Here it is, mid-September. And those of you who have the right amount of age and service are asking, “What’s the best date to retire?” While there is no single best date to retire – sorry about that! – some dates are better than others. Let me explain.
Time of Month
The time of month that’s best to retire is different for CSRS and FERS. If you are a FERS employee, you have to retire no later than the last day of a month if you want to be on the annuity roll in the following month, If you are a CSRS employee, you can retire up to the third day of any month and be on the annuity roll in the same month. However, your annuity payment for that month will be reduced by 1/30th for every day you aren’t on the annuity roll. (To keep annuity payments equal across a calendar year, all months are treated as if they are 30 days long.)
Clearly, picking the wrong date by as little as one day can affect your annuity. If you are a FERS employee who retires on January 1 instead of December 31, you won’t be on the annuity roll until February 1, and you won’t receive your first month’s annuity payment until March 1. The same delay applies if you are a CSRS employee who retires on January 4 instead of January 3.
When you retire also affects your annual cost-of-living adjustment, which is based on the month you are first on the annuity roll. For example, to receive a full COLA in January 2017, a FERS retiree would have to retire no later than November 30, 2015, and a CSRS employee no later than December 3, 2015. For every month you aren’t on the annuity roll, your 2017 COLA would be reduced by 1/12th.
Unused Annual Leave
You have a limit on how many hours of annual leave you can carry over from one leave year to the next. For most employees, that’s 240 hours. So, if you have a lot of “use or lose” leave, there’s an incentive for you to retire before those hours are lost. That’s because you’ll receive a lump sum payment for any unused annual leave.
To calculate the amount of that lump sum payment, your agency will treat every hour of annual leave as if you were still on the job. Assuming that there’s a pay increase in 2016, the closer you retire to January 9, 2016 (the last day of the 2015 leave year), the larger your lump-sum payment will be. That’s because more of those hours would be paid at the higher hourly rate.
However, as I already pointed out, unless you’re willing to give up one month’s annuity in exchange for the additional annual leave hours you’ll gain by completing a pay period (and the higher hourly rate at which your unused annual leave will be paid), you’ll need to retire no later than December 31 (FERS) or January 3 (CSRS).
What your tax burden will be depends on the time of year you retire. If you retire at the end of the year, the amount you pay in taxes will be greater than if you had retired earlier in the year and had less income to report. On the other hand, your income for the following year will be lower, because you’ll be receiving an annuity, a portion of which will be tax exempt. To find out how much of it will be tax exempt, go to www.irs.gov/pub/irs-pdf/p721.pdf.
The lump-sum payment you receive for any unused annual leave – and any buyout you receive – will be treated as ordinary income and taxed accordingly. So you’ll want to factor that in when you make your retirement decision.
Some final thoughts
Obviously, there are a lot of variables to consider when you decide which retirement date is best. However, in the long run, a few extra dollars can’t compare with the more important questions that need to get answered. Answers that often get lost when playing the numbers game. Among them are these: Are you financially able to retire? And are you mentally and physically ready to retire?
So, before you decide to retire, consider the short and long-term financial consequences of your decision, have a clear idea of why you are leaving government, and make a good start on figuring out what you’ll do after you retire. If you do that, you’ll be in a better position to pick your own best retirement date.