Retiring? Use Your Annual Leave Lump Sum to Build a Certificate of Deposit Ladder

Your annual leave at retirement is an opportunity to start that emergency fund you’ve been neglecting.

The Federal Reserve’s annual Economic Well-Being of U.S. Households report hailed a new milestone. At the end of 2021, 78% of Americans reported they were doing okay or living comfortably financially. This was the highest percentage since the Fed started the survey in 2013. Also, in 2021 68% of households believed they could cover a $400 emergency with cash on hand. That was also a cause for celebration as a new high percentage for families.

Inflation this year has changed the financial lookout for most Americans. A report this month from PYMNTS.com and LendingClub found that nearly two-thirds of the U.S. population are now living paycheck to paycheck. How prepared are you for handling a financial emergency in the first few years of your retirement given how inflation is now?

Budgeting for the Interim Period in Retirement

If you have a budget, how will it weather the interim period between your last paycheck and the Office of Personnel Management adjudicating your retirement annuity? Depending upon all the facets of your retirement and the current forecasts, it can take at least several months of your interim pay process to be completed. 

If you do not have a budget, the interim period can be a Twilight Zone of uncertainty. The interim period should not be a stress test for your household’s cash flow.

My advice for those about to retire is to think of the check one receives for up to 240 hours of annual leave as a Get Out of Jail card for not just the interim period but the first year of your retirement. No one wants to go to jail, and no one needs a financial crisis.

Cash inflows and outflows in retirement will be different than employment cash inflows and outflows. Just getting an annuity check once a month vice a paycheck every two weeks is a challenge to some households. For those who have a budget, the lump sum for annual leave is a nice cushion. For those who do not have a budget, it can be a life preserver. 

My suggestion for anyone transitioning from federal employment to retirement or even a follow-on career is to do nothing flashy with the check you will receive for annual leave. Deposit the lump sum for annual leave apart from your checking and savings and even explore placing it in a different financial institution. If you do not currently have an account with a credit union, this might be the time to explore that option.

Credit unions are customer-owned, and their not-for-profit status is a nice alternative to banks. And if you already have a credit union there is nothing wrong with joining a second. I belong to several and that comes in handy, for example, when shopping for a car loan. It is nice to get a low-cost loan but even nicer to have two or three credit unions bid against each other for your loan.  

Separating the annual leave paycheck from your existing funds lessens the temptation to view it as potential mad money. Separate statements each month reinforce a mental barrier. Some of us need all the help we can get to guard against the impulse, except for emergencies, to tap a highly liquid source of money. 

Budgeting in Retirement After the First Year

After your first year in retirement, you may want to start thinking about doing something with the money you have set aside. By now, you’ve paid your taxes for the first year of retirement and are familiar with your retirement cash flows. 

So, what if you had no financial speedbumps during the first year of retirement? Congratulations. You have just survived your first year. What about the years to come? 

Consider a Certificate of Deposit (CD) Ladder

The time is now ripe for you to consider leveraging the account holding the annual leave assets into an emergency fund configured for the safety and liquidity of the duration of your retirement. Now would be the time to start a Certificate of Deposit (CD) ladder. 

A CD ladder is composed of several CDs with different maturity dates. You can divide your money into different maturity dates. For liquidity, consider something along the lines of 20% in a 3-month CD, 20% in a 6-month CD, 20% in a 9-month CD, a 12-month and 20% in an 18-month CD. When the shortest term CD matures, you take those dollars, and the interest paid and reinvest them in a longer term CD. If interest rates rise, then that new deposit will pay more than the CD that just matured. Investopedia has a nice overview of what a CD ladder is all about and explains the concept in more detail. 

There is nothing to prevent you from exploring a CD ladder before retirement if you already have an emergency fund. For those without a dedicated emergency fund consider using the lump sum or most of the lump sum from the annual leave payday as a liquidity pool you can eventually use to create your own CD ladder.

About the Author

Francis Xavier (FX) Bergmeister, CLU®, ChFC®, CASL®, ChSNC® has been Certified Financial Planner® for 30 years. He is a graduate of the Wharton School and earned a Doctor of Arts from George Mason University. He provides retirement seminars thru Federal Career Experts.