Second-Guessing the Best Dates to Retire

As the close of 2019 nears, you may be among those federal employees eyeing one of the best dates to retire at the end of the year. Those typically would be Dec. 31 for those in the Federal Employees Retirement System and Jan. 3, 2020 for the dwindling ranks of those under the Civil Service Retirement System.

Some folks question the notion that there are specific “best dates” that apply to everyone, and I can see their point. Here are some reasons why you might have decided not to leave at the end of this year, even if you’re thinking about moving on in the near future:

• You’re not cashing in a large amount of unused annual leave (one of the primary reasons for choosing a date that falls at the end of the leave year).
• You would rather retire in the summer (or spring or fall).
• You are over 70 ½ years old, so if you retire on Dec. 31, you must receive your first required minimum distribution from your Thrift Savings Plan by April 1, 2020. (If you’re under CSRS and retire on Jan. 3, 2020, your first required minimum distribution will be due by April 1, 2021).
• It has been your dream to retire on your birthday, or on a specific work anniversary.
• Because you don’t want to—that’s a valid reason!

One of the debates that often comes up with higher-salaried employees is whether it’s better to retire on Oct. 31 than at the end of the year. That’s because these employees reach the maximum taxable amount for Social Security FICA tax before the end of the year. For 2019, the maximum taxable wage is $132,900. (It goes up to $137,700 in 2020). If your salary exceeds this amount, then for the remainder of 2019 you would not have 6.2% deducted from your salary for FICA. The argument is that it would be better to be paid for your lump sum annual leave payout in 2019 than in 2020 so you could avoid the FICA tax on your payout. 

Let’s look at an example. Suppose Candice is covered under FERS and earns a salary of $166,500 in 2019. At the end of December, she will have 440 hours of unused annual leave (240 hours carried over from 2018 and 200 hours earned in leave periods 1-25 that she didn’t use in 2020). If she retires on Dec. 31, she would not accrue annual leave for leave period 26 since she didn’t complete the last pay period, which ends on Jan. 4, 2020.

Candice’s hourly pay rate is $79.78. Her gross lump sum payout for unused annual leave would be $35,103. When her payroll office issues this payment in January 2020, they will withhold 6.2% for FICA, or $2,176.

Her retirement benefit will be computed on 30 years and two months of service and will be worth $47,965 per year, or $3,997 per month (before reductions and withholdings). She’s also entitled to a FERS supplement of approximately $1,500 a month that will be added to her benefit until she turns 62. Her average gross monthly salary is $13,875. 

Based on the savings of more than $2,000 in FICA taxes, some people might argue that Candice should try to retire earlier than the end of the year. If that was the only factor, I might agree, but here are some additional benefits of waiting until Dec. 31 to retire that can overshadow the $2,000 savings:

• Waiting two more months will increase her retirement benefit by about $40 a month, or almost $500 a year for life.
• The additional 32 hours of leave she would accrue by Dec. 31 would be worth $2,553 before taxes.
• If she waits until Dec. 31, 2020 to retire, her payroll office would pay out the majority of the lump sum at the 2020 pay rate, since they must pay the leave at the pay rate you would have earned if you could have used the leave. If there is a 2.6% pay increase for 2020, then her hourly pay rate would be $81.85 and she would have all but 24 hours of her leave paid at this higher rate, for a difference of $861 in the gross amount of the payout.
• She would earn her full salary for an additional two months and be able to receive agency automatic and matching contributions on her TSP account, which could be worth around $1,400.
• She would not have to pay FICA tax on her final two months of salary, since she had exceeded the wage base. This would save her a little over $2,000.
• Receiving the lump sum leave payment could cause her to be taxed at a higher marginal tax rate when added to her income in 2019. (This might also happen in 2020, depending on her total income next year).

So if we add up the advantages of waiting until Dec. 31 to retire, the approximately $7,000 Candice would gain by waiting far exceeds the $2,000 she would have saved by retiring two months earlier.

If you’re among those who are retiring at the end of this year, congratulations! As you count down your final days on the job, I wish you a long and healthy life after your well-deserved retirement from a career of dedicated federal service.