A few weeks back, I taught a FERS retirement class, and I heard myself mutter something I hadn’t thought of in years! “If I had a dollar for every time someone asked me ‘what’s the best day to retire?’, I’d be rich!” I chuckled because my Nana always said that when I was growing up! Funny how phrases stick.
You need to know the answer to this question BEFORE you select your retirement date: When does your FERS pension start?
Now, the technical answer is the first day of the following month after you retire. Huh?
It gets easier if we use a picture it. Let’s pretend that Frannie FERS retires on January 15th. Her pension doesn’t start until February 1st. This could leave Frannie in a bit of a “pickle” because she won’t be getting any pension until the next month.
That’s why the general rule of thumb in FERS is to retire on the last day of the month—no matter what day of the week!
I wish it were that easy (and I bet you do, too). But there’s a bit more to picking your retirement date. I'll show you some mistakes that you’ll probably want to avoid.
When you retire, any Annual Leave that you “have on the books,” or haven’t used as vacation, is paid out to you in a one-time lump sum payment. Pretty cool benefit, right!
But if you’re in a “use or lose” scenario with Annual Leave and want leave paid out at retirement, then you’ll NEED to retire BY that Leave Ending Date that year. Otherwise, you’ll miss out on that “use or lose” leave!
But isn’t it the same every year?
Here’s the challenge: The Leave Ending Date changes every year, so this can be tricky. Check here to see OPM’s Leave Ending Dates so that you can avoid this potentially costly mistake.
If you have a lot of Annual Leave saved up when you retire, you’re likely to get a pretty big check—BUT IT’S TAXABLE! This income is going to be added to all your other earnings that year.
Let’s just pretend that Sam Sample retired on October 31, and he’s earned most of his regular income having worked for most of the year. Now, Sam get this big Annual Leave payment and it puts him into a higher tax bracket. He’s worried because he had to pay more taxes unexpectedly in April.
“What happened last year? Why didn’t you call me?”
Talk with your tax professional. Ask if it might be better to pick a retirement date on the last day of the year or within the first few months of the year when your work earnings will be less so that your Annual Leave payment may be taxed at a lower rate.
Tax planning and retirement go hand-in-hand! (Unless you like tax surprises, which most of us prefer to avoid like the plague.)
A lot people plan to use money from their TSP when they retire. But they aren’t too clear about age restrictions before they pick their retirement date.
Normally, you must be at least 59 ½ year old (yes, the IRS really does mean that), to take monies out of your retirement savings account (like TSP or IRA). If you’re younger than that, you could have to pay something called an early age withdrawal penalty, plus normal income taxes. This can get expensive.
BUT there's an exception for your TSP. If you retire or separate from service (retire, quit or RIF) in the year in which you turn 55 years or older, you can take withdrawals from TSP without any early age penalty! It’s called a waiver.
Don’t be in such a hurry...
But here’s a mistake that some people make. Let’s say Frannie FERS retires at 57. She’s decided to transfer her TSP to an IRA right away, but she doesn’t know about the early-age withdrawal waiver inside of TSP. BOOM! Once she transfers her TSP to an IRA, she’s lost the waiver, and any withdrawals under age 59 ½ may be subject to early age withdrawal penalties (until she reaches 59 ½).
The Moral of the Story: If you’re retiring under age 59 ½, you should strongly consider leaving your funds at TSP because of the early age withdrawal wavier. You can read the full details from TSP here.
It’s true that your FERS pension begins the first day of the month after you retire, BUT that doesn’t mean you’ll immediately start receiving payments that fast!
Be prepared to wait because OPM’s retirement application processing time can vary quite a bit. I’ve seen 6 weeks’ time all the way up to 9 months before the full pension is received.
It can be a big mistake to retire without enough savings to take care of expenses—and money can get very tight fast. Even TSP can take 4-6 weeks after you retire before you can request payments. It makes good financial sense to start retirement with at least 4 – 6 months of expenses in a saving account.
Make sure that you know how to pick your retirement date like a pro—before you get ready for your retirement party! If you’ll have “use or lose” leave, check the leave end calendar so that you don’t risk losing that extra leave! Talk with your tax professional about how the extra income from the Annual Leave payment may impact your tax planning. Map out how you’ll access your TSP monies. And finally, have enough saved to wait while your retirement application is “in line” at OPM.
Now you can swiftly dodge the financial salesperson and study your TSP withdrawal options in a safe, educational-only environment.
If you’re planning to retire in the next five years, you don’t want to miss the upcoming TSP in Retirement Workshop, an online retirement training delivered via livestream webinar. Tune in from any device connected to the internet so you can strategize how you’ll approach the retirement pivot and get your TSP questions answered. The instruction is lively and illustrated, plus you’ll get access to a replay for 3 months.
© 2020 The Monroe Team, Inc.
FERS Blueprinttm is an educational division of The Monroe Team, Inc. DUNS Number: 032 057260. CAGE Code: 735L3. NAICS Code: 611710 Educational Support Services. Woman-owned, small business.
FERS Blueprinttm is not affiliated with, endorsed or sponsored by the Federal Government or any US Government agency. FERS Blueprinttm is educational only. No specific financial, retirement nor tax advice is being offered. The material presented is as current as possible, but is necessarily generalized. Facts and opinions are based on research and experience, but are not endorsed by the Federal Government. It is recommended to consult with your personnel office and/or the Office of Personnel Management (OPM) Retirement Office, Thrift Savings Plan, Social Security, Medicare, Internal Revenue Service, your legal, tax and/or other advisor(s).