Choosing the best day to retire is one of the more frequently repurposed articles for federal employees. The “advice” given ranges from as simple as picking the end of a pay period, or the end of the year for maximizing annual leave, to the extreme of counting the number of sunspots for the year. To be clear, they are all wrong.
The Basics
Let’s start with the basics. For a Civil Service Retirement System (CSRS)/CSRS offset employee, the first place to pick a retirement date would be either the last day of the month or the first three days of the following month.
For a Federal Employees Retirement System (FERS) employee, the decision is easier; it would be the last day of the month. The reason is that the Office of Personnel Management CSRS/FERS handbook states that a federal employee’s pension starts accruing the first day of the month following retirement.
For CSRS, the rules state if the employee retires in the first three days of the next month the pension will start accruing at that time. Yes, this can be on a weekend or a holiday because it is based on calendar days, not business days.
From our experience, here is an example of what typically happens over the initial weeks when a federal employee retires. Two weeks after retirement, the last paycheck arrives. Approximately two weeks following that, the annual leave lump sum check arrives. Then finally, about 2 weeks after they received their annual leave check (6 weeks into retirement), their first interim pension check arrives. So essentially, the federal employee could have payments arriving that feel very similar to their paycheck schedule for the first 6 weeks of retirement. This is ideal.
Now, let’s consider the Fed who retires on the 5th of the month. Instead of the pension starting to accrue the day after retirement, it doesn’t start accruing until the first of the FOLLOWING month! So using the example above, in 2 weeks their last check is received, 2 weeks later their annual leave payment follows, and 2 weeks after that they receive…nothing.
Did we say nothing?! Yes, we did. The reason is that the pension has not started accruing yet. Therefore, a federal employee can have a 2-4 week gap with no income. Retiring on the last day of the month (or the first 3 days of the next for CSRS) is so important because you don’t want to give your first pension check back to the government.
Retiring at the End of a Pay Period
The second favorite “best day to retire” – one that gets a lot of press — is the end of a pay period. Again, this would not be the “best” day to retire.
This is popular for folks concerning annual and sick leave accrual. If a federal employee retires in the middle of a pay period, they forfeit the leave for that pay period. Seems reasonable, but as I’ll mention in more detail in a minute, accruing that annual leave results in a larger lump sum check.
Also, retiring at the end of the pay period is easier on HR. They don’t have to calculate a partial paycheck. Believe me when I say that WE LOVE OUR HR REPS, however, we have to side with the employees on this one. Do not worry about picking a retirement date in the middle of a pay period. In addition, going back to issue #1, the end of the pay period may not be on the last day of the month. We do not want to delay the pension accrual for only 8 hours of leave.
Retiring at the End of the Year
With the first two hurdles cleared, we address the third most popular choice which is retiring at the end of the year to maximize your annual leave lump sum payout.
When a federal employee retires, all annual leave on the books will be paid out to the employee in one check. To calculate, find the hourly salary amount and multiply it by the number of annual leave hours accrued, subtract 20% for Federal tax and that is what they will receive.
One way to max out this payment would be to deploy this 2-step strategy:
- Step number one: in the year before you retire, be sure to carry over your allotted amount, 240 for General Schedule (GS), 720 for Senior Executive Service (SES),
- Then step two: in the year you plan to retire, do not take any annual leave and retire at the end of the leave year, which would be 12/31 or the first few days of the next year. This will allow you to accrue an additional 208 hours of leave thereby “cashing out” the 208 hours plus all of the accrued annual leave you already have.
This strategy is smart in one important way as it pushes the income tax bill into the following year for taxes. If you received the lump sum within the same year you retired, that gross amount is added to your taxable income for the year, possibly pushing you into a higher bracket. But be forewarned, if you decide to retire at the end of the leave year to get every single penny from the government you can, and it is not 12/31, refer back to hurdle #1 which results in your pension being delayed.
Conclusion
Now, I’ve given you the bad news, let me pull it all together with some good news. Sometimes the stars do align and all three of these events line up perfectly.
For example, this occurs when the end of the leave year is on 12/31 and it is also the end of the pay period. If that year is your retirement year, good for you! There are also times throughout the year when the end of the pay period falls on the last day of the month. These are definitely better days to consider retiring.
In summary, to finally reveal the best day to retire. The best day to retire is the last day of whatever month you decide to retire on. Some days allow all of the above-mentioned strategies to line up although at the end of the day, you need to decide when to retire. You may not want to retire in the middle of winter, and we see it all the time, some folks don’t need to suffer an additional 6 months just to secure a larger annual leave payout.
James “Wes” Battle is a Financial Planner offering securities through Cetera Advisor Networks LLC, member FINRA/SIPC. Advisory Services offered through Cetera Investment Advisers LLC, a registered investment adviser. Cetera is under separate ownership from any other named entity. 2101 Gaither Rd., Ste 600, Rockville, MD 20850.
The opinions contained in this material are those of the author, and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Advisor Networks LLC cannot guarantee or represent that it is accurate or complete.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
