Best Date to Retire CSRS/FERS

Many federal employees choose to retire at the end of December or early January to coincide with the new leave year. There are two primary benefits to retiring during this timeframe:

1. Retiring before the start of the new leave year allows the employee to maximize their lump-sum payment for unused annual leave.
2. Both the lump-sum payment (which is fully subject to federal and state taxes) and the employee’s final paycheck will be directly deposited into their bank account in January.

This strategy can result in lower federal and state income taxes on the lump-sum payment since the retiree is likely to fall into a lower tax bracket in the new calendar year, beginning January 1. This is because the retiree’s income from retirement sources (such as CSRS or FERS annuities, traditional TSP withdrawals, and potentially Social Security) is expected to be less than their salary earned in their final year of federal service.

In this column, we will compare two specific retirement dates for an employee retiring at the end of leave year 2024: December 28, 2024 (which generally marks the end of pay period 25 for that leave year for most federal agencies), and January 11, 2025 (the end of pay period 26). The goal is to determine which retirement date offers greater financial benefits to the employee.

For this comparison, the following assumptions are made:

• The employee’s salary for the current year (reflected in their SF 50) is $125,000.
• The retiring employee is a FERS participant, age 62, with 32 years of service.
• The employee has carried over 240 hours of unused annual leave from leave year 2023 and has not used any annual leave in leave year 2024.
• The employee possesses six months of unused sick leave, which counts toward their FERS annuity calculation.
• The employee’s high-three average salary is $123,000.
• Federal employees will receive a 2.2 percent pay increase effective on the first day of the new leave year, January 12, 2025.

Calculating the Lump-Sum Payment for Unused Annual Leave

A lump-sum payment typically equals the salary the retiring employee would have earned if they remained employed until the end of the annual leave period. To determine this payment, the agency multiplies the number of unused annual leave hours by the employee’s applicable hourly pay rate. This rate is calculated by taking the employee’s annual salary (as shown on the current year’s Form SF 50) and dividing it by 2087 hours, excluding specific allowances intended solely for retention.

For employees on annual leave, the calculated hourly rate is adjusted by any applicable government-wide pay increase (and locality pay adjustment) that takes effect at the start of the new leave year.

Here’s an overview of the lump-sum payment calculations for the two proposed retirement dates:

Retirement Date: December 28, 2024

• Unused Annual Leave Hours: 440 hours (55 days total, comprised of 240 carried over hours plus 200 accrued during leave year 2024).
• Effective Retirement Date: January 1, 2025; first FERS annuity check issued on February 1, 2025.
• Hourly Wage Rate for Leave Year 2024: $125,000 / 2087 = $59.89/hour.
• Remaining Workdays After Retirement: 10 days (12/30/24 – 1/10/25), equal to 80 hours.

Lump-Sum Calculation for unused annual leave:

• Payment for Remaining Days:
  • 80 hours x $59.89/hour = $4,791.57.
• Hourly Rate Adjustment (starting January 12, 2025):
  • $59.89 x 1.022 = $61.21/hour.
• Payment for Remaining Unused Annual Leave:
  • 360 hours x $61.21/hour = $22,035.60.
• Total Lump-Sum Payment: $4,791.57 + $22,035.60 = $26,827.17.

Retirement Date: January 11, 2025

• Unused Annual Leave Hours: 448 hours (56 days total, consisting of 240 hours carried over plus 208 hours accrued during leave year 2024).
• Effective Retirement Date: February 1, 2025; first FERS annuity check issued on March 1, 2025.
• Hourly Wage Rate for 2025: $61.21 (determined above).

Total Lump-Sum Payment for unused leave:

• Payment: 448 hours x $61.21/hour = $27,422.08.

Comparison Summary

By retiring on December 28, 2024, the employee benefits from an additional monthly annuity check of $3,664. However, their lump-sum payment for unused leave will be $595 less than if they retire on January 11, 2025. Therefore, the net financial benefit of retiring on December 28, 2024, over January 11, 2025, amounts to $3,069 ($3,664 – $595).

Key Takeaways

1. Retiring at the end of December is financially more advantageous than retiring in the second week of January due to the extra FERS annuity check.
2. A larger government-wide pay increase at the beginning of the new leave year diminishes the net dollar advantage of retiring in December.
3. An advantage of retiring at the end of the leave year is the ability to contribute one final time to the Thrift Savings Plan.
4. Regardless of retirement date, the last paycheck and lump-sum payment for unused leave will be deposited in January, potentially resulting in a lower tax burden in 2025 due to the retiree being in a lower income tax bracket.

About Edward A. Zurndorfer

Edward A. Zurndorfer is a Certified Financial Planner (CFP®), Chartered Life Underwriter, Chartered Financial Consultant, Registered Health Underwriter, and Enrolled Agent based in Silver Spring, MD. He offers consulting services on tax planning, federal employee benefits, retirement, and insurance through EZ Accounting and Financial Services located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019.

Disclaimer

The information provided on MyFederalRetirement.com is intended for general informational purposes only and has been gathered from reliable sources. It is not a substitute for professional legal, accounting, or other expert services. For specific advice, individuals should consult a qualified professional. For further details, please review our Terms of Service.