Rethinking the Best Date to Retire
I recently received the following e-mail from one of my readers, Jerry:
I am a FERS employee who is eligible to retire and will have 27 years, 11 months and six days service on Dec. 31, 2012. In looking at your column "The Magic Date," I noticed that the leave year ends on Jan. 12, 2013. Your article indicated that a FERS employee would do best by retiring on Dec. 31, 2012, as they would start drawing a retirement annuity on Jan. 1, 2013, and get their first check on Feb. 1.
There are 27 pay periods in that year, which starts on Jan. 1, 2012. Would it not be better for a FERS employee to retire on Jan. 12, 2013? They would get an extra regular paycheck that would be more than the retirement annuity they would receive on Feb. 1, they would earn an extra eight hours of annual leave and four hours of sick leave, and they would get an extra 12 days longevity computed into their retirement annuity. In my case, that would give me 27 years, 11 months and 18 days before my sick leave is figured in. Am I missing something?
No, Jerry, you are not missing something, you are on to something. Let's plug some hypothetical numbers into this example:
- Jerry's high-three average salary: $65,000 (There will be a slight difference in the high-three if he works another 12 days at his current salary, but for simplicity's sake, let's not compute that difference.)
- Age: 60. That means Jerry's FERS basic retirement will be computed at 1 percent x high-three x years and months of service, plus a retirement supplement.
- Final salary rate: $69,000
- Annual leave balance on Dec. 31, 2012: 440 hours
- Annual leave balance on Jan. 12, 2013: 448 hours
- Service on Dec. 31, 2012: 27 years, 11 months, 6 days
- Service on Jan. 12, 2013: 27 years, 11 months, 18 days
- Sick leave on Jan. 31, 2012: 1,182 hours (under new rules, he'll receive credit for 50 percent of that, or 591 hours)
- Sick leave on Jan. 12, 2013: 1186 hours (with 50 percent credit, 593 hours)
If Jerry retires on Dec. 31, 2012:
- His 591 hours of sick leave will add three months and 12 days of additional service to the computation of his retirement benefit, giving him a total amount of service of 28 years, two months (0.1666 of a year), with 18 days left over.
- His benefit will be 1 percent x 28.1666 x $65,000 = $18,308. Plus, he'll get a FERS supplement of approximately $10,000. His first retirement check will be for the month of January. With the supplement, it would be about $2,359.
- He would receive a lump-sum payment for annual leave of 440 hours x $33.06 (his hourly pay rate), or $14,547 (minus taxes).
If Jerry retires on Jan. 12, 2013:
- His 593 hours of sick leave will add three months and 13 days of additional service to the computation of his retirement benefit, giving him a total amount of service of 28 years, three months (0.25 of a year) with one day (less than six hours) left over.
- His benefit will be 1 percent x 28.25 x $65,000, or $18,362, plus a FERS supplement of approximately $10,000. His first retirement check would be for the month of February. With the supplement, it would be worth about $2,363. (That's not much more than if he left on Dec. 31, 2012, but it is an additional $4 per month for life.)
- Even though he would forfeit his January FERS benefit, Jerry would have earned a full paycheck for Dec. 30 through Jan. 12. His gross biweekly salary is $2,653 (almost $300 more than his monthly retirement check). Of course, he'll have to pay FICA, Medicare and FERS contributions of 8.45 percent, or $224, on his salary that wouldn't have been paid on his retirement benefit. So he'll end up with $76 more than his monthly FERS retirement check.
- His lump-sum payment for annual leave would be 448 hours x $33.06, or $14,810 (minus taxes). The additional eight hours of leave would provide him $264 more than retiring on Dec. 31, 2012.
- He would have one more pay period to contribute to the Thrift Savings Plan and use his 2012 flexible spending account dollars.
The Bottom Line
If you are retiring under FERS, there might be something to be said for leaving at the middle of the month, or at the end of a pay period. Here's a summary of the pluses:
- The possibility of another month of service toward your retirement computation by staying on the job another two weeks and accumulating another accrual of sick leave to add to your length of service.
- Another accumulation of annual leave to be included with the lump-sum payment.
- The value of your last paycheck could be higher than one month of your FERS retirement benefit. Of course, this might not be true if you have a Civil Service Retirement System component to your retirement, or if you will be retiring with more than 30 years of service. Be sure to do the math before you decide this is the best option for you.
If you plan to take this approach, then be sure to stay at least one full pay period into the next month. If you were to retire on the 5th of the month, for example, the benefit of a few days of salary and possibly another accumulation of leave would not offset the loss of a month of retired pay under FERS.
And finally, a note to CSRS employees: Don't do this! Under CSRS, your monthly retirement check is more than your paycheck after you have reached around 25 years of service (46.25 percent of your high-three average salary). So it wouldn't be worth losing a month of retirement to gain a final paycheck and leave accrual. For the end of the 2012 leave year, the best date for CSRS employees would be Thursday, Jan. 3, 2013. For any month, consider the last day of the month, or the first three days of the following month if you are retiring under CSRS, or CSRS Offset.
For the best dates to retire throughout 2012, stay tuned. I plan to map out the dates on the calendar in the next few months.
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.