Choosing the best date to retire can mean taking advantage of many different opportunities, but you’ll have to choose what is most important to you.
This article will explore the many benefit and tax related issues involved in counting down the days to your prime time to retire.
Best Date: End of the month (any month)
Retirement benefits commence the first day of the month following your retirement. Here is an example: John chooses August 12 as his retirement date and Joan chooses August 31 as her retirement date. Regardless of which retirement system they are under (CSRS or FERS), both employees will receive their first monthly retirement benefit payment for the month of September (the payment due to be paid on October 1). Joan received salary through her date of retirement, while John’s salary stopped at the close of business August 12 and he received no retirement compensation until his September benefit payment was made.
Why does this matter? If John’s salary were $65,000 / year ($250 / day), he forfeited $3,250 in salary by leaving 13 days prior to the end of the month.
Best Date: End of a leave period
According to Title 5 of the U.S. Code of Federal Regulations: “An employee is entitled to annual leave with pay which accrues one day for each full biweekly pay period for employees with 15 or more years of service.”
If you retire on Wednesday, August 31, you would not accrue your final leave accrual for leave period 17 since it is before the end of the leave period. To earn leave, you must complete your 80 hours of work (if full time).
CSRS (and CSRS Offset) can retire on the 1st, 2nd, or 3rd day of the month and you will be entitled to a retirement benefit that will begin the day following your retirement. FERS does not have this same “grace period.” If you are under CSRS, you could retire on Friday, September 2, 2005, and not only accumulate your last leave accrual, but also be entitled to a September retirement benefit.
The end of some months actually coincide with the end of a leave period. If you normally work Monday through Friday, you will accrue leave on Friday (even if the leave period ends on Saturday). This occurs 6 times between now and the end of 2006 (using the leave year that began January 9, 2005):
1. September 30, 2005 (leave period #19 ends October 1)
2. October 31, 2005 (leave period #21 ends October 29)
3. March 31, 2006 (leave period #6 ends April 1)
4. April 30, 2006 (leave period #8 ends April 29)
5. September 30, 2006 (leave period #19 ends September 30)
6. October 31, 2006 (leave period #21 ends October 28)
CSRS employees could also take advantage of being able to retire the 1st, 2nd, or 3rd of the month when there are a few more leave periods that end by the 3rd.
1. September 2, 2005 (leave period #17 ends September 3)
2. February 3, 2006 (leave period #2 ends February 4)
3. March 3, 2006 (leave period #4 ends March 4)
4. September 2, 2006 (leave period #17 ends September 3)
Choosing the end of the leave period could mean an additional 8 hours of annual leave paid in your lump sum payment. If your salary is $65,000, this is worth $249!
Best Date: End of the leave year
One reason to retire at the end of the leave year is to take advantage of receiving a large lump sum payment for your unused annual leave.
If you carried over 240 hours from 2004 and haven’t used any annual leave in 2005 (which means you would have earned an additional 200 hours of leave by the end of leave period #25), you would receive a lump sum payment for 440 hours of unused annual leave.
An agency calculates your lump-sum payment by multiplying the number of hours of accumulated and accrued annual leave by your hourly rate of pay, plus other types of pay that you would have received while on annual leave. Generally, your lump-sum payment will equal the pay you would have received had you remained employed until expiration of the period covered by the annual leave.
For example, if your salary is $65,000 and a 3.5% pay increase is granted on January 8, 2006, here is how the payment would be computed:
If you retired on Tuesday, January 3, 2006, your leave payment would be computed at 24 hours (Wed – Fri) paid at the 2005 rate ($65,000) and the remaining 416 hours paid at the 2006 rate ($67,275). The gross amount of the payment would equal approximately $14,157.
Your payment for lump sum annual leave will generally be paid within 30 days of your separation. It will arrive and be taxable in the year it is received.
Best Date: 3 years after a “major” pay increase to maximize your high-three average salary computation
- Jill retires February 28, 2006 with 30 years and 4 months of service. Her high-three average salary will include 2 months of 2006 ($68,535), all of 2005 ($65,584), all of 2004 ($62,760), and 10 months of 2003’s pay rate ($60,000) The average is $63,255. Jill’s retirement is $36,002.
- John retires December 31, 2005 with 30 years and 2 months of service. His high-three average salary will be computed on his 2003 ($60,000), 2004 ($62,760) and 2005 ($65,584) pay rates. The average is $62,781. John’s retirement is $35,523.
- Joan retires October 31, 2005 with 30 years of service. Her high-three average salary will include 10 months of 2005 ($65,584), all of 2004 ($62,760), all of 2003 ($60,000) and 2 months of 2002’s pay rate ($57,500). The average is $62,332. Joan’s retirement is $35,061.
- Jim retires August 31, 2005 with 29 years and 10 months of service. His high-three average salary will include 8 months of 2005 ($65,584), all of 2004 ($62,760), all of 2003 ($60,000) and 4 months of 2002’s pay rate ($57,500). The average is $61,883.
Jim’s retirement is $34,602.
Jill’s 2/28/06 retirement: $36,002 ($479 more than John)
John’s 12/31/05 retirement: $35,523 ($462 more than Joan)
Joan’s 10/31/05 retirement:$35,061 ($459 more than Jim) Jim’s 8/31/04 retirement: $34,602
NOTE: Since there wasn’t a major pay change (all 4 employees received annual basic pay increases of about 4.5%), there is not any special benefit to the high-three average salary computation for staying until the end of December other than having a slightly higher average salary and a couple of months more service in the retirement computation. There would be a more noticable difference if the employees had a more substantial difference between their current salary and their 2002 salary rate.
Here’s how the same examples would have changed if the 2002 pay rate had been 10% less than the 2003 rate:
Jill’s 2/28/06 retirement: $36,002 ($479 more than John)
John’s 12/31/05 retirement: $35,523 ($555 more than Joan)
Joan’s 10/31/05 retirement:$34,968 ($552 more than Jim)
Jim’s 8/31/04 retirement: $34,416
Best Date: Springtime (choose the end of a month and end of a leave period, if possible!)
If the lump sum annual leave payment is not that big of an issue for you, you may wish to consider taking advantage of some tax breaks before you retire!
Beginning in 2006, there will no longer be percentage limits to your TSP contributions. This means that you could elect to contribute your entire salary to the TSP – tax-deferred – until you reach the IRS elective deferral limit ($15,000 for 2006). In addition, if you are going to be age 50 or older next year, you may contribute an additional $5,000 in catch-up TSP contributions (also tax deferred!). FERS employees will also be entitled to the usual agency automatic and matching contributions during this time. This results in a reduction of taxable income of $20,000 for 2006! What a great time to cash in those savings bonds!
Another benefit of the spring timeframe is to be able to use your flexible spending accounts (FSA) (or healthcare savings accounts (HSA)) one last time before you retire. Employees now have 14 ½ months to use the money allotted in their FSA accounts – so your 2005 account is available until March 15, 2006 and your 2006 account is available January 1, 2006 through March 15, 2007. The annual limit for your healthcare FSA is $4,000 (2005) and $5,000 for 2006. Check out fsafeds.com for eligible expenses and a complete set of participation rules. If you need some expensive medical care, this could result in lowering your 2006 taxable income by an amount up to the FSA limits!
If you are eligible for Social Security benefits, you may be able to begin receiving your benefits on January 1 rather than waiting until the month after you retire. If you’re under your full Social Security age but at least age 62, there is an earnings limit that applies. If your earned income for the year will not exceed the limit, you may be eligible for benefits before you actually retire! If you have reached your full Social Security age, you may already be eligible to receive benefits even if you continue to have substantial earned income. Go to ssa.gov for additional information.
Best Date: End of the summer
For those of you under FERS who will have earned income in excess of the Social Security maximum taxable wage amount ($90,000 for 2005), you will no longer have to pay the 6.2% FICA tax when you reach this level of income. If you retire in time to receive the lump sum annual leave payment in 2005, you would not have to pay the FICA tax on this payment.
Note: In some situations, you may not have as much flexibility in choosing your retirement date.
These cases include:
- Mandatory retirement for law enforcement officers (LEO), air traffic controllers (ATC), and firefighters (FF): When an employees reaches the mandatory age, they must separate by the end of the month of their 56 (ATC) or 57th (LEO and FF) birthday. The retirement benefit will begin the day after the employee separates during the month of their mandatory age birthday.
- Voluntary Early Retirement Authority (VERA): When you are offered VERA, you must choose a retirement date within the “window of opportunity” provided in the offer.
- Discontinued Service Retirement (DSR): This is considered an involuntary separation. This may occur during a major reorganization or a transfer of your job to a far away location. If this occurs, the agency will involuntarily separate employees according to the requirements of the situation. In these situations, the retirement benefit begins the day after the pay ceases.
- Disability Retirement: An employee who is approved for disability retirement benefits is generally separated once the disability benefit is approved by the Office of Personnel Management (OPM). The employee is generally entitled to receive retirement benefits beginning with the last day in a pay status.