Your federal career is a marathon, and picking a date to retire is the final leg. The last thing you want is to trip right before the finish line. To ensure a smooth transition into retirement, it is crucial to understand the financial implications of your chosen retirement date. Today, we will compare the pros and cons of retiring at the end of the year versus the beginning of the next year, as this decision can result in swings of $10,000 or more depending on how you structure it.
The Impact on Your Pension
The first factor to consider is how your retirement date affects your pension. Your pension is calculated using your high-3 average salary (the three consecutive years you were paid the most), your years of service, and a multiplier. Working an extra month or a couple of weeks into January will not significantly impact your years of service. Many employees believe that staying until January to receive the annual pay raise will boost their high-3. However, because the high-3 is an average over 36 months, receiving the higher pay for only one or two pay periods will have a marginal effect on your overall pension calculation. Unless you are reaching a critical age or eligibility milestone (such as age 62 for a full pension without reductions), working a few extra weeks into the new year has very little impact on your pension.
The Three-Day Rule and Pension Payouts
As a FERS employee, it is generally best to retire near the end of the month. Your pension is not payable until the month following your retirement. For example, if you retire on December 31st, you are considered retired in January and will receive a pension payment for that month. However, if you retire on January 1st, you will not receive a pension for the remainder of January; your first pension payment will be for the month of February. Retiring near the end of the month ensures you do not miss out on any pension dollars.
Advantages of an End-of-Year Retirement
Retiring on December 31st offers several distinct advantages. First, because you will be retired for the entire following year, your pension will be eligible for the full Cost of Living Adjustment (COLA) for that year. Second, and perhaps most importantly, is the annual leave payout. Any unused annual leave you have when you retire is paid out as a lump sum, which can easily amount to tens of thousands of dollars. Because December 31st almost always falls before the end of the leave year, you can carry over more than the standard 240-hour limit into retirement. You could potentially have 400 or more hours of annual leave paid out. Additionally, because it takes a few weeks to process, this payout will be taxed in the following year, when you may be in a lower tax bracket.
Advantages of an Early-Year Retirement
Retiring in early January also has its benefits, primarily concerning Federal Employees Health Benefits (FEHB) stability. Many retirees change their FEHB plans as they transition into retirement to better suit their changing health needs. If you retire on December 31st and change your FEHB plan simultaneously, the administrative process between OPM and the insurance providers can sometimes become messy and delayed. If you retire in January, you can switch to the new FEHB plan as an active employee during Open Season, and then carry that new plan smoothly into retirement. Furthermore, working additional pay periods in the new year allows you to contribute a bit more to your Thrift Savings Plan (TSP).
Crucial Deadlines to Remember
If you choose to retire in January, you must be acutely aware of the end of the leave year deadline. This date varies slightly each year but typically falls around January 10th. If you retire after this deadline, any annual leave you have accumulated above the 240-hour limit will be forfeited (use-or-lose). To maximize your lump-sum payout, you must retire before the leave year ends if your balance exceeds 240 hours.
Creating Your Action Plan
Ultimately, the best retirement date depends on your specific circumstances. Start by consulting with your HR department to verify your exact years of service, your projected annual leave balance, and your eligibility status. Compare the scenarios: If you retire on December 31st, are you fully eligible, and do you want your pension to start immediately? By understanding these logistical details and applying them to your unique situation, you can confidently cross the finish line of your federal career.