The leave you’ve built up over your career is worth real money when you retire, but not in the same way. Annual leave becomes cash. Sick leave becomes pension. Knowing how each one works can help you pick a better retirement date and avoid a surprise on your last paycheck.
Annual leave becomes cash
When you retire, your unused annual leave is paid out as a lump sum after your last day. A few things to know:
- It’s paid at your final rate of pay, including locality pay.
- It’s taxed as wages, like the rest of your salary.
- It can’t go into the TSP. The lump sum isn’t eligible for TSP contributions, so there’s no way to shelter it from tax that way.
For someone with a few hundred hours on the books, this can be a sizable check, and a helpful cushion while your retirement application is processed.
The withholding surprise
Many retirees look at their leave payout and think, “Where did the rest of it go?”
Lump-sum payments are often withheld like a bonus, at a flat rate, so the check can look smaller than you expected. That’s withholding, not your final tax. Your actual tax is settled when you file your return. If you retire late in the year and have less income than usual the next year, you may get some of it back.
Sick leave becomes pension
Unused sick leave isn’t paid out in cash. Instead, under FERS, 100% of your unused sick leave is added to your service time when your pension is calculated.
The conversion is based on a 2,087-hour work year:
- 2,087 hours of sick leave = about 1 year of extra service
- 1,044 hours = about 6 months
That extra service raises your pension for the rest of your life.
The catch: it doesn’t help you qualify
Sick leave can only increase your pension once you’re already eligible to retire. It can’t get you to your Minimum Retirement Age or to 30 years of service. If you’re one month short of eligibility, your sick leave won’t close the gap.
What it’s worth: an example
Here’s a simple illustration (not a real client):
- Unused sick leave: 1,044 hours, about 6 months of service credit
- High-3: $100,000
- Pension multiplier: 1%
- Extra pension: about $500 a year, for life
Over a 25-year retirement, that’s roughly $12,500, before cost-of-living adjustments. It’s a good reason not to burn through your sick leave on the way out the door thinking it’s worthless.
Timing your retirement date
Your leave balance and your retirement date are connected:
- Annual leave: your full balance is paid out when you retire, including any hours over the 240-hour carryover cap, as long as you retire before the leave year ends. The 2026 leave year ends Jan 9, 2027.
- Sick leave: every hour you keep adds to your pension, so use it when you’re sick, but there’s no reason to spend it down before you go.
The bottom line
Your unused leave can mean a bigger final payout and a bigger pension for life. Know what both are worth before you pick your retirement date.
If you’re a federal employee within 12 months of retirement, or already retired, with $1 million or more invested, book a free 15-minute Fit Call and we’ll help you run your numbers.
Educational only, not tax, investment or legal advice. Haws Federal Advisors | HawsFederalAdvisors.com