Planning for Short Term Cash Flow After Retirement

Most federal employees know they should look at their long-term financial plan when considering retirement. Once the long-term plan is set, the next thing to account for is short-term cash flow right after retirement. In order to do that, it is important to understand the various sources of income that will be involved in the first year. Here is an overview of some of the key potential income sources you will have in retirement.

Most federal employees know they should look at their long-term financial plan when considering retirement.  That would include all sources of income, including a strategy developed to maintain their accustomed lifestyle throughout retirement.  Once the long-term plan is set, the next thing to account for is short-term cash flow right after retirement.  In order to do that, it is important to understand the various sources of income that will be involved in the first year.  Those can include all of the following:

Annuity Check

The FERS or CSRS monthly annuity payment will be one of the primary income sources in retirement.  The initial payment will be made covering the first eligible month, and will be distributed in the first part of the following month.  Keep in mind that FERS employees cannot work any days in a month to be eligible, while CSRS employees can work up to the 3rd of the month.  As an example, the first deposit for a FERS employee who retired on December 31st would be made in the first part of February.  The initial payments are not for the full amount, however.  The “interim” annuity is typically only about 2/3 of the final amount and don’t include deductions for items such as insurance.  The permanent amount will start being paid once OPM finishes the final calculations, which is typically anywhere from 2 to 10 months, depending on the backlog.  Once the amount is finalized, a make-up payment will be sent for any previous under-payment.

FERS Supplement

FERS employees who retire on an immediate annuity under the age of 62 are also eligible for the FERS special retirement supplement.  The supplement is intended to fill the role of Social Security until the employee is eligible.  The supplement is paid in the same payment as the FERS annuity.  The supplement is not paid until after OPM finishes the final annuity calculations.  The back payments of the supplement will be paid at the same time the makeup payment is made from the lower interim annuity.

Last Paycheck

Retiring employees will have a number of days in the final pay period cycle that isn’t paid out yet on the day of retirement.  The check for the remaining time will come as expected on the next pay period date, for an amount between $0 and a full check depending on the timing.

Annual Leave Check

Unused annual leave is paid out as a lump sum at retirement, and can be received anywhere from two to six weeks after retirement.  For employees who have carried over the full 240 hours and have relatively high balances, the amount of this payment can be significant.  It is important to remember for planning, however, that a significantly higher tax rate may be applied to this one-time payment.

Social Security

Workers who have at least 40 quarters of employment (may not apply to all CSRS employees) are eligible to receive Social Security at age 62.  Filing at 62 may not be in the best interest of the retiree, however, depending on the situation.  When benefits are applied for, payments will begin the following month.  For most federal retirees, Social Security will play a large part in their long-term income planning, but not necessarily in the short-term.

For additional information on Social Security options, please see my other article on the topic.

Savings or Investment Account

The most accessible and flexible source of funds early in retirement will be the money that has already been set aside in a savings or standard investment account.  This wouldn’t include IRAs, TSP, or other retirement accounts, but simply after-tax money that has been saved over the years.  This fund can be used on an as-needed basis for cash flow early on, especially to make up the difference while recieving the interim annuity and no supplement.  Once the OPM calculations are complete and the make-up payment is received, that can be used to replenish any amounts taken from savings.

Many people nearing retirement do not have this type of account set aside, especially if all of the savings over their career have gone to the TSP.  One useful strategy is to reduce the TSP contributions to 5% (still receiving the full match) for a year or two prior to retirement, and direct the difference towards an outside savings or investment account.  This concept keeps the same savings rate in place, but moves it to a more accessible type of account.  The transfers can even be set up directly from payroll, just like the TSP.

Thrift Savings Plan (TSP)

The TSP is typically a federal retiree’s largest liquid asset, and plays an important role in both short-term and long-term planning.  One of the key rules to remember when considering accessing the TSP is the restriction on withdrawal options.  Only one partial withdrawal is allowed in a lifetime, and the only other options are equal monthly distributions or a full withdrawal.  There can also be penalties applied to withdrawals if not done properly, which can be referenced in my other article on TSP withdrawal options.  This all means that sufficient thought and planning needs to be put into a strategy for accessing the TSP account.

TSP withdrawals needed for cash flow immediately after retirement will also have a prescribed timeline.  The TSP is typically notified of retirement approximately two weeks after the retirement date.  From that time, if the withdrawal or transfer paperwork has already been received, there can be another two weeks to process the distribution.  If the withdrawal was directly to a bank account, it would be deposited immediately at that point.  If transferred to an IRA, etc., a check would then be mailed and may take an additional 5-10 business days to clear before being accessible.  A combination withdrawal would utilize both methods.

Employees that are still working and over age 59 ½ have an additional TSP access option that may be useful.  They are eligible for an in-service age-based withdrawal, which would take the place of their one-time partial withdrawal for their lifetime.  The benefit of this option is that you can move the TSP to a more flexible accessible account like an IRA (with no tax consequences for the transfer) prior to retirement and ready for use on a day’s notice.  This strategy also allows for accessing the funds prior to retirement.  Examples of this would be to buy plane tickets early for a post-retirement trip or buying the RV ahead of time that will be used extensively in retirement.  Retirees younger than age 59 ½ can only access their TSP after retirement, using whatever strategy is appropriate.

Employees retiring early and many law enforcement officers who retire before the year they turn 55 would also be subject to the 10% early withdrawal penalty if they access their TSP directly.  The exception to this is the IRS rule regarding “substantially equal periodic payments”.  This allows early penalty-free distributions to be taken out as long as they follow the IRS formula for a specified percentage of the overall account.  The distributions would have to continue unchanged for at least five years or until the person reaches age 59 ½, whichever is longer.

The same rules also apply to withdrawals from an IRA prior to age 59 ½, called a 72(t) program.  Using an IRA has one additional benefit, however, which is the ability to split up accounts.  For example, a 53 year old retiree, who had $300k in the TSP that was transferred to an IRA, could split the balance into two separate IRA accounts of $250k and $50k.  The 72(t) withdrawal program could be applied to the larger $250k balance and paid out equally over the next 6 ½ years, but the other account ($50k) would stay as is.  The reason for this method is that any additional withdrawal that was necessary over the 72(t) calculation could be withdrawn from the smaller account.  That additional withdrawal would be subject to the 10% early withdrawal penalty, but it would not cause all of the 72(t) program withdrawals to also be retroactively assessed the 10% penalty.  Maintaining the separate account simply provides an additional option for flexibility if needed.

There are many different rules, restrictions, and penalties that should be factored in when planning a withdrawal strategy from TSP, and it is strongly recommended to talk to someone familiar with the process before finalizing anything.

From Planning to Action

Everyone has heard stories from co-workers or read articles on federal employee websites about people who thought they had a comfortable retirement, only to find themselves broke and missing mortgage payments mere weeks after leaving their job.  While this is unfortunate, it is also avoidable with knowledge of what to expect and some time to implement a plan before leaving.  If you haven’t started getting ready yet, it is never too early to begin yourself or with the help of someone who has seen it before and can guide you through the process.

About the Author

Jason Visner is a financial advisor with Brook Federal Advisors, and works with federal employees to optimize their retirement benefits. The process starts with a complimentary analysis of the complete federal benefit package, and then builds an overall retirement plan on that foundation. He can provide recommendations on FERS or CSRS annuities, survivor benefits, military/LEO service, FEHB, FEGLI, TSP, IRAs, annuities, and social security. He can be reached at 262-456-5514 or