The concept of a “best” day to retire is usually related to finances, specifically the idea of 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 age and length of service requirements. Once those 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 (AWS) day off; at the beginning, middle or end of a pay period, etc. Yes, any date you choose.
And No: you do not have to be physically in the office on your last day. Your agency may prefer that you be in the office on your last day, but they cannot require you to be.
Let’s also establish an understanding of what “retirement date” means. The date that you choose as your retirement date (or the “effective date” for your retirement) is actually your last day as an employee. Your retirement date/effective date of retirement are the same thing: your last day on the rolls as a federal employee. So be careful to use the correct date on all documents: don’t use your “last day in the office” or “last day at work,” which are less defined than your retirement date/effective date of retirement.
The Short Version
Do you just want to know the “best” days (financially) to retire in 2019? Here’s a quick chart, from Best down to Better:
|Dec. 31, 2019||Jan. 3, 2020|
|Jan. 2, 2020|
|Jan. 1, 2020|
|Dec. 31, 2019|
|The LAST DAY of any month||The LAST DAY of any month or the first 3 days of a month|
CSRS folks: You may think that retiring during the first 3 days of a month is always advantageous. It’s not. In fact, if you retire on a Saturday or Sunday and you’re not scheduled to work those days, then you’re not earning any additional pay and are delaying the start of your annuity. (If you need those days of service to be eligible to retire or to complete a month of service credit, that’s different, and may be reasons to stay through non-work days!)
That’s the short version. If you want to understand why those dates are the better, read on…
The Long Version
While you can indeed retire on any date you want, there are advantages to retiring at certain times of the month or year. You may not want to satisfy a whim to retire on a certain date if you find that you’ll forfeit income or incur losses by making that choice. (So you might want to re-think retiring on National Caramel Popcorn Day – which is April 6th, by the way.)
Retire at the end of a month (or, for CSRS, within the first 3 days of a month)
The end of the month is a good time to retire because of a provision in the FERS and CSRS systems that goes like this: your annuity commences (that is, your annuity begins to accrue or you start “earning” annuity) at the beginning of the month after you retire. If you retire effective April 30, your annuity commences May 1 – which is good because that means there’s no gap between when you are earning salary and when you are earning annuity. (You won’t receive your May annuity until June anyway, but that’s the best you can do.)
You are welcome to retire effective National Caramel Popcorn Day (April 6), but that means you will not receive any compensation at all (no salary; no annuity) for April 7 through 30. Why? Because you’re no longer an employee so you won’t earn salary, and you won’t start earning annuity until May 1. Most people don’t like having a gap between earning salary and earning annuity, so most retire at the end of the month.
But CSRS folks have an exception to the standard rule of the annuity beginning at the start of the month after retirement. If CSRS folks retire on the last day of the month or within the first three days of a month, their annuity will commence the day after retirement. Those extra three days aren’t really anything special by themselves, but they may allow you to earn a little more full pay; may add enough days of service to acquire an additional month of service credit (for a higher annuity), or may complete a pay period (for more annual and sick leave) – and your annuity will still commence the day after you retire.
Retire at the end of the year (or, for CSRS, within the first 3 days of January)
Retiring at the end of a calendar year is the mother lode of end-of-month retirement dates. Why is it better than all the other months? There are several reasons:
- You can usually 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, thereby raising your average.
- You have the opportunity to accumulate the most hours of annual leave toward your annual leave lump sum payment. If you roll the standard cap (240 hours) into the 2019 leave year and save all your annual leave during 2019, 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! It’s possible to even reach 448 hours, depending on your agency’s payroll cycle.
- The hourly rate of pay used to calculate part or all of your lump sum payment may 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 2020 tax year, when your taxable income will generally be lower. If that large lump sum payment was received during the same year that you received substantial salary, the total of your income for that year 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 my personal recommendation for a FERS employee wanting to retire around the end of 2019 would be to retire effective December 31, 2019. That date results in the greatest financial benefits available.
My personal recommendation for a CSRS employee wanting to retire around the end of 2019 would be to retire effective January 3, 2020. In that scenario, “Bob the retiree” would receive full pay through January 3 (since he’s still an employee until the end of January 3rd) and he would begin to accrue annuity on January 4. If he retired December 31, he would miss out on three days of full pay (including a holiday), and that pay would likely be far more than the annuity he would have received for those days. He may also have missed out on earning additional annual leave and sick leave by completing a pay period.
What about that statement that “hourly rate of pay used to calculate part or all of your lump sum payment may be higher” if you retire at the end of the year? When your payroll office computes your lump sum payment, they are required to calculate that payment as if you had remained an employee and used it up. So they will actually spread your annual leave out over a calendar to see how long it would have lasted. If a general pay increase/locality increase is effective during the time you would have been “using up” your annual leave, then that increase must be included in the calculation of the lump sum payment for any leave that would have been used after the date of the increase. Using the higher hourly rate for any part of your lump sum payment increases that payment.
Example: Bob retires on December 31, 2019. At retirement, he was making $85,000 and had 400 hours of leave. There is a 2% pay increase effective January 5, 2020. His lump sum payment will be calculated as follows:
- 24 hrs [annual leave Bob would have used Jan. 1-3, 2020] X $40.73/hr = $978, plus
- 376 hrs [annual leave Bob would have used after Jan. 5, 2020] X $41.54/hr = $15,619
- Total lump sum payment: $16,597
If Bob left earlier in the year and didn’t benefit from the January 2020 pay increase, his lump sum annual leave payment would have been more than $300 less.
Is it ever smart to work into January and retire sometime during that month? Sure: if you 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 (probably January 4 in 2020), you’ll forfeit any leave over your cap. And remember that staying past the date of a general pay increase won’t significantly increase your high-3 average pay unless you stay for many months past the date of the increase.
Remember: it always pays to work longer. Always. But at some point it just doesn’t pay enough to work longer.
Confusing? Absolutely! And are there exceptions to these recommendations? Of course!
Ask a retirement counselor or expert to review your possible retirement date before making your final decision. Educate yourself by attending a pre-retirement seminar, if possible. If your agency doesn’t offer such seminars, ask them to – but always seek out the services of a retirement counselor.