The concept of a “best” day to retire is often related to financial considerations, specifically maximizing your potential “income” while minimizing your potential “losses.” The “best” day to retire is also a matter of personal preference, so there is no “best day to retire” that applies to every individual.
Let’s start by establishing one significant fact: You can retire on any date you choose, as long as you meet the applicable eligibility requirements. Once the age and service requirements are met, you can retire on any day that suits your plans: ANY day of the month (first, last, or any day in between); on a holiday; on a Saturday or Sunday; on your Alternate Work Schedule day off; at the beginning, middle or end of a pay period, etc. Yes, any date you choose.
But there are some advantages to retiring at certain times of the month or year, and you want to be sure that you’re not satisfying a whim to retire (on National Caramel Corn Day, for example) only to find that you’ve lost some potential income by making that choice. This article will address end-of-2015 dates that would result in the best financial outcome, including the associated annual leave lump sum payment considerations. Please note: These are the author’s opinions. Your opinions and those of others may vary.
Retiring at the end of a calendar year is a smart move financially, so for FERS employees, December 31, 2015, is recommended. For CSRS employees, December 31, 2015 through January 3, 2016, are recommended.
Why is retiring at the end of the year a smart move? Several reasons:
- You can achieve the highest possible “high-3 average salary” by working as long as possible at your final salary rate, probably the highest salary of your career. Even if your last pay increase was only a small COLA at the beginning of the year, that still gives you almost a full year at that salary.
- You have the opportunity to accumulate the most annual leave toward your annual leave lump sum payment. If you roll 240 hours over into the 2015 leave year then save all your leave in 2015, you would retire at the end of the year with a total of 440 hours of annual leave – and you’ll be paid for every hour of that leave!
- The hourly rate used to calculate your lump sum payment may also be higher if you retire at the end of the year with more than just a few hours of annual leave. How’s that ? See the explanation below.
- The taxes on your lump sum annual leave payment will fall in the next tax year, when your taxable income will generally be lower. If that large lump sum payment was received during the same year you also worked, it could change your tax bracket, resulting in higher taxes. Receiving the lump sum payment in a year when you’re no longer working should result in fewer tax implications.
So why is there one date for FERS, but a range of dates for CSRS? FERS retirees always start accruing annuity at the beginning of the month after they retire, so it’s always best to retire at the very end of a month so that you start accruing annuity the next day. CSRS retirees also start accruing annuity at the beginning of the month after they retire, except that a CSRS retiree also begins accruing annuity the day after they retire if they retire during the first three days of the month. So if a CSRS employee retires any time during December, the annuity begins accruing on January 1, but if a CSRS employee retires on January 1, 2, or 3, the annuity begins to accrue on January 2, 3, or 4, respectively. If a CSRS employee retires on January 4 or later, however, the annuity begins to accrue on February 1. (FERS does not provide the exception for retirement within the first three days of a month.)
So my personal recommendation for a CSRS employee wanting to retire at the end of 2015 would be to retire effective January 1, 2016. In that scenario, “Bob the retiree” would receive full pay for January 1 (since he’s still an employee until the end of the day) and he would begin to accrue annuity on January 2. If he waited until January 3 to retire, he would not receive any pay for January 2-3 (unless his regular work schedule included Saturday and Sunday) and his annuity would not begin to accrue until January 4.
And what about that statement that “the hourly rate used to calculate your lump sum payment may also be higher”? 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 general pay increase/locality increase for federal employees during the time that you would be “using up” your annual leave, the payment for any leave that would have been used after the increase will reflect the pay increase, resulting in a slightly higher lump sum payment.
Example: Bob retires on December 31, 2015. At retirement, he was making $75,000 and had 400 hours of leave. There is a 1% general pay increase expected January 10, 2016. His lump sum payment will be calculated as follows:
48 hrs [6 workdays – Jan. 1, 4, 5, 6, 7, 8 – @ 8hr/day] X $35.94/hr = $1,725.12
352 hrs [400hrs – 48hrs] X $36.30/hr = $12,705
Total lump sum payment: $14,430.12
Is it ever smart to stay at work into January and retire sometime during that month? Sure: if you can work enough to make more than you would have made in annuity for that month, then it may pay to stay. Also, if that additional service would be enough to increase your annuity, it might pay to stay. Be careful if you have a lot of annual leave, though: if you have more than the rollover cap (240 hours for most employees) and you stay past the end of the leave year (January 9, 2016), you’ll forfeit any leave over your cap. If your leave exceeds the cap, you might want to stay until January 9, 2016, if the pay you would receive for that time would exceed the annuity you’re losing for the month of January. Bear in mind that staying past the date of a general pay increase won’t increase your high-3 average pay unless you stay long past the date of the pay increase.
Confusing? Absolutely! No one ever said that understanding the federal retirement systems was easy. When it comes to choosing retirement dates or making other retirement decisions, forewarned is forearmed. Prepare yourself by attending a pre-retirement seminar, if possible. If your agency is not offering such seminars, ask them to, or seek out the services of a retirement counselor who knows the federal retirement systems.