By Tammy Flanagan
March 27, 2009I received an e-mail the other day about a common situation facing those about to retire:
I plan to retire under the Civil Service Retirement System this year. My plan was to take my annual leave (at least my 240 hours that I carried over from last year), extending my date to retire rather than leaving earlier and getting a lump sum for my annual leave. But a friend told me you come out better to take a lump-sum payment for unused annual leave.
Which is the right choice? Taking the lump sum. The simple reason is that you're not supposed to take leave on your way out the door. The comptroller general has ruled that federal managers cannot grant an employee "terminal leave" if they know in advance that the employee is going to separate from federal service when the leave is used up.
But is the e-mailer's friend right that you actually would come out better financially by taking the lump sum? That's a more interesting, and more complicated, question.
Under the scenario the employee poses, here are her options (assuming she wants to retire in the middle of the year):
So far, it looks like using the leave and staying on the payroll makes sense. The employee figured her additional salary for staying until September would be $18,902 before deductions (these include retirement contributions, insurance premiums and taxes). Taxes are withheld from the annual leave payment, but not retirement deductions or insurance premiums. She calculated that she would come out with about $5,000 extra in her pocket by staying the extra two months. Also, her retirement benefit would increase by $32 per month for the rest of her life, with annual cost-of-living adjustments.
But here's what she is missing from her computation: If she retires on July 3 and gets a lump-sum payment for unused annual leave, she can then receive a retirement check for July and August, too. Since she has 36 years of federal service, it would amount to $6,485 per month before taxes and insurance withholdings. That's a lot of money just for waking up every day.
Under this scenario, she would end up with around $8,000 in cash. Considering that if she stayed on the job two more months and her retirement goes up only $32 a month, it would take her more than 20 years to break even.
What About FERS?
Under CSRS, it's pretty easy to see that taking the lump-sum payment is the way to go.
But if you're in the Federal Employees Retirement System, it's a different story. By staying longer on the payroll and using the annual leave, you can continue to contribute to your Thrift Savings Plan and Social Security, as well as your retirement benefit. Plus, you would receive your full salary longer.
The basic FERS retirement benefit received for July and August would be only about half as much as it would be under CSRS. Under FERS, the computation generally is 1 percent times the high-three average salary times years and months of service. Under CSRS, after 10 years of service, all years are worth 2 percent times the high-three average salary. But the additional matching and automatic TSP contributions for four more pay periods would be almost $1,000 for this employee, plus the same amount in employee contributions -- or more. That's assuming TSP contributions are 5 percent of salary or greater.
Remember, it might be nice to have the lump-sum annual leave payment to weather the transition from employee to annuitant. It can sometimes take several months before your retirement benefits are finalized. It is nice to have a little cash cushion to tide you over during this period. 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.
For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.
By Tammy Flanagan
March 27, 2009