The Case for Waiting to Retire

Even for those who’ve decided they want to go next year and are at the higher end of the pay scale, it can pay to be patient.

A federal employee recently asked me this question relating to my recent Best Dates to Retire 2021 column: Would it be better for an employee who earns above the maximum taxable Social Security wage base ($137,700 in 2020) to retire at the end of October instead of the end of the leave year on Dec. 31?

Let’s explore this using the example of an employee earning $170,800 (a salary limited to the rate for Level IV of the Executive Schedule). But other than the FICA (Social Security) tax considerations, the points below apply to employees at all salary rates.

The salary of this employee exceeds the Social Security maximum taxable wage by $33,100. So by the end of October, the FICA tax would no longer be withheld from their salary. This means that if the employee retires on Oct. 31, their annual leave payment would not be subject to the 6.2% FICA tax. 

Leave period 21 ends on Oct. 24 this year for most federal workers. If the employee in our example carried over 240 hours of annual leave into 2020 from 2019 and didn’t take any leave through leave period 21, they would potentially have a lump sum leave payment based on 408 hours of unused annual leave. At a pay rate of $81.84 per hour, this would add up to a gross payment of $33,390 and a savings of $2,070 due to not being subject to the FICA tax. 

That makes the end of October a pretty good time to retire. But there are several reasons to consider waiting until Dec. 31.

First, the employee would see similar savings on their income for the remainder of 2020 if they delayed their retirement to the end of the year. Their annual salary exceeds the maximum taxable Social Security wage base by over $33,000, which would mean they’d see a savings of over $2,000 for 2020. 

Also, retiring on Dec. 31 would allow four additional leave accruals of eight hours each, for a total of 32 additional hours included in the lump sum payment. This leave would be paid in the 2021 tax year. The extra 32 hours at the 2020 pay rate would be worth $2,618.

And remember, If there is a general pay increase for 2021, most of the annual leave would be paid at the higher pay rate if the employee’s retirement date was Dec.  31 instead of Oct. 31. Generally, a lump-sum payment will equal the pay the employee would have received had he or she remained employed until expiration of the period covered by the annual leave. For example, if a 2% pay adjustment took effect on Jan. 3, 2021, eight hours of leave would be paid at the 2020 pay rate and the remaining 432 hours would be paid at a 2% higher rate—an increase of about $700.

Delaying retirement until the end of the year would also result in two more months of the employee’s high-three average salary being computed at the 2020 pay rate and two more months of service included in their retirement benefit computation.

The employee also could continue making Thrift Savings Plan contributions for the rest of 2020,  along with agency automatic and matching contributions on the last two months of salary for 2020. That would add up to more than $1,400.

Finally, receiving a lump sum leave payment along with 10 months of salary payments in 2020 could cause the payment to be taxed at a higher marginal rate than if it was received in 2021, when the then-retiree’s income could be lower. (Alternatively, if the retiree went back to work following their federal retirement, their income could be higher in 2021 than it was in 2020.)

The bottom line is it’s important to keep benefit and tax considerations in mind in deciding when to retire.

Correction: An earlier version of this column miscalculated the value of additional leave accrued when an employee delays retirement in the example given. It has been corrected.