lump sum payment will be received in 2012 when, presumably, the retiree will be in a lower tax bracket. Retirement contributions (currently 7% for CSRS and .8% for CSRS Offset and FERS) will not be deducted from the lump sum payment, neither will insurance premiums nor TSP contributions. This will result in a larger payment, though your payroll office might withhold taxes at a higher rate than normal.
The leave year ends on a different date each year, often resulting in a different “best” day to retire from year to year. Usually the “best” day is different for employees in CSRS and FERS due to different rules that affect the starting date of annuities.
Under the FERS system, an employee must be off the rolls for an entire month in order to receive an annuity for that month.
- A FERS employee retiring October 31, 2011 will receive their first annuity payment on or about December 1, 2011, and the payment will represent the November annuity.
- A FERS employee who waits until November 3, 2011 to retire will receive the first annuity payment on or about January 1, 2012, and the payment will represent the December annuity. The employee is not entitled to any payment for November, as they were not off the rolls for the whole month.
Under the CSRS system, an employee must be off the rolls no later than the 3rd of the month in order to receive any annuity for that month.
- A CSRS employee retiring October 31, 2011 will receive their first annuity payment on or about December 1, 2011, and the payment will represent the November annuity.
- A CSRS employee who waits until November 3, 2011 to retire will receive their first annuity payment on or about December 1, 2011 and the payment will represent the annuity payment for November 4th through November 30th. CSRS employees who retire up to, and including, the 3rd of any month are entitled to a pro-rated annuity for that month
- A CSRS employee who waits until November 4, 2011 to retire will receive their first annuity payment on or about January 1, 2012, and the payment will represent the December annuity. The employee is not entitled to any payment
for November, as they were not off the rolls by the end of the day on the 3rd
of the month.
The above rules have resulted in a general rule that FERS employees should retire on December 31st and CSRS employees should retire on January 3rd if they wish to maximize their lump-sum leave payments. Of course, general rules have exceptions and, for the last two years, January 3rd has not been the “best” date to retire for CSRS employees.
The following chart shows the “best” days to retire from 2011 through 2020. Exceptions are noted and they are explained below the chart.
|Leave Year||Ending Date||Best for CSRS||Best for FERS|
|2013||01/11/2014||01/03/2014||12/31/2013* or 01/11/2014*#|
* refers to 2012, 2013, 2014 and 2015. In these years, FERS employees who have a lot of federal service and carry-over a lot of annual leave may want to crunch some numbers to see if working to the end of the leave year and forgoing a January annuity is to their advantage. They should calculate the amount of salary and the lump-sum payment they will receive by working until the end of the leave year, then compare it with the January pension and the lump-sum payment they would receive if they retired on December 31st. Here is an example for 2012 (keep in mind that leave year 2012 has 27 pay periods): Bill is a FERS employee who is eligible to retire with 30 years of service and a “high-three” of $75,000.
If Bill retires on 12/31/12, his monthly unreduced annuity will be $1,875 (using the 1% multiplication factor). He will receive payment for 448 hours of annual leave (assuming a carry-over of 240 hours and no leave used during the year, a leave accrual rate of 8 hours a pay period gives him an additional 208 hours at the end of the 26th pay period). At $35.94 an hour, the 448 hours will be worth $16,101.12.
Using the same assumptions, if Bill waits until 1/12/2013 to retire, he will earn $2,587.68 for working 9 days into January (OK, working 8 and getting paid for the New Year holiday). He will receive a lump-sum annual leave payment for 456 hours of annual leave (as he has completed the 27th pay period), giving him $16,338.64.
In this circumstance it is better (financially at least) for Bill to work until the end of the leave year and forgo his January annuity. If the additional 12 days of service result in his receiving an extra month of service time in his pension calculation (roughly a 1 in 3 chance), his FERS annuity will be marginally higher for the rest of his life.
# refers to the fact that, beginning on 01/01/2014 FERS retirees will receive full credit for their sick leave in the computation of their annuity. Any FERS employee who retires up to and including 12/31/2013 only receives half credit. Here’s an example: Jill is a FERS employee who is eligible to retire on 12/31/2013 with exactly 25 years of service and a “high-three” of $85,000. She has 1,500 hours of sick leave.
If Jill retires on 12/31/2013, she will have 750 hours of sick leave added to her length of service; this gives her credit for another 4 full months (and a few days) of service. Her annuity (1% factor) will be $21,533.05 per year.
If Jill waits until 01/01/2014 to retire, she will have the full 1,500 hours of sick leave added to her length of service; this gives her credit for 8 full months (and 19 days) of service. Her annuity (1% factor) will be $21,816.69 per year.
If Jill, like Bill above, waits until the end of the leave year, she will have another 11 days of service credit. Added to the 19 days of sick leave she had (over and above the 8 months), the 11 days she works give her another month worth of service credit towards her retirement, resulting in a slight increase to her annuity. Also, like Bill, Jill will likely earn more money working an additional 8 days than she would in the January annuity payment and will have 8 more hours of annual leave in her lump-sum payment.
No one ever said that understanding the federal retirement systems was easy. If you’re approaching retirement, attend a pre-retirement seminar. If your agency is not offering such seminars, ask them to. Federal Career Experts delivers pre-retirement seminars for federal agencies.
© 2014 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.