Delivered on: Thursday, February 15, 2024

To watch on YouTube, CLICK HERE

Choosing the ‘Perfect’ Day to Retire:

How not to let short-sighted decisions ruin your big day:

• PENSION: Timing and amount of first check, formula used and creditable service
• LEAVE: Effects on the application of both the annual leave and sick leave
• OTHER BENEFITS: How benefits like SRS, SS, FEHB, FEGLI and TSP are impacted by your retirement date
• TAXES: The tax consequences directly tied to your retirement date

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Prefer to read instead? Here’s a transcript of this webinar:

Hello and welcome everybody to the FedImpact webinar today on “Choosing the ‘Perfect’ Day to Retire.” Now, based on the number of registrations we have for today’s webinar, I can tell y’all are ready to go and you’re just trying to put the final touches on choosing the right day, maybe the right month, maybe even the right year, but you’re just trying to get it right to make sure that you’re not losing out on any particular perks or benefits for waiting.

You guys know me. I’m Chris Kowalik. I’m the founder of ProFeds. I’m the developer of the FedImpact Retirement Workshop. Many of you have already been to that workshop, which I’m delighted to hear. And, of course, I’m the host of the FedImpact Podcast as well.

No matter what kind of platform you might hear our message from (webinars, podcasts, workshops, whatever it might be), we bring just a candid perspective to the decisions that people are making because I’m a big believer that when you know your numbers, your financial decisions become more obvious. And we can get stuck in some of the government speak on how the rules are written without really understanding how they affect you in real life. And so that’s really what we’re going to be talking about today.

Choosing the Perfect Day to Retire for Federal Employees

Choosing the Perfect Day to Retire: How not to let short-sighted decisions ruin your big day. Now, I share this subline here because oftentimes federal employees look at the wrong thing to determine their best day to retire. They’re not looking at the bigger picture of what they may be giving up by choosing to retire on a particular day, a particular month, a particular day of the month. There’s all sorts of things that go into this, and that’s really what today’s material is going to cover.

Agenda

So quick agenda. We’re going to talk about the real objective of choosing the right date. Gosh, we have to address the water cooler effect. Many of know exactly what I’m talking about here. We have to learn to balance all of these decisions. It’s not just looking at a calendar and putting your finger on a day.

There’s a lot of decisions that go into this. And like I mentioned before, we’re going to use a case study today to show the effect on all of the various benefits that you have, like your pension, your leave, your other benefits like health insurance, life insurance, those types of things, and certainly, on taxes.

The real objective

The real objective of choosing the perfect retirement date is to get the very most possible, get everything that you’ve earned, get it on time, get your priorities straight and get your ducks in a row. There’s a lot that goes in to choosing when to retire and if you’re not looking at the bigger picture of what you’re doing, you may very well miss out on one of these important objectives.

The water cooler effect

Let’s talk about the water cooler effect. I don’t know if you all have a water cooler at your office, but I’m going to guess there’s someplace that you all stand around and talk about money. You talk about benefits. You talk about the easiest culprit, which is the Thrift Savings Plan, right? Somebody in your office is maybe spouting off a little bit of what they think everybody else in the office should be doing and the decisions that should be made. But I’ll tell you, at this water cooler, there’s a ton of misinformation. There’s myths, and there’s a boatload of misplaced advice, and it spreads like wildfire. What works for one person may not work for everybody else.

It’s important to recognize that the person at the water cooler, who we refer to as the “self-appointed office expert,” (that’s the person who thinks they know what everybody else in the office should be doing).  I think they’re well-intentioned, but they often don’t know anything about you. They don’t know the rest of the story. They don’t know what your finances are like. They don’t know what maybe your spouse brings to the table. They don’t know about a disabled child. They don’t know about the mountain of debt that you might be in. They have no clue about you and your personal financial situation.

I would offer to you that you owe it to yourself to get true and accurate information. And make sure that if you’re looking for advice and you want to take advice from someone, let it be a licensed professional that knows what they’re doing. They know what they’re talking about, and they have an obligation to make sure to inform you prior to you making decisions. Very important. Again, I think the water cooler expert is well-intentioned, but they can give a lot of really misplaced advice that can really hurt a lot of people. Now let’s talk about balancing all of these decisions.

The Big Rock Theory

So many of you have seen this analogy before. It’s pretty well known. This idea of the big rock theory. There are three levels of decisions when it comes to really anything, but I’m going to put it in the context of federal benefits and the decision to retire. If we have a jar and we’re trying to fill it with big rocks, smaller pebbles, and little sand, we have to figure out what order we need to put these things in the jar. Rocks are those big decisions that have big consequences. The pebbles, in respect to the retirement decisions, these are medium-sized decisions with medium-sized consequences. And then the sand. That’s what fills all the little crevices. Those are small decisions with very small consequences.

I share this with you because, oftentimes, federal employees and really everybody, but I deal with feds all day, every day. This is what we do. I find that many times they get so narrowly focused on the sand, right, those little, tiny decisions that in the grand scheme of things don’t matter, and they lose sight of the big decisions that need to be made, the big rocks that really do move the needle for them. I want you to just be cognizant of this. When you start to get too in the weeds for itty bitty decisions, I want you to be sure to pick up your head and look around and say, “What are the bigger decisions, the bigger impact that I should be focused on?”

We have to get those big decisions right then we can move on to the medium decisions. And if we’ve got all that right, then, by all means, look at those small things. And I’ll point out some of those small things in today’s material that as long as we’ve got the big and the medium things taken care of, we’re cool to move on to the small decisions that are those fine-tuned opportunities for these benefits. But if we get the small stuff right but we miss out on the big stuff, you’re probably not going to be all that happy in retirement. We’ve got to get it all right and make sure we’re prioritizing the decisions that need to be made.

So, what this webinar will not cover, we are not here to give financial planning advice. I don’t know if your situation is going to look like our case study that we’re going to follow today as our example, but I think you can glean some perspective of the types of decisions that we need to be making as we’re choosing when the right time is to go, right. When that retirement date starts to fall right in line with our situation and the finances of retirement as well.

Case Study

Here’s our case study today. We’re going to follow a gentleman named Mike. He is under the FERS program, so if we have any CSRS on here, your numbers certainly will be different than what we’re going to see here, and some of your decisions would be different, but the vast majority of federal employees are under the FERS program. I’ll apologize in advance for any of the CSRS that happen to be listening.

This will not be lost information for you. So, I encourage you to pay attention to the themes that we have throughout today’s material. But the example that we are going to give is for a FERS employee. That is anyone hired for the first time after 1983. Here’s Mike’s current situation. He’s 58 years old. He has 25 years of service, and he’s making $80,000 a year as a federal worker. He plans to retire, and he’s debating between doing that now at 58, and kind of going to the span of 62. He heard there were some perks at 62, but he wasn’t really sure he understood, and frankly wasn’t going to be worth it to him because he’s looking at a contractor job. And really, this could be any kind of job, but it is very common for feds to move to contractor positions.

The pay is going to look good. He thinks, “Well, maybe it’s just better that I go to the contractor side, and I go ahead and retire and start drawing my pension.” And so, he’s got a lot of decisions that he’s faced with, and we’re going to follow those decisions on today’s webinar.

Best Day to Retire: Eligibility to Retire

The very first thing we have to establish for Mike is eligibility to retire. We would really hate for him to leave federal service only to realize that he was not eligible to retire, and so he ends up losing out on a lot of benefits. Let’s take a quick look.

Of course, you as an employee, looking at this, you want to make sure that you are eligible based on your age and your years of creditable service. And you have to pay special attention to any type of service like military time, non-deduction service where you are not contributing to the FERS program, any refunded service where you are a federal employee, and you left, and you thought you’d never ever come back, and so you took a refund of your FERS contributions, not TSP, but the pension contributions that you had made into the FERS program and then you’ve returned back to service. That’s considered refunded service. These three types of special service can drastically impact your eligibility to retire.

It is important that you understand what service counts and what doesn’t when it comes time to determine your eligibility to retire. If you have any of these types of service or even if you jumped around a lot. Maybe you’re the spouse of a military member, and so you relocated a lot, and there were some little breaks in service, and you’re trying to figure out, “How do I cobble all of that together?” Or, frankly, if you’re just curious, please get your certified summary of federal service. You can get it, at least the form to submit, at FedImpact.com/certify on that page. We, of course, link to the form, but we also give some instructions and important pieces for you to advocate for yourself to get this document. Some agencies give a little pushback.

They say, “No, no, this is supposed to be submitted when you go to retire.” And while I understand that that is a point that you submit this document, everyone will submit this when they go to retire. It’s way more important that you find out now that certain service can count and certain service won’t count or could count if you’re willing to make a deposit or pay some money to get credit for it. I would really prefer you to know that now before you apply to retire and then you’re surprised. And now you’ve got your eyes and your heart set on a particular retirement date.

You’ve submitted your package, and now they come back and say, “Well, in order for you to go right now, you’d have to pay this money.” And maybe it’s a whole lot more than you were planning for. And so, you pull back your retirement application and start over. Get this now. It is your right to get this document and to know for sure how your service is being treated in the eyes of the government for eligibility and pension calculation purposes. Your agency is going to complete the vast majority of this document. If you’re going to submit it as a standalone document, not as part of your retirement application, the only thing you’re going to put on this document is your name. Your agency’s going to complete the rest based on what they find in your service record, and they’ll return it back to you, and it will line item every single piece of federal service that you’ve ever had in your whole career.

Next to that, it will tell you if a particular piece of service does not count or at least doesn’t count yet, then you can take the next step of figuring out what you need to do. But it’s the first alert for you, it’s the first red flag, that action needs to be taken on a particular piece of service to get credit for it. Let’s talk about full eligibility versus this thing called MRA+10. On the far left-hand side of the screen, you’ll see the FERS full eligibility chart. You’ve probably seen this many times. Certainly, if you’ve gone through our training, either webinar or workshop base, you have seen us use this chart many, many times. As a FERS employee, to be fully-eligible to retire, you must meet one of three sets of criteria.

You either need to be age 62 with at least five years of federal service, age 60 with at least 20 years of service, or have reached your minimum retirement age, which is somewhere between 55 and 57, depending on the year that you were born, with 30 years of service. As long as you meet one of those gates, you are free to retire at will. You do not need approval from anyone. You don’t need the agency to offer you an opportunity to retire. This is your full eligibility. You can voluntarily retire and walk out the door. Now, on the far right-hand side, we have the minimum retirement age schedule. Remember, MRA is somewhere between 55 and 57, depending on the year that you were born. You can find exactly what your MRA is on this chart. So, let’s look at the middle box.

MRA+10

This is FERS employees who are retiring under MRA+10 eligibility. In order to qualify for this unique kind of retirement, you’ll need to have your minimum retirement age with at least 10 years of service. I want to put in contrast to the prior chart, for full eligibility, you have to have 30 years of service at your MRA, but for MRA+10, you only need 10 years. It’s 10 to 29 years of a service that you need for MRA+10 to work. This is a way almost like a FERS employee is creating an early out for themselves. We don’t call it an early out because we don’t want there to be confusion with the true early out program. But this idea that once you’re old enough, in this case, your MRA, as long as you have at least 10 years of service, you have some options.

However, there will be penalties applied to the pension because you’re not fully eligible. We’ll see those penalties here in just a bit, but it’s important to realize there are consequences to the MRA+10 eligibility. There are a couple of penalties that you’re going to receive, and so you really have to decide whether it’s worth it or not to you to take a benefit like this. Let’s take a look at our case study. So, Mike is debating, “Do I retire now, or do I retire later?” If he retires now, remember, he’s 58 years old, and he has 25 years of service, so he does qualify for the MRA+10.

He could go ahead and take that now to retire and go ahead and begin receiving the pension right away, and if he does that, there will be a permanent penalty assessed to his pension. You’re going to see the penalty here in just a bit. I’ll put some real numbers to all of this. The other option that he would have if he goes out on MRA+10 is he could choose to voluntarily wait to begin receiving the pension until he reaches age 60. At that point, he would avoid the penalty, and this process of voluntarily waiting to draw the pension to avoid the penalty is called postponing the pension.

MRA+10 is different than “Deferred”

Do not use the word deferred to talk about this scenario. A deferred retirement is very different than an MRA+10.

A deferred retirement is when there’s somebody who is too young to begin drawing a pension right away. They’re required to wait to draw their pension. That is a deferred pension. This is a voluntary decision that you are making. In order to avoid the penalty, you’re simply going to wait to turn the pension on. This is squarely your decision. With a deferred pension, that is the government’s decision on when you’re able to come back and draw it. So just don’t confuse the language because when you start looking up rules and you’re using the wrong language, you’re going to end up falling in the wrong regulations and seeing the wrong information. So that’s why it’s so important to use the right language.  So that’s what it looks like if he retires now.

Fully-eligible

If he were to retire at age 60 or later, he would be fully-eligible to go, right, because he would be 60 with, at this point, 27 years of service or 62 with 29 years of service. He would be fully eligible because he meets the normal requirements that we saw in the previous slide. He would be able to draw the pension right away with no penalties. Now, that’s not to say that his pension wouldn’t be different if he retired at 60 or 62. You’re going to see those calculations here in a moment, but there won’t be any true penalties assessed to it.

Best Day to Retire: High-3 Calculation

So now let’s talk about the High-3 calculation because, of course, the longer that someone continues to work and presumably they’re getting pay raises, normal January pay raises, step increases, maybe even true promotions, that is naturally going to change their High-3. So, the High-3 calculation is the average of the highest three years of consecutive earnings, but it only includes certain kinds of pay, and it’s important to understand what that type of pay is. I am not going to go into that in this particular webinar. But we’ve got a number of webinars that we do have that High-3… the details on the High-3, but it is important to know that not every single type of pay that you receive will count towards this calculation.

By far, the number one question that we get about the High-3 is, “Does my locality pay count?” And the answer to that question is yes. If you’re curious of a certain type of pay, you can pop that in the Q&A area. We’ll try to get to everybody’s questions. There are so many of you on today’s call. I’m not convinced that we’re going to be able to get to everybody’s questions, but we will do our very best. So be as clear as possible when you initially submit your questions so that we can get to you as easily as we possibly can. Most of the time, for the vast majority of employees, they’ve earned their High-3 average at the end of their career, and it stands to reason because we continue to get paid more and more as time goes on.

I do want to make a special note, though, that the High-3 average is not based on pay in a particular calendar year or a particular fiscal year, and you do not have to be in a pay grade for a whole year for that pay to count. If we’re looking at 36 months of consecutive earnings, which is that High-3 timeframe, every month that you are in a higher pay grade, your High-3 will be affected in a positive way because we add one higher month of pay, and we drop a lower month of pay, right. So, it’s going to continue to go that way. Every time you stay another month, it’s going to continue to add to your High-3. The only time that doesn’t happen is when there are no pay raises for a long time, and we don’t have any step increases, or you’re not moving or anything like that.

If your pay is staying level, then, of course, your High-3 won’t change the longer that you wait, but that is a very unusual thing to have happen. It’s not to say it hasn’t happened. It certainly has, but that’s not really the environment that we’re in right now. Okay, so let’s take a look at Mike’s High-3. So, in our case study, if you remember right now, he’s making about $80,000 a year. If he were to go today under that MRA+10 scenario, his High-3 would be $77,600.  We’re making some backwards math happen here to know how pay raises and step increases and that kind of thing have affected him over the last three years.

But we would add… But we would estimate that we’d be right at about $77,600. If he were to retire at age 60, his High-3 would be almost $81,000. And if he were to wait until 62, because remember, he’s continuing to work during all of this time, his High-3 would be nearly $83,000. “But we get this question all the time. “What am I better off retiring in December, or should I wait until January?” Well, this sounds like a really simple question. It’s actually kind of a loaded question because there are a lot of factors that go into this. But with respect to the High-3, this is where most people ask this question from is like, “Well, if there’s going to be a huge January pay raise, shouldn’t I wait until January to retire?”

Well, that January pay raise, if you were to retire, say January 31st, you would’ve only been in that new pay level for one month. So, it will count for one of the 36 months in your High-3 calculation. It’s not going to make some overwhelming change to your High-3. It will only affect one of those months. It’ll still be positive for you, but it’s not a huge decision. This is the sand that I’m talking about. Sure, we can get nitty-gritty and talk about December 31st or January 31st.

But if we don’t get the right year, what does the right month really do for us, right? If you’re not ready to retire, if you’re not eligible, if what you’re going to receive in your pension or your TSP isn’t enough for you to live the retirement that you want, those are the rocks.  This is the sand. When we’re trying to fine-tune that High-3 with respect to January pay raises and if you were to wait until January to retire.

Best Day to Retire: Pension calculation

So now the part that most of you care about, which is the pension calculation, like, “Well, how does my pension change or how does Mike’s pension change if he goes now, if he waits a little while, what’s that look like? What are his options?” Well, if you retire under these different types of scenarios, it’s going to yield some different pension calculations. So, we’re going to use different formulas to determine the calculation itself.

If you are FERS and you are under the age of 62, regardless of the number of years of service, you’re going to have one calculation If you are FERS who have at least 60… age 62 but less than 20 years of service. And then FERS employees who are at least 62 and have at least 20 years of service, right. All this just yields different calculations. And then keep in mind, like I mentioned before, if you go out under that MRA+10 scenario, you will have a penalty to your pension. Then the question is how do you either take the penalty or mitigate it or hopefully avoid it altogether by some of the next choices that you would make? Okay, here’s Mike’s situation. If he retires now, remember he’s eligible under MRA+10 rules, he could take a penalized pension right now at $15,520/year.

And remember, because he’s 58, we’re looking at how much younger under 62 is he because the penalty is 5% for every year he’s under 62. He’s receiving a 20% penalty on his pension if he wants to get it right now. Not just leave federal service now but draw his pension right away. This $15,520 is after a 20% penalty has been applied. The other option is he could voluntarily wait to draw the pension at age 60. At that point, he would have no penalty. Now, his pension would be $19,400/year. Again, this is not him waiting to retire until 60. It’s him going ahead and leaving service now at 58 and choosing voluntarily to draw the pension beginning at age 60.

If he does that, he doesn’t have the penalty, but remember, for two years, he didn’t get a pension at all. Now, if Mike’s plan is to go out and have a contractor job or any other kind of job, maybe this doesn’t matter to him. So that’s part of the decision here. “Does this income matter to me for those first two years, or am I better off just holding off and getting the full pension, the $19,400 at 60?” That’ll be a decision that Mike’s going to need to make in our example.

Next option is to retire at age 60. At that point, we know he’s fully eligible to retire. He can draw the pension right away with no penalties at that time, and his pension would be just shy of $22,000 per year. Because remember, he continued to work.

His High-3 average continued to go up. His number of years of service continued to go up as well. At 60, he’s not going to get the $19,400 that he would’ve gotten under the MRA+10 rules. He’s going to get a higher pension because he’s continued to work, and presumably, his High-3 has gone up. The other option is that he could wait to retire at age 62. If you remember, Mike had heard that if you wait until 62, there’s some extra perk in the actual pension calculation for the retirement pension, and he didn’t really know what that was, but he wanted to see the numbers. If he were to retire at 62, he could draw the pension right away with no penalties, and that pension would be $26,000 for 27 per year.

He’s continuing to work for two more years. He’s continuing to have two more years of pay increases that affect his High-3, and the calculation of the actual pension is different if he can get to age 62 with at least 20 years of service under his belt at that time. He moves to a different formula for the pension. It’s the 1.1% formula for those of you who have seen those formulas. It’s basically that, coupled with the High-3 change and the extra years of service, is yielding a pretty substantially different, nearly $5,000-a-year difference in the pension that he would receive.

So, a pretty big difference if he goes now and just takes the pension right away with the penalty at $15,000 a year, or if he waits four more years to get to 62, then his pension is over $26,000 per year. Big decisions. And Mike needs to weigh all of this based on the rest of his financial life to see does this make sense. And he’s got a big decision ahead of him.

Best Day to Retire: Sick Leave

Another decision is sick leave. Now, I’m going to share with you right out of the gate, this is sand. This is sand in the decision that you are making. This is where you are fine-tuning the decisions on when to retire. This should not be the basis of your retirement decision. This is just after you’ve decided that you’re ready to go. The finances make sense.

You feel like you’ve maximized all the other pieces that we’ve talked about so far, right? You’re eligible. You know what your pension’s going to be. It’s right in line with financially what you’re needing, then sick leave is just kind of the icing on the cake care because here’s the deal. When you go to retire, those sick leave hours that you have at that time will be converted to years, months, and days. There’s a whole calculation. I won’t bore you with the details of that. But there’s a chart that allows you to convert those hours into years, months, and days, and that length of service will be added into the pension calculation that you have. Couple of important points that I want to make. Unused sick leave only counts to increase your pension.

It never, ever, ever counts towards eligibility – so, it never helps an employee to retire sooner. It only makes the pension better once they’ve already fulfilled their eligibility obligation. Any extra days, once we’ve converted years, months and days, the sick leave into years, months, and days, and we added it to the other service that someone has, any extra days that don’t equal a full month, which is considered 30 days, those extra days are going to be discarded. I want to show you how it works so that you can have an appreciation for how this really plays out in real life. Again, let’s say that Mike has 25 years and 20 days of creditable service.

He has no military service, so we don’t have to worry about that, and then we have unused sick leave. When he does his calculation to determine the months and days of sick leave, it comes out to six months and 28 days. Many of you have heard erroneously that sick leave only counts in 30-day increments. That’s not true. It’s added to the creditable service that you have, your CSRS your FERS time, and anything that combined doesn’t equal 30-day increments that will be chopped off. In this case, this person has 25 years, six months, and 48 days of sick leave or of total service in the pension calculation.

For 48, I’ve circled that, we’re going to take 30 of those days and give Mike credit for another month of service. In total, he would have 25 years seven months in the pension calculation, and the 18 days that are left over would not count in his pension calculation at all. So, if I were Mike, I would find appropriate legal ways to use my sick leave. I wouldn’t use all 18 days. Maybe get a little close, you know, 15, 16 days. Go ahead and use that. And I’ll give a good example. Maybe Mike has a parent who needs to go to the doctor. They’re having surgery. They have rehab. They have whatever, and Mike is taking time off of work to go transport mom or dad. He can use sick leave to be able to care for a parent.

And while he might’ve normally just used annual leave because he thought, “Oh, well, I mean, I’m not sick. I’m just going to use annual leave.” He may be better off burning some of this sick leave again in an appropriate way. We’re not suggesting that Mike fakes an illness, but that we utilize leave, especially if it can’t count in retirement anyway. It doesn’t help the pension anymore. Those 18 days are just going to be lost. Mike might as well find a way to legitimately use that sick leave as he gets closer and closer to that retirement window. So, we need to look at what sick leave actually does for Mike.

For each extra month of service that Mike is able to add to his pension based on that sick leave addition to his creditable service, if he were to retire now, every extra month that he adds to his pension is worth $70 or $65 per year, not per month, per year to his pension. If he were to wait until 60, we’re looking at $67 a year. If he waits until 62, we’re looking at $76 a year to his pension. This is why I tell you that sick leave is the sand in this analogy. It’s not making a huge difference. Now, that’s not to say that Mike might not have a whole lot of leave, and it might feel like it’s a lot, but in the grand scheme of things, the decision whether he goes under MRA+10 or 60 or 62 is far more important than how much sick leave he has when he retires.

And I shared this with love. I want you guys to be looking at the right things that make the biggest impact for you and sick leave isn’t it. This is one of those things that once we’ve made all the other good decisions, then we can start to fine-tune our decision and get the most out of this decision as possible as far as how much sick leave he steps into retirement with. Now let’s talk about when the first pension check is due. I wish the government just made things a little simpler, but they don’t. So, here’s how this works. The pension begins accruing on the first day of the following month after someone retires, and then it’s payable to them the next month.

We want people to retire on the last day of a given month, no matter which month it is, so that their pension begins accruing the very next day. We don’t want there to be any gap between the time you’re paid as an employee and the time you’re paid as a retiree. We want one day for you to be paid as an employee, and the very next day, you’re starting to be paid as a retiree. Let me show you how this works on a timeline. Let’s say in Mike’s situation that he’s going to retire on January 31st. By the rules, his pension will begin accruing the first day of the following month or February 1st, the very next day, and it’ll be paid to him on March 1st.

Now, fair warning, chances are he’s not actually going to get a check on March 1st. OPM is going to be a little delayed in getting payments to him. It’s payable on that date, and he will eventually get backpay when OPM sorts everything out. But we have to be prepared from a cash standpoint that we’re probably not going to get paid on time for the first several months or at least not the dollar amount that we should. Aside from that, let’s see what happens if he decides to retire on February 4th. I’ll tell you why he might think this is a good idea here in just a moment. If he retires on February 4th, his pension begins accruing the first day of the following month, March 1st. It’s a long time from February 4th. And then that pension would be payable for the very first time, April 1st.

My question to you is, between February 4th and March 1st, was he paid as an employee? The answer is no. He’s not paid as an employee. He’s retired. But was he paid as a retiree? No, because his pension hasn’t started accruing yet. It doesn’t accrue until March 1st. For this period of time, between February 4th and March 1st, he is giving up 87% of his first check. Depending on which option he chooses, whether he goes MRA+10 or the other extreme, waiting until 62 to retire, that means he’s giving up between 1,100 and $1,700 of his very first retirement check for no good reason. But I told you there might be a reason that Mike has heard that February 4th is the way to go. And I use this as an example.

We’ve used February 4th for many years in our training. If February 4th happened to be the end of a pay period, he might’ve heard from HR or perhaps from other employees that you should always retire on the last day of a pay period so that you get your annual leave for that pay period. Well, what he’s hearing is correct that if you don’t complete a pay period, you don’t get your annual leave, or your sick leave for that matter. You don’t get that credited to you for that pay period. But what’s he giving up to get eight hours of annual leave? He’s giving up $1,100 to $1,700 of a check. How valuable is eight hours of annual leave? It’s a whole lot less valuable than $1,100 to $1,700. All of this is about balancing decisions.

If it just so happens that the last day of a pay period is on the last day of the month, either the 30th or the 31st or frankly in February the 29th, if that happens to be a leap year, whatever the last day of the month is, then we get a sweet little bonus that he also gets some extra hours of leave granted to him. But we do not want to trip over a dollar to pick up a penny, and that’s what we do when we don’t retire on the last day of a month. We end up… In order to get a couple of hours of annual leave, we end up giving up a huge portion of our first retirement check. So please don’t do that. Let’s look at the bigger picture, eyes wide open. We want to see the whole picture and know that the last day of the month is a huge priority.

Best Day to Retire: When COLAs begin

Next decision or area that is affected, which is when COLAs begin. Cost-of-living adjustments are what happens to retirees pay. This is not your locality pay. Locality pay is only paid to employees, and it is based on where they live physically in the country. COLAs are only for retirees, and it has no bearing on where you live. Everybody gets the same amount based on which retirement system they are in. It’s important to know that cost-of-living adjustments are paid to FERS retirees beginning at age 62. The month in which a FERS employee retires determines how much of the COLA they get in their very first year.

The question is, what percentage of the months in the prior year were they due a FERS pension? They will receive that percentage of the next year’s COLA. If someone were to retire at the age in which they’re 62, then their COLA is going to begin right away, but they may not get the full COLA based on how many months of the prior year they were actually retired. For Mike, if he were to retire now at 58 or at age 60, his pension will not receive any cost-of-living adjustments until he reaches the age of 62. It’s important to know that there is a loss of purchasing power that is forever for those years because what is actually happening during that time is that inflation is happening. Everything around Mike is getting more expensive but his pension stayed level. Another reason why waiting until 62 is a great perk.

It’s not to say it’s for everybody, and it’s certainly not the only part of that decision that is important. But recognizing that the pension… we want the pension to keep as best paced with inflation as possible and when there’s no cost-of-living adjustment until age 62, it makes it hard to justify retiring much earlier than that unless all the other math shakes out. If he were to retire at age 62, his pension will be subject to cost-of-living adjustments immediately. Now I say immediately, but I need you to appreciate that COLAs are announced in October. They go into effect for a December pay that is paid in January. And so, if he retires at different months throughout the year that he is 62, he still going to be subject to that first year look back to say, “What percentage of last year were you a retired employee and that you were subject to a FERS pension?”

That is the percentage that he’s going to get of the COLA. And then from that point forward, he’ll get the full COLA for every year after that. But that very first year, that COLA is likely going to be calculated at a little bit different rate. But when COLAs begin is the big piece here that we want to make sure to get right.

Best Day to Retire: Annual leave

Next decision, or at least area to consider, is annual leave. Now, I mentioned a couple of things about annual leave before this, but let’s kind of jump in. Mike is only allowed to carry over 240 hours from one year to the next. He’s not a CSRS. He’s not a postal worker. I know there are different hour limits for different groups of people, but by and large, the majority of federal employees are at that two 40 max carryover.

If he retires at the end of a given year, that would allow him to cash out the highest amount of annual leave possible. That would be the 240 hours that he carried over from the previous year and the 208 or so that he earned in the current year. I say 208 or so because that very last pay period, as long as it ends on December 31st, December 30th, or 31st, that pay period, cool, he’s going to get that annual leave. But if it happens to roll into January like it does most of the time, he’s not going to earn that extra eight hours. We may only be looking at 200 hours that he earned in the current year.

This lump sum payment that he’s going to receive for his annual leave is going to be paid likely a couple of weeks after he retires. When we’re thinking about the month of the year to retire, we have to think about when we’re actually going to receive this money. In Mike’s case, if he were to retire December 31st, the lump sum annual leave check will hit him in January (the following tax year). He’s not as worried about that kind of messing up his taxes in the year that he’s earning his full salary. Right now, he’s moving into a retirement income, and that looks different from a taxability standpoint for most people.

So important to know if he were to retire in November, maybe that’s right when he hits a certain amount of years or maybe right when he hits 62, whatever that might… whatever the decision might be around retiring in November, he’ll have a few fewer hours to count in the annual leave calculation, but the bigger hit to him is going to be that he’s going to receive that check in this tax year and that might throw him off. Now, it may be a total wash. It depends where Mike is in the tax bracket and how that money’s going to be treated. Would it be treated differently in the year in which he’s earning a full salary, or is it different when he goes to retire?

And it is all going to depend on how much income he has on both sides of that fence, but we have to recognize when that leave is going to be paid so that we can anticipate the taxes that are going to be due on that. For Mike, if he retires now and has 448 hours of annual leave, his payout would be about $17,000, $17,172. If he retires at 60, same thing. He has 448 hours. It’s going to be about $17,577. And if he goes at 62, same 448 hours, it’s going to be $17,991, right. It is not a huge difference for annual leave payout. It’s great to be able to make some more money the longer that you wait, but it’s not an astronomical number that should cause you to make this your primary decision lever.

Now, just remember, if he doesn’t retire on the last day of a pay period, we’re going to need to exclude the eight hours of annual leave from that calculation, and that would reduce his payout by about $300, regardless of which age he goes. It’s not a huge deal. And remember when we talked about retired on the last day of the month, and I showed you that he was giving up 87% of his very first pension check that was somewhere between 1,100 and $1,700 that first payout or the first pension check that he would’ve received, if he were to go to February 4th just to get his eight hours of leave, he would’ve gotten his extra $300, but he would’ve given up 1,100 to $1,700 to get it, right.

That’s the adage, “You trip over a dollar to pick up a penny.” We want to be careful that we understand the consequences of the decisions that are being made and how financially it ends up affecting us.

Best Day to Retire: Effect on FEHB & FEGLI

Next part is the effect on health benefits and life insurance. For both the FEHB and the FEGLI programs, they have a requirement for you to be able to keep coverage in retirement. In order to be able to keep it, you must retire on an immediate pension, and you must have this coverage in place for five years immediately prior to your retirement from federal service. You have to be enrolled in the program when you retire and five years prior. Very important.

We’re going to see this kind of come to life here in just a moment. Let’s take a look at Mike’s situation. Let’s assume that he’s met the five-year rule. Frankly, most federal employees have. If they’ve got life insurance, if they’ve got health insurance, chances are they’ve had it for a really long time. The five-year rule is not really a huge deal for most people. They just naturally met it. But let’s say he retires now. He’s going… He’s thinking about that MRA+10, and he’s not quite sure, “Do I go ahead and take the pension now with the penalty, or do I postpone and avoid the penalty? Maybe I will take that other job.”

There’s lots of decisions there. If he chooses to retire under the MRA+10 rules and he voluntarily postpones receipt of that pension to avoid the penalty, he will lose his health insurance and life insurance for all of that time where he’s not receiving his pension. In the example we gave, he’s 58, he was going to voluntarily postpone until he’s 60 when he can draw the pension with no penalty. From 58 to 60, he will not have any health insurance or life insurance from the federal government. He would need to pick that up with another employer, and we’d want to make sure that all of that was locked in so that there wasn’t any surprise health insurance issues or certainly a death that would really change things for his family.

Now, if he does that MRA+10… retires now, does the MRA+10 retirement, and decides to draw the penalized pension right now, then he gets to keep his health insurance and life insurance from now until infinity when he decides that he no longer wants. It’s just if he postpones receipt, he’ll lose that FEHB and life insurance while he’s in that postponement period. And then, once he begins drawing his pension, then the health insurance and life insurance are restored at that time. And no, it doesn’t start the five-year clock over again or anything crazy like that. The government’s basically just saying, “You could only have those types of benefits if you’re also drawing a pension.”

And if he’s not drawing a pension because he’s trying to avoid the penalty, then he’s also going to lose two probably pretty important pieces of benefits. If he does retire at 60 or later, he’s going to be allowed to keep all that coverage. Again, we assumed he met the five-year rule. He would be allowed to keep that coverage if that is his choice.

Best Day to Retire: Special Retirement Supplement

Next consideration is the special retirement supplement. This is the one that’s supposed to bridge the gap between the time an employee retires from federal service and the time that they’re eligible to draw Social Security benefits.

With the supplement, this is paid to most FERS employees who retire prior to the age of 62, and employees must retire on an immediate non-disability pension. It is based on a special percentage of your Social Security benefit that you are expecting at the age of 62. And it’s also based on your length of service under the federal program. If you get another job, you might give up some or all of the special retirement supplement. Mike, if he retires now, he will not qualify for the special retirement supplement. He had to have been fully eligible to retire. And if he retires now, he’s not fully eligible. He’s going out under that MRA+10 rule. So, he will give up the special retirement supplement.

He’s not just giving up the difference in the pension. He’s giving up a completely different benefit that may provide several hundred dollars per month, maybe more than that, and he’s simply not going to receive that if he goes out on MRA+10. If he retires at 60, he will qualify for the special retirement supplement. We’ll do some quick calculations here. If he has a Social Security benefit estimate of $1,200 per month, yours might be higher, lower, whatever that might be. And let’s say he has 27 years of federal service at that time, he would receive about $810 a month until he’s 62 when this benefit stops. But remember, Mike’s thinking about going out and getting another job.

If he goes out and gets another job and he makes more than $22,320 in that year, some or all of the special retirement supplement will go away. We have to look at the big picture of what we’re doing. If Mike’s just going to retire and truly retire and not get another job to have earned income, then this earnings test that we’re describing here won’t matter. But if he’s going to go take a contractor job making 50, 60, 70, $100,000, whatever it might be, he will have given up the special retirement supplement. He simply makes too much money, and it wasn’t intended for people who are going to go out and get another job.

We can like that or not. It doesn’t really matter. They didn’t ask us. These are just the rules about how the supplement works. Now, if he retires at 62, he will not qualify for the special retirement supplement because, remember, this benefit stops at age 62. The only way that he would get this supplement maybe is if he goes at 60, and that’s dependent on whether he has another job. Lots to consider for Mike. Lots of moving parts here.

Best Day to Retire: Social Security

Next up is Social Security. We kind of hinted at this with the supplement. There are many things that operate very similarly on the Social Security side, but kind of a different twist here.

The Social Security benefits that you see on your statement, as far as the estimated amount that you are going to receive at different ages, those estimates assume that you continue to work and contribute to Social Security. The longer that you wait to retire, the more strategies you might have to be able to draw a higher amount of Social Security benefits. And if a person draws Social Security benefits and earns too much, just like we saw in the supplement, if they’re under their full retirement age, which is somewhere between 65 and 67, they may give up some or all of the Social Security benefit. So, I actually want to answer a question that we get an awful lot of.

It’s really on their first bullet. I’m going to back up here. We get this question. “Okay, my Social Security statement assumes that I continue to work until these ages, but I’m not going to work until 67 or 70 years old. Who does that?” The question then becomes, “Well, how much less is my benefit going to be if I stop working at 58 or 60 or 62? How does that really change my benefits?” It’s a little bit hard to know how your particular benefits might change because I don’t know your situation, but I want you to understand how Social Security benefits are calculated as a whole.

I won’t bore you with the intricate details of the actual calculation, but they look at your 35 highest years of earnings where you are contributing to Social Security. And so, if you had at least 35 years of earnings, then… And that’s not just federal earnings, but that’s any other kind of job that you might’ve had prior to joining federal service. If you had at least 35 years of earnings, then chances are you continuing to work is not changing your calculation all that much. But let’s say you only had 20 years of earnings. All those other 15 years are counted as zeros when they’re averaging out your 35 years of your highest income.

Continuing to work longer and longer replaces those zeroes with real numbers. And so that’s a bigger indication of the Social Security benefit changing more and more as time goes on. So again, that gets into a little bit of the weeds, but we get that question a lot. I wanted to answer that before everybody runs to the chat to ask that question.

Let’s take a look at Mike’s situation. If he retires before the age of 62, of course, there are no more contributions to Social Security. We’re going to assume he doesn’t continue to work. If he did through that contractor job, of course, that might help his Social Security benefit, but it may cause a little bit of a reduction to the estimated Social Security benefit amount.

As I mentioned, as long as we had 35 years of earnings under Social Security, continuing to work doesn’t change at all that drastically. But certainly, if there were zeroes in their years where you were not contributing to Social Security because you were not working, that is when we see the big change. Just like we saw with the supplement, if Mike goes out and gets another job that has wages more than $22,320 per year, some or all of his Social Security benefit will go away. And keep in mind, he has a big choice on whether to draw Social Security benefits starting at age 62 all the way until 70, right.

And there are pros and cons to both of these ages and every age in between. It really is a matter of how much income he needs and is he working. We actually have plenty of factors above and beyond that. Is he married? What is the age difference between him and his spouse? Who’s the breadwinner? Who’s the biggest Social Security earner? With respect to how that benefit is paid out, a lot of that will determine who should draw first and when. There’s a lot of complexity that goes into this… what appears to be a simple decision. It’s not. There’s a lot that goes into maximizing Social Security, for sure.

Best Day to Retire: Effect on Continued Salary

The next decision is the effect on continued salary.  For Mike, if he continues working in his federal job, he will continue to draw his normal salary until he retires, right? That feels great, right? He might also decide to take that contractor job whether he goes at MRA+10 or later. He may go out and get another job, and that will replace some of that salaried income that he was used to as a federal worker. And all of this, this is a natural byproduct of if you have a continued salary, it means there are fewer years in retirement that you have to live off of your savings or your investments. By virtue of continuing to draw the salary, which by its nature is financially a good thing, right? Continuing to draw the full pay, continue to contribute to TSP, which we’ll talk about next.

We haven’t dropped down to the pension level just yet as far as income. We’re not having to draw Social Security. We’re not having to take money from TSP or other IRAs or other types of accounts. We can preserve that until such time that we actually need it. And it’s simply a byproduct of continuing to work that there are fewer years now you have to support yourself off of your retirement savings.

Best Day to Retire: Effect on the Thrift Savings Plan

Next up, the last section that we’re going to review is the effect on TSP. For federal employees who are retiring or separating from federal service in the year in which they turned 55 or older, you guys can access your TSP funds without penalty.

You’re still going to pay tax on it. Let me be very clear. If it’s traditional money coming out of TSP, there’s still going to be a tax bill, but you’re not going to have a 10% early withdrawal penalty, which is a blessing. I also want to share with you, if you happen to be law enforcement, firefighters, air traffic controllers, if you are age 50 or older or any age with at least 25 years of covered service, you get the same perk. You, of course, want to make certain that all loans are paid back, or a taxable event is going to be declared. If you’ve got $30,000 of loans that are outstanding and you choose not to pay them back, it’s going to be taxed to you. We want to be careful with all of this so that we address all those matters.

And keep in mind, the longer you keep working, the longer you’re able to contribute to the TSP and get the match. There’s some, again, natural byproducts to continuing to work. For Mike, he’s already past the age of 55, so there’s no penalty for any kind of withdrawals out of TSP. If he were to continue to work, he’d be allowed to contribute. And I’ll clarify this. Continue to work for the federal government. He’d be allowed to continue to contribute to TSP. And he was maxing out the TSP at $30,500 a year, and his agency’s match is $4,000 a year, right? 5% of the $80,000 that he’s making. So, he’s able to stash away more and more money if he continues to stay on with the federal government over the next couple of years.

Wall of Decisions

So definitely a lot to think about for Mike and probably for you too. In fact, this is a wall of decisions that are going to be unique to each one of you. I’ve given you some things to think about today, but all of your numbers and your circumstances are going to be a little bit different. Just like this wall of all these switches, all these levers that we can pull might end up affecting something else, right? We turn on one light, and it turns off another. We have to be thinking about the bigger picture of what we’re doing, and what decisions we’re making, and how they affect other decisions or other outcomes that we have.

Attend a FedImpact Workshop

I would encourage you, if you have not already done so, or frankly even if you have done so, get to a FedImpact Retirement Workshop.

This is in-person training. We talk about all of the benefits that we talked about today and more. There’s no cost for you to attend. And here’s what I love about these workshops. At the end, you’ll have an opportunity to indicate if you want some one-on-one help to get clarity on your benefits and really know your numbers. Because here’s the deal. We can try to pencil-whip all these numbers all we want, but if we get them wrong and we’re not thinking about the bigger financial picture, we are making decisions based off bad information. When you know your numbers, your financial decisions become obvious.

We want to help you be able to clearly see what these benefits are and what they’re not so you can make good decisions for your family. Ultimately, we want to help you to know how to be the hero in your own retirement story. And what I mean by that is we can blame lots of people for why things haven’t worked out for us or the rules they don’t bend in our favor. But at the end of the day, we all have decisions to make about our retirement, about our future. We want you to put yourself in the driver’s seat for those decisions. Not have retirement happen to you, but have retirement happen for you. And it only happens the way you want if you are involved.

I would encourage you to go to a retirement workshop. We don’t have them in every city, but we have them in a whole lot. So, you can go to FedImpact.com/attend, and you will see a list of all of our currently open workshops that you can register for. We’re always adding cities. So, by all means, if you don’t see your city listed there and the ones that are listed are just a bit too far for you, please let us know. There’s a form right there on that site that allows you to tell us where you are so that we can notify you when we bring a workshop to your location.

Thank you so much for joining us. I hope that you’ll stay connected to us. We’ve, of course, got a lot of benefits and news updates that we send out each week. As a reminder, you can find a workshop at FedImpact.com/attend, and to get in on that next webinar you can go to FedImpact.com/webinar. Thank you all very much. We’ll see you next month.