Picking the Very Best Date to Retire

At a class I taught this week, an employee covered under the Federal Employees Retirement System shared two retirement estimates he had requested for dates at the end of this year and early next year -- specifically, Dec. 31, 2013 and Jan. 31, 2014. Those are both good dates for FERS employees to consider, as I noted in my annual Best Dates to Retire column last week.

The employee was not sure which date would work best for him and wanted my opinion. Retiring on Dec. 31 would mean he would be paid for all of the annual leave he carried over from 2012 plus what he is now accumulating in 2013. But he would only receive credit for 50 percent of his unused sick leave if he chooses to retire at the end of December. He wanted the Jan. 31, 2014 estimate to show what he would receive as credit for his full balance of sick leave and an additional month of service.

The benefit was definitely more money every month if he waited until Jan. 31. But he would have to give up the 208 hours of annual leave that he could have received in a lump sum payment, since he would be limited to only the 240-hour carryover into the 2014 leave year. I suggested he split the difference, and offered Jan. 11, 2014 as a date that would allow him to have his cake and eat it too.

Let’s see why that’s the case. First, here are some key facts about the employee:

• Salary: $85,000 ($40.73 / hour)
• Service computation date: June 15, 1991
• Age: 63

Now, for the specific scenarios:

Option One: Dec. 31, 2013

• Service: 22 years, 6 months, 16 days
• Unused sick leave: 1,106 hours
• Service used to compute FERS retirement: 22 years, 9 months, 22 days
• Retirement computation: 1.1% x 22.75 years x $85,000 = $21,271.25 per year or $1,772.60 per month
• Annual leave balance: 440 hours x $40.73 = $17,921.20 payment for unused annual leave (minus taxes)

Option Two: Jan. 31, 2014

• Service: 22 years, 7 months, 16 days
• Unused sick leave: 1,114 hours
• Service used to compute FERS retirement: 23 years, 1 month, 29 days
• Retirement computation: 1.1% x 23.0833 years x $85,000 = $21,590 per  year or $1,799.17 per month
• Annual leave balance: 256 hours x $40.73 = $10,426.88 payment for unused annual leave (minus taxes)

Using this date will increase the employee’s retirement by $26.57 a month, but cost him $7,494 in his lump sum annual leave payment since he would be limited to only two accruals for 2014 plus the 240 hours carried over from 2013. He would need to collect the extra $26.57 in his retirement benefit for more than 23 years to make up for losing the extra money he could have received in his lump sum annual leave payment.

Option Three: Jan. 11, 2014

• Service: 22 years, 6 months, 27 days
• Unused sick leave: 1,110 hours
• Service used to compute FERS retirement: 23 years, 1 month, 9 days
• Retirement computation: 1.1% x 23.0833 years x $85,000 = $21,590 per year or $1,799.17 per month (the retirement benefit is the same for Jan. 31 and Jan. 11 since the benefit is computed only on the years and months of service; the extra days are dropped if they are less than 30)
• Annual leave balance: 448 hours x $40.73 = $18,247.04 payment for unused annual leave (minus taxes)

Using this date will provide the same retirement benefit as using the Jan. 31 date and also allow the employee to be paid for his “use or lose” annual leave from 2013, since the retirement date is still within the 2013 leave year.

The downside to choosing this date is the loss of the January payment of the FERS retirement benefit, a forfeiture of $1,799. But the employee will be paid his salary for Jan. 1-11, and one of those days is a holiday. The eight days of extra salary provide a net gain of $807.

This extra salary payment also allows the employee to make an additional Thrift Savings Plan contribution for 2014. And considering there are nine leftover days in the retirement computation, the employee does have some use or lose sick leave hours that could be spent without changing the 23 years and one month of service. Nine days is equivalent to 52 hours.

The bottom line for this employee is that after careful analysis, Jan. 11, 2014 is the best retirement date of his three options on the table. It pays to know the rules and do the calculations!