When to Retire
- You've worked long enough to accumulate enough retirement income that you can live comfortably.
- You need or want a second career. And it might even be with your same agency. Some have special provisions in place to rehire retirees.
- You want to pursue a dream job. Through the years, I've heard of federal employees launching second careers as dog groomers, bartenders, crafters and performers.
- Your spouse or significant other is lonely for a travel companion and lunch partner.
- Your agency offers an early retirement option or buyout.
- Your agency is going through a transition, and you like things the way they were before.
- You want to be able to travel, pursue hobbies, volunteer or simply slow down to spend more time with family and friends.
- Health problems or physical limitations make it difficult to commute or perform the duties of your job.
- You're in that category of employees (such as law enforcement officers, firefighters, and air traffic controllers) who are required to retire at a certain age.
- Health problems of your spouse, parent or significant other require that you become a caregiver.
Setting a Date
Suppose you can picture yourself in one of the above scenarios within the next year or so. You must face the decision of choosing the best date to leave. You might pick the end of a week, the end of a month, your birthday, your anniversary date, or the day you have had enough of your career or have finally decided it is time to go. Whatever date you pick, keep the following rules in mind:
- Civil Service Retirement System: If you retire on the first through the third day of the month, your annuity starts the following day. Set any other date, and the annuity will kick in on the first day of the following month.
- Federal Employees Retirement System: Regardless of which date you pick, the annuity starts on the first day of the following month.
The end of the month is a good time to go if you're trying to ensure that there will be no gap in compensation. If you retire on Aug. 15, your annuity will begin on Sept. 1; you would not receive salary or retired pay for Aug. 16-31. But if you retire on Aug. 31, your retirement will begin on Sept. 1. It's nice to have your last day as a paid employee be followed by entering "retired-pay" status the following day.
CSRS: The First Three Days
If you're under CSRS, you may want to consider retiring during the first three days of a month. For example, if you leave on Aug. 31, 2008, your retirement will begin on Sept. 1. Not a bad date, since Aug. 30 is the end of a leave period, and by retiring on that date, you can earn your final leave accrual. But a better date for a CSRS employee would be Sept. 3. Since this is within the first three days of September, your retirement will begin on Sept. 4. By retiring on this date, you will gain three additional days of salary. Let's say, for example, that Beulah's retirement income will be $4,500 per month, or $150 a day. Assume her annual salary is $90,000, or $346 per day (determined by dividing the yearly salary by 260 working days). So for her, three days of retired pay is worth $450, and three days of salary comes out to $1,038. So working three additional days is a net increase of $588.
What's more, these additional days will add to her total length of service. Suppose Beulah's service on Aug. 31 was 32 years, four months and 28 days. By working through Sept. 3, she will have completed 32 years and five months. Adding the few additional days of service to the 28 days she already had would equal more than 30 days, or the equivalent of another month of service. This is worth one-twelfth of 2 percent of her high-three average salary under CSRS. If her high-three were $85,500, the extra month in the calculation would be worth $142 per year.
One Option: The End of the Year
Have you ever noticed that employees who are planning to retire at the end of the year tend to use very little annual leave during that year? This is not always due to their dedication in completing their final assignments. Sometimes it's because they want to maximize the lump sum payment they'll receive for unused annual leave.
When you separate from federal service, you're entitled to such a payment. Generally, the payment will equal the pay you would have received had you remained employed until the expiration of the period covered by the annual leave.
Suppose that Thomas is covered under CSRS and is planning to retire Friday, Jan. 2, 2009. (This is the last work day before the end of the leave year). He is planning to carry over 240 hours of annual leave into 2008. He does not plan on taking any vacation in 2008, figuring that he'll have a lot of time off starting in 2009. If Thomas follows through with his plan, by the time he retires he will have the 240 hours of leave that he carried over from 2007 plus 208 additional hours that he accrued in 2008, for a final leave balance of 448 hours. If his final salary is $75,000, or $35.94 per hour, then his annual leave payment would be computed at 448 x $35.94, or $16,101. If there is a 2009 pay adjustment of 3.5 percent, then he would be entitled to an additional payment of $563, since the law requires that his payroll office pay his annual leave at the rate he would have received had he stayed on and used the leave.
If Thomas had been covered under FERS, he would have been better off retiring on Dec. 31, 2008, so that his retirement could begin on Jan. 1.
The Office of Personnel Management publishes a chart with the beginning and ending dates of the leave year. It applies to most federal workers; however, some agency payroll systems use a different pay period schedule. Employees should contact their agencies to verify the beginning and ending dates of a particular leave year.
Another Option: Springtime Retirement
If getting a lump sum annual leave payment isn't that big of an issue for you, you may wish to consider retiring earlier in the year.
One reason is that there no longer are percentage limits on the amount of your Thrift Savings Plan 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 already have, you can contribute an additional $5,000 in catch-up TSP contributions (also tax-deferred). FERS employees are 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.
Also, if you sign up for a health care flexible spending account for the year you retire, you must incur expenses prior to your retirement to be able to use that year's 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 ½ months to use the money allotted in their FSA accounts. Any funds in an account established for 2007 are available until March 15, 2008, and 2008 account funds are available from Jan. 1, 2008 through March 15, 2009. The annual limit for a health care FSA is $5,000. If you need some expensive medical care, this could result in lowering your 2008 taxable income by up to the FSA limits. But you must take advantage of this 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.
Tax and COLA Considerations
Your salary is mostly taxable income and your retirement is also taxable (with the exception of the CSRS or FERS contributions you've made during your career). You may have other taxable income in retirement such as investment income and Social Security or even additional earned income. It is prudent to do some tax planning before selecting the best retirement date. In a future column, I will get my associate, CPA Bob Leins, to help write about tax issues affecting retirement.
CSRS and FERS cost-of-living adjustments are pro-rated or nonexistent the first year of retirement. Therefore, using the retiree COLA as an indicator of the best retirement date isn't all that relevant. To learn more about retiree COLAs, see my column Counting COLAs (Oct. 20, 2006).
Next week, I'll take a look at every month in 2008 and help you figure out the best dates to retire in each of them.
Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.