Picking Your Retirement Date
Why selecting a date is important
Cash flow considerations - OPM processing time
Benefits of a year-end retirement
Each year, an assortment of articles appears online with advice on the best dates to retire for CSRS and FERS participants. So what’s the “magic” behind selecting a retirement date? Well, there are many factors to consider so let’s review key considerations. And remember, selecting the “best” retirement date in this context relates to financial considerations, maximizing your “income” and not losing any money unintentionally. Your retirement date is unique and is a matter of personal preference so the “best” date for you will be different than someone else. As long as you satisfy length of service and age requirements, you can retire on any day that you want including a holiday!
Where to Start?
A good starting point is to select your exact retirement date so that your retirement benefit can be estimated using a specific date. And let’s be clear about the definition of “retirement date.” That is the effective date of your retirement or your last day as an employee. According to OPM, because your agency’s local personnel service center has your employment records, once they have an exact retirement date from you they can tell you when your benefits payments can begin based on your proposed date. They can also tell you how your proposed date impacts the amount of your retirement benefit. If you’d like to experiment with a few different dates, try out the calculator available here at the OPM site.
While we’re on the topic of your benefit amount, one primary aspect of retirement that applies whether you’re CSRS or FERS is the processing time for your retirement application. OPM (Office of Personnel Management) has been known to have a backlog of retirement applications to process so you may not receive your full pension right away and will, instead, receive interim payments. It’s a smart idea, then, to have a few months of savings available when you retire to carry you through any processing delays until you receive your full annuity check. Even a TSP withdrawal may not arrive quickly enough to pay your monthly expenses while you’re waiting for your retirement to be processed. And, yes, there is the payout of unused annual leave; however, if the timing of that deposit doesn’t coincide with when your bills are due, that could be a problem and who wants to start off in retirement with financial stress?
Looking a bit closer at leave accrual, you must be in “employee status” for your entire last pay period before you retire in order to accrue annual and sick leave – there is no partial leave accrual. If your regular schedule is Monday through Friday, eight (8) hours per day, and your retirement date is anything other than the second Saturday of the pay period, you will not accrue any annual or sick leave for that last pay period worked. There are exceptions, of course, such as employees who are on an Alternate Work Schedule (AWS).
A frequently asked question from the federal community is how one’s sick leave is credited for retirement purposes. Some think that sick leave must be in even month increments for it to apply to one’s length of service – that is not true. Sick leave is converted from hours to months and days of service for purposes of determining your length of service. There is a sick leave conversion chart online that you are welcome to explore. Please note that the sick leave credit only applies to federal employees who meet the age and time requirements for retirement – sick leave cannot be used for retirement eligibility.
When Does My Retirement Take Effect?
For FERS participants, your retirement becomes effective on the first day of the month after you retire no matter what date during the month you retire. As such, most people retire at the end of the month so there is no gap between when you are earning salary (as an employee) and earning an annuity (as a retiree). If that doesn’t make sense, let’s look at an example. If you retire on April 30th, your annuity becomes effective May 1st - as we mentioned above, that does not mean you’ll receive your full pension amount that quickly but it is effective and you will ultimately receive all monies due to you. However, let’s say that you retire on April 10th; your annuity still begins on May 1st but you will not earn any compensation (salary or annuity) for April 11th through April 30th.
CSRS participants have an exception to the rule that their annuity takes effect at the beginning of the month after retirement. They can retire at the end of the month OR the first three days of the following month and their annuity will take effect the day after retirement.
Is a Year-End Retirement Best?
As we said earlier, independent of financial considerations, the date on which you retire is a personal choice. The best of both worlds, so to speak, is often captured with a year-end retirement date…or within the first three days of January for CSRS folks. Why is that?
A year-end retirement gives you the opportunity to work as long as possible at your final salary rate, often the highest of your career. So that’s good from the perspective of your “high- three average salary.” You also have the opportunity to accumulate the most hours of annual leave toward your annual leave lump sum payout. No, you will not receive credit for leave you would earn through year-end if you retire earlier in the year…a nice thought, but it doesn’t work that way. You have to earn the leave to be paid for it. And there are caps on the maximum amount of unused annual leave you will be paid for when you separate service; generally, the most you can accumulate is 440 hours although there are exceptions. This is a good example of when selecting an exact retirement date is so beneficial; you don’t want to make a decision without knowing exactly how your proposed date impacts leave calculations, for example.
Another consideration of a year-end retirement is the timing of when you receive your lump sum payout. Receiving it in a year when your taxable income is generally lower (e.g. retired) can result in lower taxes, as well as not push you into a higher tax bracket as could happen if you received the payout during a year when you were working.
Last but not least, it’s important to understand how your lump sum payment is calculated and impacted by pay raises. To calculate your payment, your agency (not OPM) multiplies the number of accumulated and accrued annual leave hours you have by your applicable hourly rate of pay, plus some other types of pay you would have received while on annual leave, such as holidays. In other words, your unused hours of annual leave are projected forward and calculated at the rate you would have received if you were actually working and on annual leave. As such, applicable general pay increases and locality pay increases are applied as appropriate. You can learn more by reading OPM’s fact sheet on annual leave lump sum payments.
Whatever date you decide to pick for retirement, don’t wait until the last minute to talk to your agency benefit office. Many people feel they are unprepared for retirement and you won’t become any more prepared by not taking action. As a way of introduction, or to check your retirement knowledge, why not look into OPM’s retirement related FAQs listed in our Action Steps below.
To view a variety of retirement related questions and answers at the OPM site, check out Frequently Asked Questions - Retirement
If you’re unsure who to talk to at your agency concerning your retirement, there is a list of Agency Benefits Officers available online.
Educate yourself by attending a pre-retirement seminar at your agency or by talking with a retirement counselor.
Publish Date: October 4, 2019 © Tangerine, Inc. All rights reserved. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular individual or circumstance. This article is not intended to be a client-specific analysis or recommendation. Do not use this article as the sole basis for any financial decisions. Consider all relevant information. Information should not be considered as tax or legal advice. You should consult with your tax advisor and/or attorney regarding your individual circumstances.