Is retirement on your resolution list for 2019? If so, this is probably an exciting time. Perhaps you’re making plans to travel or spend time with family. You may be thinking about all the free time you’ll have available once you wrap up your career in government.
Technically, you can retire anytime you want, assuming you meet the requirements for age and length of service. However, it can be worthwhile to think carefully about the timing. Some dates are better than others in terms of maximizing your benefits.
As part of your Federal Employees Retirement System (FERS) benefits, you’ll receive a pension payment and a lump-sum annual leave payment upon your retirement. The timing of your retirement can impact both of these benefits. Below are two ideal times to consider for when to retire. A financial professional who’s experienced with FERS can help you develop your retirement strategy.
End of Month
The FERS defined benefit system is based on a monthly calendar. The annuity payments are made on the first of the month, and each payment covers the annuity due for the previous month. That means you start “earning” or accruing benefit payments at the beginning of the month following your retirement. You then receive your payment on the first of the following month.1
For example, let’s say you decide to retire on March 15. Assuming your application is processed in a normal time frame, your annuity starts accruing on April 1 and your first payment is made on May 1. As you can see, in this example, there’s a lengthy gap between your retirement date and your first payment. In fact, over the last 16 days of March, you’re not earning income or annuity payments.
You can reduce this gap by retiring at the end of the month. Assume you work until March 31. Your annuity starts accumulating the very next day, on April 1, and your first payment is processed on May 1. The payment gap is reduced to only a month.
Dec. 31 is an ideal retirement date not only because it’s the end of the month, but also because it’s the end of the year. That can enhance your retirement package in a few ways.
First, it gives you another full year of earnings. Assuming your last year of service is your highest-earning year, it’s included in your annuity calculation as one of your “highest three” years. That can increase your annuity payment, which can have a significant impact on your financial stability in retirement.
Retiring at year-end can also affect your payment for unused leave. As you probably know, you get a lump-sum payment for unused leave after you retire. If you can avoid using much of your leave in 2019, you can get a sizable payment for that amount shortly after you retire.
There are also tax benefits to retiring at year-end. If your last day of work is Dec. 31, you won’t receive your annuity payments or your unused leave payment until 2020. That income will be included on your 2020 return. It’s possible that you’ll have less income and thus have a lower tax rate in your first year of retirement, and that could reduce your total tax exposure.
Ultimately, your decision on when to retire should be based on your unique needs and goals. While it’s helpful to retire at the end of the month or the end of the year, there could be issues that make other retirement dates more ideal. An experienced financial professional can help you decide the best retirement date for your objectives.
At Benefit Resource Partners, we work specifically with government employees. We understand FERS and how it impacts your retirement. We welcome the opportunity to help you develop a retirement strategy. Let’s connect soon and start the conversation.
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