If you do it right you will walk away from the government with a large lump sum check.
But you got to know what you are doing to maximize it.
The key is your Annual Leave.
How it Works
When FERS employees retire they are given a lump sum payment for any unused annual leave they have on the books at retirement.
The amount of the lump sum is simply what you would have been paid had you actually worked those hours.
For example, if you have 200 hours of annual leave and your pay rate is $50/hour then your gross annual leave payout would be:
200 hours x $50 = $10,000
But do they take into account a pay raise you would’ve received if you would have stayed working longer?
Yes, they do! For example, let’s say you retire Dec 31st and you would have received a pay raise had you stayed on into the next year.
In this situation they’ll pay out your annual leave lump sum at the pay rate you would have had if you had worked into the new year.
Simply put, they pay out your annual leave at the rate you would’ve received if you had stayed on and used your annual leave at the end of your career.
Don’t Forget the Tax Man
But we can’t forget that we have to pay taxes on this lump sum. Most federal employees are left with about 70%-75% of their annual leave lump sums after all the taxes (State and Federal income taxes, Social Security, Medicare, etc.) are taken out.
This means that if your gross lump sum payment is $20,000 then you’ll probably be left with $15,000 net (after taxes).
How to Maximize the Payout
As I am sure you know, you can only take so many hours of annual leave into each new year as it is “use or lose”.
For most employees the limit is 240 hours but some employees have higher limits.
What most people do to maximize their annual leave payout is saving up as much annual leave as they can through their last year of their career.
This is also why people tend to retire near the end of the year. It gives them as much time as possible to build up annual leave while making sure they leave before the next leave year so they can potentially cash out more than the carryover limit (i.e. 240 hours).
For example, let’s say you have 240 hours of leave going into your last year of your career and you are planning to retire in December. If you save up all your annual leave throughout the year then you could get a payout on more than 350-450 hours depending on how fast you accrue leave.
But What About My Sick Leave?
You get a lump sum payout for only unused annual leave at retirement. Unused sick leave is handled completely differently.
Long story short, your unused sick leave gets added into your years of service to increase your pension.
Here is a quick example of how this works. Let’s say you have 20 years, 6 months, and 10 days of normal service as well as 7 months and 25 days of sick leave (about 1,362 hours).
Note: This article will help you turn your hours into years, months, and days.
20 years, 6 months, and 10 days
+
7 months and 25 days
=
21 years, 2 months, and 5 days
In this example, your pension would now be calculated as you had 21 years and 2 months of service which means more money for you in retirement!
But what happened to the extra 5 days? Any “extra” days (less than 30 days) you have after they’ve added your normal service and sick leave together will be dropped and you won’t get credit for those.
So ideally you can get your normal service and sick leave to add up to full years and months without having too many days left over.
Note: For retirement calculation purposes, OPM assumes that all months are 30 days long.
Information that Pays
There are a lot of details to your federal benefits and it can get complicated really quickly. But understanding how all your benefits work puts you in the driver’s seat in retirement.
Having good information will literally pay dividends for the rest of your life as you are able to maximize your money for the rest of your life.
