The concept of a “best” day to retire is more often than not 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 2014 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 2014 leave year. If that employee manages not to use a single hour of the 200 hours of annual leave they will have earned by 12/31/2014, they will have a balance of 440 hours of annual leave for which they will be paid in a lump sum shortly after they retire. (Shortly generally means four to six weeks).
The lump sum payment will be received in 2015 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 increases in FERS contributions for employees hired after 01/01/2013 (3.1%) or 01/01/2014 (4.4%) are extremely unlikely to affect anyone who is eligible to retire at the end of this year.
When your payroll office computes the lump sum payment, they do it by looking at how much money you would have received if you began taking your annual leave on the first workday after you retired and continued to take it until it was used up. If there is a salary increase for federal employees, all or most of your lump sum payment will be computed using a slightly higher salary; resulting in a slightly higher payment.
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 December 31, 2014 will receive their first annuity payment on or about February 1, 2015, and the payment will represent the January annuity.
- A FERS employee who waits until January 3, 2015 to retire will receive their first annuity payment on or about March 1, 2015, and the payment will represent the February annuity. The employee is not entitled to any payment for January, 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 December 31, 2014 will receive their first annuity payment on or about February 1, 2015, and the payment will represent the January annuity.
- A CSRS employee who waits until January 3, 2015 to retire will receive their first annuity payment on or about February 1, 2015 and the payment will represent the annuity payment for January 4th through January 31st. 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 January 4, 2015 to retire will receive their first annuity payment on or about March 1, 2015, and the payment will represent the February annuity. The employee is not entitled to any payment for January, 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, back in 2010 and 2011, January 3rd was not the “best” date to retire for CSRS employees as, in those years, the leave year ended prior to January 3rd.
The following chart shows the “best” days to retire from 2014 through 2020. Exceptions are noted and they are explained below the chart.
|Leave Year||Ending Date||Best for CSRS||Best for FERS|
In 2014 and 2015, 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 and compare it with amount of the January pension and the lump-sum payment they would receive if they retired on December 31st. Here is an example for 2014: 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 12/31/14, his monthly unreduced annuity will be $1,875 (using the 1% multiplication factor). He will receive payment for 440 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 200 hours as of the date of his retirement). At $35.94 an hour, the 440 hours will be worth $15,813.60.
Using the same assumptions, if Bill waits until 1/10/2015 to retire, he will earn $2,012.64 for working 7 days into January (OK, working 6 and getting paid for the New Year holiday). The salary he earned is greater than the annuity he would have collected for January had he retired on 12/31/2014. He will receive a larger lump-sum annual leave payment as well; it will be for 448 hours of annual leave (as he has completed the 26th pay period), giving him $16,101.12.
In this circumstance it is slightly better from a financial perspective for Bill to work until the end of the leave year and forgo his January annuity. If the additional 10 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.
Confusing? Absolutely! No one ever said that understanding the federal retirement systems was easy. When it comes to choosing retirement dates, or other decisions you will need to make, forewarned is forearmed. Prepare yourself by attending 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.
John Grobe’s latest book, The Answer Book on Your Federal Employee Benefits, has just been released by LRP Publications. The book is written in an easy to understand question and answer format and covers all areas of federal benefits from the perspective of an employee at various stages of their career. Order your copy at shoplrp.com.