The top 5 things that federal employees should keep in mind as their retirement date draws near.
Before pulling the trigger and submitting your retirement application to OPM’s iron mountain, there are some important items to make sure you understand when it comes to retiring from the federal government. This piece explores the best dates and ages to retire, the lump sum payment from unused annual leave, and other aspects of federal benefits that can trip people up in retirement if they’re not careful.
5. Picking a Retirement Date
For FERS retirees, retiring at the end of the calendar year (December 31st) is usually smart because that is how to maximize one’s annual leave lump sum payment. Leaving at the technical end of the “leave year” accomplishes the same thing, but generally you want to retire at the end of the month because FERS and CSRS retirement accumulation begins on the first of the month after the month you retire. So if you retire mid-month, not only do you lose some benefits, but you also have to wait until the following month to start receiving your pension.
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If December 31st doesn’t suit you, for whatever reason, the second-best time to plan your federal retirement date is when a pay-period coincides with the last few days of a given month. Read our complete list on upcoming optimal retirement dates for feds. One reason you might not want to retire at the end of the year is because it is such a popular time for feds to leave federal service. There is an uptick in OPM’s backlog and the retirement packets submitted at that time are subject to even lengthier processing times than normal.
4. Age at Retirement
There are numerous things to consider regarding what age is best for federal workers to enter retirement. Similarly, what age to start social security can be a high-impact decision also. Here are the top age-related choices that involve federal retirement:
- Retiring before 62 – With 20 years at age 60 or 30 years at the minimum retirement age, FERS employees are eligible to retire. (There are different rules if you’re subject to a mandatory retirement date.) While retiring early can seem appealing, it is important to remember the special retirement supplement (SRS) is subject to an earnings test (could be reduced or non-existent if you get another job) and it is not subject to any cost-of-living adjustments (COLAs) like social security retirement benefits. You also miss out on the 10% boost to your pension that is only available to Feds who work to age 62 or older.
- Retiring at Age 62 or Older – With 5 years of federal service at age 62 or older, you can retire immediately. But if you have at least 20 years at this age, you can use a 1.10% multiplier when calculating your pension amount. Retiring before 62 or with less than 20 years results in a 1.00% multiplier being used. Read this article to learn more about the cost of 2 years. Ed Zurndorfer refers to this 10% boost as an “enhanced” FERS annuity. Don’t miss his article on why the SRS is no substitute for the “Enhanced” FERS pension.
- “Still Working” Past RMD Age – One reason to keep working well beyond the age of 62 is to avoid paying required minimum distributions (RMDs). If you continue to work past this age (whether your RMDs began when you were 70½, 72, or 73), you would qualify for a “still working” exception when filing taxes and therefore won’t need to take an RMD. You do need to begin taking RMDs the year you retire, though, even if it is on December 31st. Overlooking this detail could result in having to take two RMDs during the first year of retirement.
3. Lump Sum Payout for Unused Annual Leave
At the end of each leave year, federal employees can keep 240 hours of unused annual paid leave. Any accrued amount above that limit is lost. A potential 208 hours of annual leave can be garnered in a given year. This leaves up to 448 hours that can be converted into a lump sum payment upon retiring from the federal government. (Learn all about annual leave in this article.) This lump sum is taxed as ordinary income and this taxation is one of the reasons why retiring at the end of the year might not be best idea for some federal workers.
The lump sum is calculated by determining how much the employee would’ve been paid had they continued to work that given duration of time. This includes holidays that would’ve been encountered along the way, and also any across-the-board pay raises, basic pay, locality pay, and overtime. The only types of pay that aren’t included in the calculation are retention incentives and comparability allowances.
2. FERS and CSRS Interim Payments
Tied to the aforementioned backlog at OPM’s retirement services, the full pension amount usually isn’t disbursed to retirees until at least a month or so. In extreme cases, processing time can take nine months. While a federal annuitant’s retirement package is pending, interim checks are given out and that dollar amount is typically 60% - 70% less than what the actual annuity income will be. Therefore, it is important that newly retired feds have a plan to make up for this shortfall in income. One strategy is to lean on the lump sum payout from annual leave. Another might be to tap into TSP savings or take out a personal loan. Talking with a ChFEBC℠ Professional at Serving Those Who Serve can help you formulate an effective strategy.
1. A Holistic Understanding of Your Federal Retirement Benefit Package
The most important thing US government employees can do as their retirement date gets closer is fully understand their benefits. For instance, making sure you understand how FEHB. Medicare, and FEDVIP benefits work in retirement is important. (Like FEHB premiums aren’t paid pre-tax after retiring.) When it comes to the TSP, your fund allocation and investment strategy can make or break your federal retirement’s outlook. Attending our financial planning for feds webinar is a great place to start learning how to determine how much TSP money you should withdraw during retirement (or even if moving money out of the TSP is the way to go.) Other benefits to be aware of once retirement hits include your FEGLI benefits. Learn which types of FEGLI coverage you should probably keep in retirement and also the costly implications of keeping FEGLI option B as you get older.
Need help preparing for you federal retirement? Check out our NO-COST WEBINAR SERIES FOR FEDS!
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Until Next Time,
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**Written by Benjamin Derge, Financial Planner. The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Benjamin Derge and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Expressions of opinion are as of this date and are subject to change without notice. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors.
