Here we go! The final installment in the “10 Critical Coordinates for Navigating FERS Retirement” series!
For a refresher, see part 1 which discusses a federal employee’s future tax concerns and discussion of the need to work with a well-informed Federally Focused Financial Advisor or Chartered Federal Employee Benefits Consultant, and part 2, which takes an in-depth look at the coordination of key Federal Benefits.
Coordinate Number 8: Coordinate Retirement System & Retirement Date
For both FERS and CSRS employees, retiring on the last day of the year is mathematically the best day (cue major groans from Postal Employees). This is because you can accumulate your annual leave and cash it in before “losing hours” to the rollover limit of 240 hours.
For example, if, going into the year of your retirement, you carried the maximum 240 hours of annual leave, then saved all of your leave for that year, on December 31st you would have 440 hours. This means the lump sum payment calculation that Feds receive for Annual Leave will include a full 200 more hours than you would be paid for if you were retiring just one week later – after the carryover limit is enforced. (Additionally, the tax liability for the annual leave lump sum payment would fall in the first year of retirement, rather than the last year of employment.)
This equates to free money! You’re welcome.
Now, if you’re not able to separate December 31st, then based on the pension calculations, for CSRS employees – look at retiring on the first 3 days of the month and for FERS employees – look at retiring on the last day of the month.
Coordinate Number 9: Coordinate Annual Leave & OPM’s Final Determination
During the first few months of your retirement you will only receive somewhere in the range of 60%-75% of your full retirement pension. This is to give OPM time to double check your earnings history and determine your final pension calculation.
Depending on how many people are separating service at the same time as you will determine the size of OPM’s back-log, which in turn determines the length of time you are stuck receiving a lower retirement income.
At the end, OPM “makes you whole” by providing a lump sum payment for the amount withheld, but how do we get by for the 3-9 months of lower retirement pay?
Many informed Feds’ retirement plans account for this by utilizing the Lump Sum payment that their Annual Leave nets them upon separation. Suddenly maximizing that lump sum payment by following Coordinate Number 8 is a lot more important, isn’t it?
Coordinate Number 10: Coordinate FERS Special Retirement Supplement & Wage Earnings Test
Many FERS employees qualify for an MRA+30 retirement before attaining the age of 62, at which time their Social Security benefit would begin. So to fill that gap, the government provides the FERS Supplement payment to “bridge” the gap between retirement and the start of Social Security. It generally equates to somewhere between 66%-75% of your SS benefit.
But, just like Social Security has a Wage Earnings Limit, so too does the FERS Supplement, meaning if you “earn income” above a certain threshold, then they will withhold some of your supplement on the assumption that you are now so wealthy, so you do not need it. So if you plan to retire early and work elsewhere, you need to coordinate your income to make sure you are not penalized into giving up free money!
They are called your “Golden Years” for a reason. As a Federal Employee, you are given a map with the coordinates to building a retirement fortune: Financial Freedom! You are also provided with more of the tools required to get there than most any of your private sector friends and peers.
The only question left is whether you plan to pack up your jungle gear to head out on your own or start interviewing guides to see whose expertise and beliefs you can lean on to help you coordinate your expedition into the FERS Retirement Jungle.