One of the big questions federal employees have is when is the best day to retire? There are several things that you want to take into consideration. Let’s talk about FERS employees because that’s where most of the federal employees are at this point. Below is a short list of what you’ll want to consider as you are choosing your retirement date.
When does your pension get paid?
As a FERS employee, the first thing that you want to understand is when your pension gets paid. For FERS employees, the pension always gets paid the following month after you retire. So for example, if you were to retire on December 10th, then your pension would start on January 1st. You can optimize this so there’s not a gap in time where you’re not getting paid, by retiring on the last day of the month. In this example, you would want to retire on December 31st. That way your pension would start January 1st.
However, under FERS it is not so clear cut as simply deciding to retire at the end of the month. The FERS annuity is usually much smaller than CSRS, so it may be worth working an additional week or two during the month to accrue additional sick and vacation leave, and contribute additional amounts to your TSP.
How is your annual leave paid?
The other thing that you want to take into consideration is how your annual leave is paid. When you retire, any unused annual leave that you have saved up is going to be paid to you in a lump sum payment. Basically, the amount of unused annual leave is going to be multiplied by your hourly pay rate and you’ll get a check in that amount.
Also, if you retire before the next leave period ends, you can retire with more than 240 hours of vacation and receive a lump sum check for that amount, without worrying about the “use it or lose it” restriction on vacation hours.
Important Note: It’s important to know that amount is going to be taxable in the year that you receive it. If you’re going to have a big annual leave payment, and you’re looking to optimize the amount of money and keep the most amount of money in your pocket, then try to push your retirement date to the end of the year. That way the large amount is going to come in during the next year, where likely your tax bracket is going to go down because you’re retired.
Do you have enough money to retire?
Another factor that will help you determine the best day to retire is making sure you have enough money to retire. Start by identifying what you want retirement to look like for you. Questions to ask are:
- What’s important to me?
- How do I plan on spending money in retirement?
- What do I want to do in retirement?
Once your goals are defined, then you can begin thinking about and quantifying how much they’re going to cost. From there, you can map out, over the course of your projected lifetime, where that money may or may not come from and what day you’ll be able to achieve that number.
What are your other sources of retirement?
If you are a FERS employee, you probably know that your retirement income is structured like a three-legged stool with these components:
- FERS Annuity / Pension – Provides guaranteed benefits to you based on age, years of working, and salary range.
- Social Security – There’s a lot to consider when deciding the best time to start collecting Social Security benefits. The first step is a social security analysis to find out approximately how much income you will receive at different ages.
- Thrift Savings Plan (TSP) – The amount you have saved in your TSP is the third leg of your retirement income stool. The TSP can be converted to an income stream to provide an additional source of income.
How these three pieces fit together to provide you with the income you need is very important. Once you retire your annuity is paid monthly starting the second month after retirement. However, it’s entirely up to you when you begin to withdraw from your TSP and when to begin Social Security Benefits.
When is the best day to retire?
Generally speaking, if you’re a FERS employee, then December 31st is the best day to retire, but there is no “one-size-fits-all” solution. You also need to think about current and anticipated cash needs, other sources of retirement income, whether you plan to work after you begin benefits, and what the advantage of delaying the start of Social Security would be. The day you choose may determine whether you are getting the most out of your retirement benefits, and there are a number of factors to consider.
If you’d like to look at the specifics of your situation, or if you have any additional questions that you’d like answered, let’s have a conversation! Click here to schedule a free consultation.
For over 30 years, federal employee retirement planning has been a key focus of Medallion Financial Group. We recognize that FERS retirement benefits have extra layers of complexity, such as the Thrift Savings Plan (TSP), 401K, Pension plan, FEGLI and more. It’s easy to get lost in a sea of bad advice when so few people understand the basics. We help with the basics and beyond to enable our clients to get the education and advice they need to retire with confidence.Our focus is twofold: first and foremost, we are fiduciary advisors. We stand against any violation of laws, values, and ethics. Second, we treat our clients as part of our family, not only those who call Maryland and Georgia home, but clients across the US who have benefited from our reputation of personal service, integrity, and expertise.We strive to exceed client expectations – because we have high expectations of ourselves.