Q: I’ve read the annual articles written by retirement experts about the best date to retire. It seems the so-called “best date” is usually December 31 for FERS and January 3 for CSRS. I understand that the reason for choosing these days is to maximize the individual’s annual leave payment. However, I want to retire in the middle of December 2017 so that I can take my family to Hawai’i and enjoy the holidays in style. What effect will this have on my FERS pension?
A: The effect will be minor, but you will end up with a somewhat smaller pension and a smaller lump sum leave payment. Here’s why:
- Your length of service will be less and may result in a slightly smaller computation factor for your FERS pension. Your pension is computed by taking a percentage factor derived from your years and months of service and multiplying it by your high-three average annual salary. Only years and months count – not days. Let’s say you retire on December 15, rather than on December 31; that’s a difference of 16 days. The odds are slightly better than even (with 30 days being considered a month for the purpose of this calculation) that if you had worked an additional 16 days, you would have gotten an extra month’s worth of service credit. That extra month would have been worth an extra 1/12 of 1% in your pension computation; not a lot, but something.
- Your high-three average annual salary will be slightly smaller. OPM defines the high-three as “The largest annual rate resulting from averaging, over any period of three consecutive years of creditable service, the rates of basic pay during that period.” If, like most employees, your high three is your last three years of service, it will be smaller if you retire earlier. Basically, your high-three is your highest 1095 days of service. Each day you work at today’s salary will replace a day (3 years ago) when your salary was lower. Once again, not a big difference, but something.
- You will receive a smaller lump sum payment for your unused annual leave. 16 days is more than one pay period, so you would be paid for 8 fewer hours of annual leave (assuming that you accrue you’re A/L at 8 hours a pay period).
The above does not mean that you shouldn’t go to Hawai’i with your family and celebrate your retirement and the holidays on a beach with some Mai Tais. It’s clear that (at least under FERS) the longer you work, the bigger your pension will be.
But there’s a flip side to this coin – every day that you work is a day you won’t be retired. I’ll see you on Hanalei beach!