November 3, 2006Of all the topics I write about, the one I'm focusing on this week generates by far the most interest. Since people already are e-mailing me to ask about the best dates to retire next year -- and in 2008 and even 2012 -- I decided not to wait any longer to write about the issue.
The great thing about federal retirement planning is that if you understand the basic rules (and you have a long-range calendar), you can choose the best date under the Civil Service Retirement System or the Federal Employees Retirement System for any year.
If you're still considering whether to retire by the end of this year, start by going back to my February column on best dates to retire in 2006. For those thinking about 2007 and beyond, let's look at the basics.
You can retire whenever you want -- on your birthday, on the anniversary of when you started working in government, or on the date you wake up and decide it would be more fun to stay home than go to work. Choosing one of these dates might make your retirement more memorable, but it also could cost you hundreds or even thousands of dollars.
The best dates to retire are at the end of the month, the end of a leave period or the end of the year. The date varies from employee to employee; for some, it might even be during the first few months of the year. To analyze this decision for yourself, here are the important rules:
1. Choose a retirement date at the end of a month.
Voluntary retirement benefits commence the first day of the month following your retirement. So suppose John chooses July 20 as his retirement date and Joan chooses July 31. Regardless of which retirement system they are in (CSRS or FERS), both will receive their first monthly retirement benefit payment for the month of August (payable on Sept. 1). Joan would get her salary through her date of retirement, while John's salary would stop at the close of business July 20. He would receive no retirement compensation (or salary) until his first retirement payment on Sept. 1.
Why does this matter? If John's salary were $65,000 per year, he would forfeit $1,744 in salary by leaving seven days before the end of the month.
2. Retire at the end of a leave period to earn another leave accrual.
Title 5 of the U.S. Code says: "An employee is entitled to annual leave with pay which accrues one day for each full biweekly pay period for employees with 15 or more years of service." Unused annual leave hours for each of these leave periods are reimbursed in a lump sum payment upon separation from federal service.
CSRS (and CSRS Offset) employees can retire on the first, second or third day of the month and be entitled to benefits beginning the day after they leave. FERS does not have this grace period. If a FERS (or transFERS) employee retires on any day of the month (including the 1st, 2nd or 3rd) their retirement begins the first day of the following month.
So, for example, a CSRS employee could retire on Friday, Feb. 2, 2007, and accumulate the last leave accrual for leave period 2 and still be entitled to a retirement benefit for the month of February. But an employee retiring on Wednesday, Jan. 31, would not accrue leave for period 2 (unless he or she worked an alternative schedule and completed 80 hours of work by Wednesday afternoon).
Here are some good dates in 2007 for both CSRS and FERS employees that would allow retirement to occur at the end of a month as well as the end of a leave period:
3. Retire at the end of the year to get the maximum lump sum leave payment.
This is just common sense. The leave year ends on Saturday, Jan. 5, 2008. So FERS employees should consider retiring on Dec. 31, 2007. CSRS employees can take advantage of the three-day grace period by retiring on Thursday, Jan. 3, 2008. If you work an alternative work schedule and finish your 80 hours of work on Thursday, you may earn leave for leave period 26 if you retire on Jan. 3, 2008.
Most federal employees are limited to carrying over 240 hours of annual leave each year. In addition to the carryover leave, employees with more than 15 years of service accumulate an additional 208 hours of annual leave each year. Employees must use this accumulated leave each year to avoid losing it to the carryover limit -- except in the year they are planning to retire.
For example, suppose Helen will carry over 240 hours of leave from 2006 and wants to save up her leave accruals in 2007 since she is planning to retire next year. By the end of December 2007 (through leave period 25), she will have 440 hours (240 hours from 2006 and 200 additional hours accumulated in 2007) of unused annual leave. Helen would receive payment for 440 hours of leave in a lump sum payment following her retirement on Dec. 31.
The lump sum increases relative to the pay raise that General Schedule employees receive at the start of the new leave year. This is because the law requires that employees' lump-sum payments equal the pay he or she would have received had they remained employed until the expiration of the period covered by the annual leave.
So, if Helen makes $65,000, and if a 3.5 percent general pay increase is granted on Jan. 7, 2008, here is how her lump sum annual leave payment would be computed: Her 2007 pay rate ($65,000) would apply to the first 32 hours of leave (covering Jan. 1-4) and the remaining 408 hours would receive the 2008 rate ($67,275). The gross amount of the payment would equal about $14,148, and the boost in salary would increase her annual leave payment by $445.
Before you start spending this check, remember it is subject to federal, state and Social Security taxes. CSRS employees will not pay the FICA tax of 6.2 percent, but all employees will pay the Medicare tax of 1.45 percent.
Expect the lump sum annual leave payment within 30 to 45 days of retirement. So even if you retire on Dec. 31, the payment will be taxable the following year.
4. A springtime retirement can provide some tax breaks.
If getting a lump sum annual leave payment is not that big of an issue for you, you may wish to consider retiring earlier in the year to take advantage of some tax breaks.
First, beginning this year, there are no percentage limits on your TSP contributions. This means that you could contribute your entire salary to the TSP -- tax-deferred -- until you reach the IRS elective deferral limit ($15,500 for 2007). In addition, if you are turning 50 this year (or are already have), you can contribute an additional $5,000 in catch-up TSP contributions (also tax deferred). FERS employees also will be entitled to the usual agency automatic and matching contributions during this time.
This results in a reduction of taxable income of $20,500 for 2007. What a great time to cash in those savings bonds!
If you signed up for a flexible spending account for 2007, you must incur expenses prior to your retirement to be able to use that year's health care allotment. For health care FSAs, the amount allotted for the year is available for reimbursement on Jan. 1 of the plan year. Dependent care FSA reimbursement is limited to the amount in the account at the time the claim is made.
Employees usually have 14 and a half months to use the money allotted in their FSA accounts. So any funds in an account established for 2006 are available until March 15, 2007, and 2007 account funds are available from Jan. 1, 2007, through March 15, 2008. The annual limit for health care FSAs will be $5,000 in 2007 -- the same as this year. If you need some expensive medical care, this could result in lowering your 2007 taxable income by up to the FSA limits. But you must take advantage of it before your retirement date.
If you have reached your full Social Security eligibility age (from 65 to 67, depending on your year of birth), you may begin receiving Social Security benefits even if you continue working. If you are under your full Social Security age but at least age 62, an earnings limit applies. Those eligible for Social Security benefits can begin receiving them on Jan. 1 of the year of their retirement rather than waiting until after they retire.
If your earned income for the year will not exceed the limit, you may be eligible for benefits before you actually retire. Retirement annuity income does not count as earned income. Your lump sum annual leave payment also is not considered earned income since it was "earned' prior to your retirement.
November 3, 2006