Video Transcript
Okay, fantastic. I wanna dive into the, today’s material. And I’m in a different location, so my my technology deficiencies are gonna be showing in this class. But at least you guys hopefully be able to see what I’m trying to share over here. Hopefully you guys can see this. Okay, fantastic.
So best time to retire. The best time to retire. Now you may say, “Stefan, does it really make a difference the best time to retire? Once I’ve already chosen the age that I’m planning on retiring, does it make a difference, when in the year I retire? Does it make a difference when in the month I retire?
Does it make a difference when in the pay period I retire? Does it make a difference which day I retire?” And the answer to all those questions is yes. Actually, it makes a difference. We’ll actually see how one day could translate into thousands of dollars of lost benefits if you get it wrong. So without further ado, let us dive into today, the best time to retire.
There are a number of considerations, and I’ll try to go through them as best as I can. The first consideration is as follows. When you retire, you wanna have as few days left over as possible. What do I mean as few days left over? So the way it works is as follows. OPM is gonna give you a pension based upon your years of service and your months of service, not days.
Days do not get added to your pension. In order for days to be added to your pension, the days have to add up to a month. And how many days add up to a month? Is it thirty? Is it thirty-one or February twenty-eight? Does it make a difference which month? And the answer is no. For OPM, thirty days add up into a month.
So it doesn’t literally have to be c- the days in a calendar month, it just has to be thirty days of service. Thirty days of service adds up into a month, and that month you will get credit for. So you’ll get credit for da- for years, you’ll get credit for months. However, any days that do not aft- add up to thirty, you will not get credit for that.
Now let me warn everybody in this class, everybody here should brace yourselves. You’re all gonna have some denomination of days that goes into the trash. That is very normal. In fact, let me give you guys a couple of illustrations so you can see what I mean that your pension’s based on years and months, but the leftover days go into the trash.
I’m gonna give you guys two illustrations on this slide right over here So as you guys can see on this slide over here, this is a person that’s gonna be retiring December 31st, 2026. December 31st, 2026. So that means the date of final separation is gonna be 2026, December 31st. So when you look at your retirement application, this person, when they fill out their retirement application, their date of files final separation is gonna be December 31st, 2026, which is a very popular day.
Many people retire on December 31st. Now, we’re gonna get into whether that should be the case. Should you retire December 31st? I’m not ready to answer that question just yet, but just so you know, there are many people that retire December 31st. So in this case, this person is aiming to retire December 31st, 2026.
Now, they have a service comp date. Let’s be very clear. When I say service comp dates, what I’m talking about is your service computation date for retirement computation, as opposed to a service comp date for leave accrual. Many people, their service comp date for leave accrual is the same thing as their service comp date for retirement.
That’s the way it is for many people. However, there’s also other people where they have two different service comp dates. They have one service comp date for leave purposes, and that’s the date that they see on their leave and earning statement. But they may have a totally different service comp date for retirement computations.
If you guys ever look up their benefit statement, usually the benefit statement has a breakdown. What’s your service comp date for leave? What’s your service comp date for retirement? Again, they might be the same dates, but they might be different. But in this case, this person’s ser- service comp date was in 1996, in August 20th of 1996.
So when you add up this person’s total service, you take the date of final separation, you subtract the service comp dates, and that tallies up to thirty years, four months, and eleven days. Their pension is gonna be based upon thirty years and four months. But what happens to the eleven days? Trashed.
Trashed. Okay? So that means eleven days is gonna go into the trash can. Now, as I mentioned, everybody here should brace themselves. We’re all gonna have some denomination of days that goes into the trash can. The question is, how many days going into the trash bothers you? So for example, if I look at the second illustration over here, the second illustration, which is somebody whose date of separation is gonna be- July 18th.
Okay? So now the way that works is when, if you see the, on the bottom over here, the rules are whatever your date of separation is going to be, you add one day to the date of separation. So if your date of separation is July 18th, so you add a day to that, so it’s gonna become July 19th in this example.
Okay? Just follow me in the example. So this person, when they’re doing the total service computation, they’re gonna take their date of final separation, which is July 18th, you add one day, so it’s July 19th 2035, and they’re gonna subtract their service comp date. Now, in this case, their service comp date was August 20th in the year 2000.
Okay? So this person, when they retire, they will have a total of thirty-four years, ten months, and twenty-nine days. Their pension, however, is gonna be based upon thirty-four years and ten months. What happens to the twenty-nine days? Trash. Trash. Now, let me ask you something. If you saw twenty-nine days going into the trash can, would that bother you that’s pretty annoying. Okay? What does this person need to do in order to get credit for the month? They just need to work one more day. Do you hate your job that much that you can’t even work one more day? Now, the truth is, I’m gonna give you another example soon of how sometimes working one more day opens up a whole other can of worms.
But my point is, if you saw 29 days going into the trash can, would that bother you? I think so. What about 28 days going in the trash can? What about 27 days? How low can you go? At some point, you’re just gonna say, “You know what? Keep your days. I don’t need your days anyhow.” But everybody here should brace themselves.
There’s gonna be some denomination of days that goes into the trash can. What we’d like to do is we’d like to minimize those days going to the trash can. Now, the truth is, I just mentioned that this person with 29 days, if they wanna get credit, you know what they need to do? They need to work one more day.
However, the truth is, they don’t have to work one more day. There’s another way of adding service to your total service, and that is with your unused sick leave, with your unused sick leave. So let’s talk about unused sick leave. Now, for those who don’t know, your unused sick leave is gonna be converted into service time, and that service time is gonna be added to your pension.
Does anybody here know, is there a maximum amount of sick leave that you could add to your pension? And the answer is no, there is no maximum. I’ve seen people retire with over 5,000 hours of sick leave. 5,000 hours, that’s a lot of time. Now, one second, if there is no maximum, so what’s the number that I’m showing you on this slide?
This number 2087, what does that represent? If there’s no maximum, so what’s this 2087? So for those who know, or for those who don’t know, 2087 represents the amount of sick leave hours that translates into one year of service added to your pension. So if you have 2087 hours of sick leave, you could add one year to your total service.
But you don’t need 2087. You can retire with more than 2087. You could retire with less than 2087. Whatever denomination of sick leave that you have gets added to your pension. Now, I’m gonna give you guys an example. I’ll give you guys an example of sick leave that gets added to your pension. Okay? So I’m gonna go to one of my charts over here.
Okay? Hopefully you guys can see this chart. And let’s say a person has 1,000 hours of sick leave. I’m just making that number up, 1,000 hours. So let’s look for the number 1,000 on this chart. Now, I’ll make it a little bit larger so you guys can see. And oops, right over here. 1,000 hours. Do you guys see that, 1,000 hours?
Actually, the truth is I don’t see 1,000 hours because 1,000 is in between two numbers. Whenever your sick leave balance is in between two numbers, which number does OPM give you credit for? Do they give you credit for the higher value or the lower value? And the answer is the higher value. Believe it or not.
I know, it’s so generous. OPM is so generous. So in this case, they’re gonna give you credit for 1,003 hours. Now, if you guys are looking at this slide, you should see that 1,003 hours converts into a certain amount of time. How much time? So if you’re looking over here, 1,003 hours converts into five months, and how many days?
23 days. Five months and 23 days. So let’s come back to what the slide I was showing you guys before. So the slide I was showing you before, right over here So the slide I was showing before would all be here. So again, let’s remember, we’re adding 1,000 hours or 1,003 hours of sick leave, which as we said equals five months and 23 days.
So what that means is we’re gonna have to add five months and 23 days to these numbers. So let’s go to the first example. This person ended up with 30 years, four months, and 11 days. What happens if we add five months and 23 days to the service? Let’s see. 23 plus 11 equals 34, right? 34 days is one month and four days.
So that means that eq- that this person, their sick leave got them not just five months and 23 days, but as a result of adding it, now they have six months and four days left over, okay? So what that means is the four days left over, that goes into the trash can. By the way, as an aside, if you saw four days going to the trash can, you know what you might as well do?
You might as well get sick. I’m not joking. You sh- might just spend down that sick leave. If it’s going to the trash, you might as well spend it down. Okay, so those four days go into the trash can. However, let’s not forget to add the six months. Remember, it was five months and 23 days, but the days added up to 30 plus four, four went to the trash, the 30 converted to the month.
So now we have six months added to the four. So six plus four equals 10 months. So this person’s pension is gonna be 30 years and 10 months. Beautiful. They didn’t have to work an extra day, they just had their unused sick leave added to their total service. And you could do the same thing in the next scenario.
So let’s go down to the next example, and let’s say this person added five months and 23 days. So if you add 23 to the 29, what does it equal to? That equals one month And 22 days left over. Ooh. So what happens to those 22 days? Trash. And once again, if you saw 22 days go in the trash can, you might, you know what you might as well do?
You might as well get sick. You might as well use up those sick leave as much as you can. This way less goes into the trash. But at least you’ve squeezed out an extra month that’s gonna be added to your service. So again, we had five months, and then they got another month because the 29 plus the 23 gave them another month.
So that’s six months. So 10 months plus the 6 months, that’s 16 months. 16 months, as we know, is one year and four months left over. So add a year, 34 plus one year, that’s 35 years and four months. So this person’s pension’s gonna be 35 years and four months. That’s gonna be their total service. So that’s what happens to your sick leave.
Now, the truth is, you could retire with a balance of sick leave. You could also retire with a balance of annual leave. Annual leave. Now, annual leave, that does not get added to your to your credible service. No. The annual leave, that get, gets paid out to you lump sum. And does anybody know, is there a maximum amount of annual leave you could retire with?
Yes, there definitely is a maximum. So the way it works for most employees, most GS employees, the way it works is let’s imagine you have a carryover amount of t-two hundred and forty hours. So that means you could start a year with two forty. And then over the next twenty-six per-pay periods, you could accrue eight hours over the next twenty-six pay periods.
So if you do twenty-six times eight, that’s an additional two oh eight, right? So two forty you start, and then two oh eight you accrue. So two forty plus two oh eight, that equals four hundred and forty-eight. That’s for regular GS employees. If you’re a senior executive, you carry over seven hundred and twenty.
If you have foreign service, you can carry over three hundred and sixty. But for most federal employees, it’s gonna be you carry over two forty, plus you could accrue an additional two oh eight. So two forty plus two oh eight equals a maximum of four hundred and forty-eight hours. So for most GS employees, the max, the maximum amount of annual leave you could retire with is four hundred and forty-eight hours.
Now, I have news for you. If you have a goal to retire with the maximum four hundred and forty-eight hours, I have news for you. Your retirement date has already been preselected for you. What do I mean it’s been preselected? So the way it works is in order to accrue s- accrue any leaves, sick leave, annual leave, leave accrual only happens at the end of a pay period.
And if you want to retire with the maximum amount of of annual leave, if you want to retire with the an- the maximum amount of annual leave, that means you have to retire on the very last day of the very last per-pay period of the leave year. So for example, the twenty twenty-six leave year, as you guys can see on this slide over here, the end, the last day of the twenty twenty-six leave year is not December thirty-first.
It’s actually January ninth of the next year. It’s the s– it’s the end of this leave year, but it puts you into the next calendar year, okay? So if a person has it as a goal to retire with the maximum amount of annual leave, that means you have to work to the very last day of the last pay period of the leave year.
And the leave year, as we can see, for twenty twenty-six ends January ninth, twenty twenty-seven. So your retirement date has already been preselected for you. Okay? Now let me just emphasize something, that in order to accrue the leave of your final pay period, you have to retire at the end of the e- of the pay period.
Does anybody know what day of the week is the last day of a pay period? And the answer is the pay periods end on Saturdays. Can you retire on a Saturday? Yep, yes you can. You can retire on a Saturday, you can retire on a Sunday, you can retire on a legal holiday if you really wanted to. The point is that your date of final separation, even though you’re not showing up to work, but your date of final separation has to be that Saturday in order for you to accrue the leave of your final pay period.
Because again, leave accrual only happens at the end of a pay period. So somebody’s retiring December 31st. Let be, let’s be very clear about that. That person may retire, may be retiring at the end of the calendar year, but it’s gonna be in the middle of the final pay period. So that means that they’ll get paid until December 31st, but they will not accrue any of the leave that theoretically they would’ve accrued until the date of December 31st.
Okay? So keep that in mind. Keep that in mind. Fantastic. Now before I go further, we just spoke about sick leave, we spoke about annual leave. Sick leave gets added to your pension, annual leave gets paid lump sum. Let me ask you a question. What’s better? Is it better to retire with the biggest balance of leave possible, or is it better to spend down the leave as much as possible?
What’s better? I’ll give you guys a couple of examples. So one of my clients, they were forced to retire medically. They had some medical conditions and they had to undergo a surgery, a surgical procedure, and the surgery was gonna sideline them for an entire month. And so they said, “You know what?
They’re going to retire instead.” And w- here are the timing. Their plan was they were gonna retire at the end of June, and then they were gonna have a surgery at the beginning of July, and the surgery was gonna sideline them for the entire month of July. That was their strategy. I proposed a different strategy.
I said, “You know what? Instead of retiring at the end of June, why don’t you just have your surgery at the beginning of July and use your sick leave for the rest of July?” Spend down your sick leave at the end of, through the month of July and then retire at the end of July. I don’t know if you guys are noticing, but if this person uses my strategy, they’re gonna get at least five benefits from their sick leave.
However, if they don’t use my strategy, if they use their strategy, they’re only gonna get one benefit from their sick leave. What’s the one benefit they’re g- they’re gonna get from their unused sick leave? The one benefit is that sick leave gets added to their pension. Great. However, if you think about it, if they use my strategy, the month of July gets added to their pension.
So it’s one for one. They both get add time to their pension with their sick leave. However, by using my strategy, there’s additional benefits. For example, they g- they get paid for their sick leave. Also, they accrue more leave while they’re on their leave. Also, TSB contributions and matching for another one or two more pay periods.
Also, pre-tax FEHB premiums. I don’t know if you guys know this, that your FEHB premiums are pre-tax while you’re working, but once you retire, your FEHB premiums are no longer pre-tax. So this person, by extending their service, they got another pay period or two pay periods of pre-tax FEHB premiums. Beautiful.
Now, to be fair, in order to use this strategy, you have to have a legitimate sick excuse. You can’t just be sick of work or can you? Okay? But you know what? Even if you don’t have a legitimate sick excuse, you could use my same strategy with your annual leave. Let’s give an example. Let’s say a person was planning on retiring at the end of June, and then once they’re retiring, they’re going on vacation.
They’re going on a trip to Tahiti. Beautiful. That was their strategy. Let me propose a different strategy. Instead of retiring at the end of June, why don’t you just use your annual leave in July in Tahiti, and then at the end of July, that’s when you retire. Once again, are you noticing that if they use my strategy, they’re gonna get five benefits from their annual leave?
If, however, if they don’t use my strategy, they’re only gonna get one benefit from their annual leave. The one benefit that they get is they get paid lump sum for their annual leave. That’s it. However, if they use my strategy, they get paid in the month of July with their annual leave. So they’re getting paid for their annual leave, so it’s one for one.
But number two, they add– they have July added to their pension. Number three, they’re accruing more leave while they’re on leave. Number four, TSB contributions and matching. Number five, pre-tax FHP premiums. Once again, instead of getting only one benefit, I’m allowing them to get five benefits from their annual leave.
Now, the truth is, even this strategy of using your annual leave that, as I just described, is technically a no-no. There’s something called terminal leave. Terminal leave is basically when people, they sail off into the sunset, spending down their leave. OPM is not happy when people ride off into the sunset spending down their leave.
Now, let me share with you a couple of things. Number one, even though technically it’s no-no, however, I have seen federal employees at different agencies do exactly this. So I think it’s going to depend on not just your agency, but also the dynamic in your office, your relationship with your boss how urgently that, that position is gonna be filled.
So that may be a factor in whether or not you’re gonna be able to pull it off with your annual leave. But even if your boss gives you some pushback, there’s a very simple workaround You could come back to work the very last day. So that means you could spend down your annual leave in Tahiti, and then don’t just retire the last day, come back to work on the last day.
This way, you circumvented the terminal leave. Okay? Fantastic, amazing, unbelievable. Now, with this being said, that the the annual leave gets added to your pension, and the sick leave… I’m sorry, the sick leave gets added to your pension, the annual leave gets paid lump sum, and you have the way of getting five benefits from your sick leave, and you get five benefits from your annual leave.
Let me just point out what both of these cases have in common. In both of these cases, with the sick leave, with the annual leave, all I did was I found somebody who was planning on retiring on a specific date, and I said to that person, “You know what? Instead of retiring on that date, why don’t you just act retired?
Pretend you’re retired.” And by pretending you’re retired, that’s how you extend your service with your leave. That’s the trick. The way you get the five benefits is by extending your service by spending down your leave. Okay, fantastic. So we just spoke about your leave. And the leave accrual only happens at the end of a pay period.
So by the way, let me just finish this thought. Because leave accrual happens in a, at the end of a pay period, when you hear people choosing their retirement date, very often they will choose a date that coincides with the end of the pay period. Now, as I mentioned before, December 31st may be a popular date, but December 31st is not always the end of a pay period.
In fact, it’s usually not the end of a pay period. So we have many people that retire in the middle of a pay period. And let me just say something, it’s okay to retire in the middle of a pay period. I see people drive themselves bananas and they say, “Stefan, the stars have to align perfectly.” I have news for you, it’s very hard to have all the stars align perfectly.
And if you end up retiring in the middle of the pay period, it’s okay. It’s okay. You’ll still get paid for the work that you’ve done, you just won’t accrue whatever hours of leave you thought you should accrue. Okay, fine. Fantastic. Fantastic. Let’s go a little bit further. Let’s go a little bit further.
Another consideration for choosing a retirement date is your pension starts the month after you are deemed retired, the keyword being deemed. And who does the deeming? Do you deem yourself retired? Very nice what you deem yourself, but guess what? OPM has to deem you retired. And in order for OPM to deem you retired, here’s the rule for FERS employees.
The rule for FERS employees is you are not allowed to work any day, not even a single day of a calendar month, and still be deemed retired for that month. Meaning, let me say it differently. If you work even one day in a given calendar month- You will not be deemed retired for that month. So let me give you guys an example.
Let’s say a person, their last day of work is July 1st. So July 1st is their last day at work. Now, between you and me, how much work actually happens on your last day of work? Not so much. You come to the office and you have goodbye parties, and you obviously, you have to sign off on some paperwork, turn in your badge, turn in your laptop, people give you hugs and kisses goodbye, and then you’re off to Tahiti.
And you send a postcard to the office, and you ask the people in that office, “Does that guy look retired?” And they say, “Oh, yeah, he’s definitely retired.” Ask OPM if that person’s retired, and OPM’s gonna say wasn’t he still an employee on the first day of the month?” Ooh, so I’m sorry. Because this person was still considered an employee on the first day of the month, he’s not deemed retired for the month of July.
So one second, if he’s not deemed retired for the month of July, when is he deemed retired? And the answer is he’s deemed retired the month of August, and the pension starts the month after. So that means he’s gonna get a pension check at the beginning of September. Now, here’s the thing. That pension check, which he gets at the beginning of the month of September, that pension check is only for the month of August.
Okay, the way the pensions work is you get paid at the beginning of the month for the previous month of being retired. Okay? So if a person gets paid at the beginning of September, it’s for the month of August being retired. But one second, wasn’t this person retired in the month of July as well? No. You thought that they retired, but OPM didn’t deem th- deem him retired.
So what that means is that the month of July just passed them by, and guess what? They got no retirement compensation because they weren’t deemed retired in the month of July. And guess what else they were not doing in July? They were not working in July. Okay? Only July 1st was the last day of work, but everything else, the rest of that month, for the next 30 days, they were not working.
So it turns out for those next 30 days, they’re not gonna get any work pay because they weren’t working, and also they’re not gonna get any retired pay because they weren’t deemed retired. So what that means is they lost whatever compensation they could have gotten that month. That month is what I call no man’s land.
They’re not working, they’re not retired, so whatever compensation they could have gotten that month is gone. Now, let me translate what that means, ’cause that’s a substantial amount of money. Some of your monthly pension checks are gonna be like 4,000 bucks a month. Some of them are gonna be $5,000 or $6,000 a month and some even more, especially if I’m talking about the CSRS people, okay?
By the way, CSRS people, they have a different consideration. So if there’s any CSRS people in this class, just so you know that the first people, if they work one day or two days or three days into the next calendar month, they will not be deemed retired. But CSRS, you have the ability to work w- the first, second, or third day of the next month and still be deemed retired for that month.
So let’s go back to the example I just gave you. The person who July … who retires July 1st are they deemed retired for the month of July? It de- it depends whether they’re in the first system or the CSRS system. If they’re in the first system, they are not deemed retired for the month of July. But if they’re in the CSRS system allows a person to work the first day and the second and the third day of the month and still be deemed retired for month of July.
Okay. But my point, let’s go and just try to wrap up this point, which is as follows: if you guys are choosing the best time to retire, you do not want your retirement date to be early in the month because then you have a whole bunch of no man’s land, basically a whole bunch of time that you’re not gonna get compensation for.
So what you wanna do is you wanna make sure that you schedule your retirement date for the end of the month, or as close to the end of the month as possible. Does not literally ha- have to be the very last day, okay? But as close to the end of the month as possible. The closer to the end of the month, the less no man’s land.
The early in the month, the more no man’s land. So you definitely wanna minimize the no man’s land by pushing your retirement date as close to the end of the month as possible. By the way, if anybody’s paying attention, let me just back up a couple of slides. Remember what we pointed out, that the leave year for 2026 ends January 9th.
So I have news for you. If you chose to retire January 9th you know what that means from January 10th for the rest of January? You’re in no man’s land from January 10th for the rest of January, okay? So that’s 21 days of no man’s land. That’s 21 days of lost compensation, okay? So again, I would encourage my, my clients, and I encourage you all that when you’re choosing the best time to retire, you should be aiming for a date that’s as close to the end of the month as possible.
It doesn’t literally have to be the last day. Now, I’m gonna take this one step further. Let’s go back to this slide over here. I hope you guys can see my screen. On this slide over here, so as you can see, this person is retiring with 29 days going into the trash can. That hurts. As we said, 29 days, oh, come on, you’re so close.
Do you hate your job that much? Can’t you just work one more day? Stephan, what if I told you I’m willing to work one more day? I really am. But the problem is, let’s just say that one day is gonna be the first day of the next calendar month. So now this person has to decide should they work that one more day?
If they work that one more day, they will be in no man’s land for the next month. They’ll lose that month’s compensation. What did they gain? Oh, you know what they gained? They gained that the 29 days plus that one day now equals 30, so they got a credit of a month in their pension. So the question basically is, what’s more valuable, getting credit for that one, one month to your pension or avoiding no man’s land?
Now, if you think about it, it’s gonna vary c- case by case. For some peoples, their pensions are not so strong, some people’s pensions are stronger. But for most federal employees, it’s gonna be valuable, it’s gonna be more valuable to not work that extra day. Meaning, do not enter no man’s land.
Let me explain why. If this person works one more day, they get one month added to their pension. What is the value of one month added to your pension? So for those who don’t know, there’s a formula. For every year of service, you get 1% of your high three average salary if you’re the first system. 1%, okay?
Some people get 1.1, I’m not gonna get into that math right now. 1% of your high three average salary. That’s if you work one year. What if I only work one month? If I add one month to my se- to my pension, so that means I’m gonna get one twelfth of 1% of my high three average salary. So let’s just say your high three, let’s just pretend, is $200,000.
So 1% of 200,000 is $2,000 a year. However, one twelfth of 1% would be what is it equal to? 175 bucks. So that means this person will have increased their pension by $175 a year. Okay, so that sounds nice. They increased their pension by 175 bucks. Yeah, but they entered no man’s land, and so they lost one month of pension check for that next month of no man’s land.
What’s one month of your pension? As I mentioned, some of your pension’s gonna be worth 4,000 bucks a month. So you just lost $4,000 so you could gain, what? 175 bucks a year? Oh my goodness, that’s gonna take you 20-something years to break even. Not worth it. Not worth it. Okay? Fine. Fantastic.
Fantastic. I hope I am making sense on all this. Now, another consideration. We spoke about the end of the pay period for the leave accrue. We spoke about the end of the month. This way you avoid no man’s land. What about the end of the year or the beginning of the next year? So believe it or not, there’s arguments for both sides of the fence, okay?
I’ll give you a couple of arguments to for to retire towards the end of the year, and I give you se- a couple arguments to retire towards the beginning of the year. First of all, let me just get thing, some things out of the way. You may notice on this slide at the bottom, there’s a performance bonus on either side.
And the reason why I say on either side, because it really depends on when your bonuses get paid out. And also, in your agency, you might have to be there for a certain amount of time in order to be included in the performance bonus. Or it might be that if you if you separate before a certain point, you’re gonna be automatically disqualified for the bonus.
So I would encourage you guys to just check with your HR how exactly the perfor- the bonus pe- per- the bonus periods are calculated, and if you separate after the close of a bonus period, will you be included? Okay? So again, that’s gonna vary from agency to agency. So the performance bonus, let’s put that aside, ’cause that’s gonna vary.
But let’s talk about the left side of this slide and the right side of the slide, starting with the left side. There’s an argu- there’s two arguments to retire toward the end of the year. The first argument is the jumpstart on the COLAs. Now, for those who don’t know, you get a COLA every year. Every year, your in- your pension gets an inflation adjustment.
COLA stands for cost-of-living adjustment. It’s an inflation adjustment. Now, that inflation adjustment kicks in January, so that means retirees will notice their pension have an increase in the month of January. Now, here’s the thing. In order to get a pension check in January, you need to be retired in the month of December.
By being retired in December, you’ll get a pension check in January for the month of December. However, in order to be deemed retired in December, you cannot work a day in December. You just remember, if you work even one day in December, you’re not deemed retired in December, so that pushes you back to November.
Let’s say the end of November 30th. So if this person retires November 30th, so that means that they are, will be deemed retired in December, and they will get a pension check in January. Now, let me compare two people. One person retires November 30th, and the other person retires December 31st.
So the person who retires Nove- November 30th, they’re deemed retired in December. They’re gonna get a pension check in January, so that means already in January they will see a a, an adjustment to their pension amount in January. Okay? However, the person who retires December 31st, so they’re not deemed retired in December, so that means they’re not gonna get a pension check in January.
So let me ask you something. The person who retired December 31st, when do they get their first COLA? When does their pension get the increase, the inflation adjustment? You might think I guess they’ll have to wait till February, right?” Nope. Unfortunately, this person who retires December 31st, they’re not gonna get a COLA in February.
They’re gonna have to wait to the following January in order for their COLA to kick in. Now, when I’ve shared this information with clients and with students in classes, their jaws drop. They’re like, “Whoa, I, I can’t believe that. That person loses an entire year of COLAs, or that, the other person, the one who retires November 30th, he gains an entire year’s of COLAs?
That’s incredible.” Now, I know it sounds impressive. However, however- It’s not that impressive. I’ll tell you why. Because in order to get the full COLA in January, you have to have been retired for the full previous year. If you were only retired for part of the previous year, you’re only gonna get a partial COLA in January.
So for example, the person retires November 30th. How many months of the previous year are they retired? One. So they’re not gonna get the full COLA in January. They’re only gonna get a pro-rata COLA, like one-twelfth of the COLA. So that’s no longer super impressive, okay? By the way, in fact, let’s think about this.
If that person retires November 30th just to get one-twelfth of the COLA- I have news for that person. Had they worked to December 31st, you’re right, they would not have gotten the jumpstart in the COLA, that 1/12 of the COLA. But you know what they would have gotten? A number of things. Number one, they would’ve gotten full salary for the month of December, which is way more valuable than that COLA, okay?
Number two, they got the month of December added to their pension, to their total service, okay? Number three, they got another month of TSB contributions and matching. Number four, they got pre-tax FEHB premiums for another months, m- another month. So what I’m trying to say is that this idea of getting the jumpstart in the COLA it’s not impressive.
It’s really not impressive, and had this person just worked another month, you’re right, they would’ve lost the jumpstart in the COLA, but what they gained is way more valuable than the fractional COLA that they lost. Whoop-de-doo. Okay? Now, that’s the first argument to retire towards the end of the year.
Let me give you another argument. So as you guys can see on the left sen- left part of the slide, you may avoid Social Security tax on your annual leave. Okay? What do so you guys, when you retire, you may have a lump sum payout of your annual leave. It depends, actually, if you take my advice and you spend down that leave.
But let’s just say you didn’t take my advice, or let’s say you only spent down part of your leave, but not all of your leave. Okay, fine. So when you retire, whatever balance of leave gets paid out to you lump sum. Let’s think about the tax consequence of that. Are you gonna owe federal taxes on that lump sum?
Yes. Are you gonna owe state tax on that lump sum? Yes. It ac- it actually depends which state you live in, but let’s just say you live in a state that has state tax. Yes. Are you gonna owe Social Security tax on that lump sum? And the answer is yes, but only if your income is below the Social Security cap.
What do so for those who don’t know, Social Security does not tax all your income. There is a cap. There is a maximum that if your income goes beyond that, they no longer tax that income for Social Security, okay? That number changes from year to year. I think this year it might be like $184,000 in the vicinity.
I don’t remember the exact number. Don’t quote me on it. But in that ballpark, $184,000. So what that means is if someone’s income is above $184,000, any income that is above the $184,000, it will not owe Social Security tax. That means any income above the $184,000 avoids 6.2 Social Security taxation. Now imagine this.
Imagine a person, their income is above $184,000, and then they get a lump sum payout of their annual leave above the $184,000. That means they will not owe 6.2 Social Security tax on that lump sum annual leave. That’s incredible. Some of you guys are gonna have a 20,000, 30,000, $40,000 annual leave lump sum payout.
You could avoid the tax the Social Security taxation, 6.2% savings. It sounds amazing, but here’s the catch. You have to be very sensitive to the timing. Because, for example, let’s say a person retires December 31st, so that’s at the end of the calendar year. But here’s the thing. If you retire December 31st, are you gonna get the annual leave paid out to you on that same date, December 31st?
No. It’s gonna be paid out to you the pay period after you separate. So that’s gonna put you into January sometime. So what that means is you’re not gonna get that lump sum at the end of the year after your income ha- has reached the 184 cap. It’s gonna get paid out to you in the next year, and the next year you have not yet made 184,000.
So that means the annual leave is gonna be subject to 6.2 Social Security tax if you collect it in the next year So in order for this strategy to work, you have to receive the annual leave towards the end of the year. It doesn’t have to be December 31st, but towards the end of the year. Now, just so you guys know, this Social Security tax savings that I’m trying to get for you, just so you know, I never use this argument to backdate a client’s retirement.
For example, if one of my clients was planning on retiring December 31st, I’m not gonna try to convince them to retire November 30th. Why? Aren’t they gonna save 6.2% Social Security taxation? It’s true, but you know what? They’re gonna get a month of salary in December, a month of service added to their pension a month of TSB contributions and matching, pre-tax FPH contributions.
All those are gonna be more valuable than the the 6.2 tax savings that they’re gonna get in that lump sum annual leave. Okay? So I never use this s- Social Security tax savings to backdate a client’s retirement. What I will do is I may use it to to pro-date, or what the work- word I’m looking is to push forward a client’s retirement date.
So for example, let’s say a client was planning on retiring September 30th. I may push them to retire, October, 30… The end of October. What is that? 30th or October 30th or November 30th, right? I may tell them to retire at the end of October/November. This way, not only do they avoid the Social Security tax because their income goes above the one eighty-four cap, but I also got them extra service into their pension, extra TSB contributions and matching, pre-tax FPHB, salary for another couple of months.
Fine. Fantastic. Those are arguments to retire towards the end of the year. Let’s now talk about arguments to retire towards the beginning of the next year. So the first argument to retire towards the beginning of the next year is, again, you’re gonna get the lump sum annually paid out. But if it gets paid out to you in the next year in the next year you’ll be making less money.
So you might be able to have less taxes due on that lump sum annual leave. Which by the way, just as an aside, does anybody here know how much tax to expect is gonna be withheld from that lump sum annual leave payout? It’s egregious. They’re probably gonna withhold about forty percent of tax- taxation on that lump sum annual leave.
So for example, if you have a lump sum annual leave payout Of $40,000, okay? They may withhold 40% of that, which is outrageous. Outrageous. Now, you may say, Stephan, that then how am I saving in taxes? If they’re withholding 40%, how am I saving?” And the answer is, you’re right, they’re withholding an egregious amount, but w- at the end of the year when you file your taxes, that’s when y- you will discover, and they will discover, that you withheld too much tax, or rather, they withheld too much taxes for you.
So when you do your tax returns, you’re actually gonna get a tax refund because they withheld too much in taxes for you. I know it’s super annoying, but that’s just the way it is. So that’s an argument to retire towards the beginning of the next year, because next year your income’s gonna go down, and you’ll, you will receive the annual payouts in a year where you may be in a lower tax bracket.
Okay. One more argument to retire towards the beginning of the next year is the free money. What do I mean by free money? So the FSA, in theory, is giving away free money. Now, what does that even mean? Come on. What do you mean free money? So here’s the way it works. For those who don’t know, the healthcare FSA, if you participate a certain dollar amount, they will give you access to that entire dollar amount at the very beginning of the next year, even though you have not yet put in that dollar amount.
So let’s give an example. Let’s say you plan on participating $3,400, okay? Now, I’m sure you know that at the beginning of next year, when you start contributing to the FSA, you’re not gonna put in $3,400 in the very first pay period of the year. No. You take 3,400 and you chop it into 26 pay periods.
So each pay period you get a little bit, okay? So you’re not putting in 3,400. You may be putting in, 180 bucks a pay period, or whatever the number may be, okay? So imagine this. A person has a $3,400 medical expense that arises in January of the next year. Will the FSA reimburse them all $3,400, or will the FSA only reimburse them the $180 that they put in thus far?
And the answer is, the FSA will re- reimburse them the entire $3,400. What that basically means is FSA is gonna front you $3,400. Now, that sounds very risky. Why in the world will they front you this money? And the answer is because they know you’re good for it. You’re gonna be on the payrolls for the next 26 pay periods.
So slowly but surely they’ll get back the money that they fronted. But one second, Stephan. Who says I’m gonna be on the payrolls for the next 26 pay periods? Why wouldn’t you be? Because maybe I’m gonna retire. And if I retire and I have not yet paid back the 3,400, will I be responsible to pay back the $3,400 that they fronted me after I retire?
And the answer is no
So what this means, if you guys will hear what I’m saying, is theoretically, you could schedule all your doctor’s appointments, you could fill all your prescriptions, you can have all the dental work do- done, you can have your LASIK surgery right before you retire. You run up a bill, 3,400, and then at the end of the month, let’s say at the end of January, that’s when you retire.
And as you’re leaving your building, you could turn around and wave a thank you to all of the use it or lose it people who sponsored your LASIK surgery. I know, it seems so wrong, doesn’t it? I used to feel guilty telling people about this ’cause it actually seems wrong, but I don’t feel guilty anymore.
Why? Because it’s plastered on the FSA website. It says in black and white, “You will not be responsible to pay back the money that they funded you.” I know, but it still seems wrong, doesn’t it? You can blame it on somebody else. You didn’t hear it from me. Blame it on somebody else. Okay, so let us summarize the considerations that go into choosing the best time to retire.
Consideration number one… Let’s back up. Consideration number one is you wanna retire with as few days going into the trash can. So when you guys add up your service, try to see how many days are gonna go into the trash can. That’s number one. Number two, if you could retire at the end of a pay period, end of a pay period means on a Saturday, okay?
And by retired, end of the pay period, you accrue the leave for that final pay period. That’s number two. Then we said to aim to retire as close to the end of the month as possible. If you retire as close to the end of a, end of the month as possible, you will minimize no man’s land. But if you retire early in the month, then you will increase no man’s land.
We also mentioned retiring either towards the end of the year. There were arguments to retire towards the end of the year, and we also just mentioned retiring towards the beginning of the year, the arguments to retire towards the beginning of the year. There is one more consideration when you guys are choosing the best time to retire.
In fact, it is probably the most important consideration for best time to retire. The most important consideration for best time to retire is you better be ready for it.
Does anybody here know, what is the number one cause of depression in the United States of America? No, it’s not retirement, even though that’s the way I framed it. No, it’s not retirement. It is not feeling productive. Some people call it boredom, but it’s not feeling productive. I don’t feel like I’m doing anything.
I want you guys to think about this because as much as we love to complain about our jobs, let’s realize that our jobs, money aside, there are many non-financial benefits to working. Can you think of any non-financial benefits? Think about it. Non-financial. All right? I know it’s hard. I know. It’s very hard to think of non-financial benefits, but there are many non-financial benefits.
I’ll give you guys just a few. Number one, social interaction. You guys have a healthy dose of social interaction. You’ve been socializing your entire lives, and then all of a sudden you retire. “Yeah, I’m done socializing.” Are you kidding me? Where are you gonna get your socialization once you retire?
Oh, I know where. Your spouse, right? Oh, of course. Now, I know some of you are looking forward to quality time with your spouse, but others are thinking, “Stefan, too much time with a spouse, that could be counterproductive.” So you really gotta think about what is your social life gonna look like once you retire.
So that’s one non-financial benefit. Number two, intellectual stimulation. At work, you’re using your noodle. You’re making decisions and distinctions. You’re articulating your thoughts, whether it’s orally or in written format. You’re staying sharp. You’re staying with it, and you’ve been using your noodle your entire life.
And then all of a sudden you retire. “Yeah, I’m done. I’m done using my noodle. Let somebody else use their noodle.” Are you joking me? I don’t know if you’ve ever seen this before, but I’ve seen people that w- shortly after they retired, they slow down big time. So what are you gonna do to stay active and productive?
Okay. That is number two. Another non-financial benefit, social interaction. I’m sorry, excuse me, we said social interaction. The sense of productivity, excuse me. Sense of productivity. Remember before, that cause of depression. At work, you’re being a productive person, we hope. At work, you’re being a contributing member of society, we hope I know some people when they retire, yes, they do golfing, yes, they do gardening, but they don’t feel that sense of contribution anymore, and it bothers them.
And then another non-financial benefit to working is daily structure. You guys have structure to your days. Once you retire, you’re gonna have to ensure that you have structure to your days for the next few decades of your life. Retirement can take decades Imagine this. Imagine a person retires and when they retire they have plenty of money, so money’s not an issue.
But once they retire, they have no social interaction, no intellectual stimulation, no sense of productivity, no daily structure. Would you call that a successful retirement? That’s a disaster. So retirement readiness is not just about picking the best retirement dates so you can get the most money from your federal benefits, although that is definitely a good thing.
If you guys could capitalize on your federal benefits and walk away with the largest w- largest value from your service that you’ve done, your federal service career, right? That it will be amazing. But in addition to doing the financial numbers, the cr- the number crunching, you also have to do some personal planning.
What is your social life gonna look like? What is your intellectual life gonna look like? What is your sense of purpose and productivity gonna look like? Okay? Very important that you give these things consideration, and that will help you choose the best time to retire Fantastic. Fantastic. So before I let you guys go, let me just remind you all that you guys can request a a session with me, okay?
One-on-one. And that is the link in the sidebar right over here. So if anyone clicks on that link, it’s gonna take you to a page. And In fact, I’m going to post that into the chat box, the link. So if you guys are in the chat box, here we come. One, two, three, and bang. There you have it.
Fantastic. Fantastic. Okay. I very much appreciate you guys hanging out with me today, and I hope that you enjoyed today’s material. And, Oh, I do see I have a question that just popped up. The question is, he s- somewhat un- unrelated, “In one of your or more of your prior trainings, you stated one million in TSP in or instead of Roth investments was more or less a Holy Grail where a federal employee can retire and be set for life.”
Whoa, whoa. Did I say one million is the Go- no. That is not me. Definitely not me. Okay? What I would say is it depends. It depends. It depends on what your expenses are. It depends on what is the value of your federal pension, the value of your Social Security. Oh my goodness. I would never just make a blanket statement that one million dollars in investment is the Holy Grail.
No way. Okay? “New to this information, I haven’t been one million may not be sufficient. Do you still recommend the one million number?” Never said such a thing. Okay. Fantastic. I’m glad you brought it up. This way I could clear the record for myself. All right, everybody. Great to hang out with you all.
Until we meet again, I wish you all blessing and success. Take care. Take care
