What's with all this "Best Date To Retire" stuff?

If you’ve been reading about retirement for more than a few months or so, you’ve probably come across one of these types of articles. One that supposedly highlights the “best” days to retire for the upcoming year. Sometimes it even has a calendar with certain dates highlighted. As if there is some complicated, magical formula where you can only maximize all of your benefits when the stars align on say, March 26th.

But what does that actually mean? Is there really a “best” day to retire? Does that imply that if you don’t retire on one of those days, you’re somehow hurting yourself? Let’s clear all of this up. In my opinion, it’s overthinking something that’s relatively simple, but I’ll let you be the judge of that.

DIFFERENT STRATEGIES (and the logic behind them)

End of the Pay Period

Sometimes FERS employees will argue that it is best to retire at the end of a pay period. Why is this? Well, the main reason is that if you do NOT retire at the end of a pay period, you forfeit the leave for that period. If you don’t complete a full pay period, you will not get the 8 hours of annual leave and 4 hours of sick leave credited to your account for that pay period.

Is that a big deal? Maybe. But probably not. Or at least it’s not as important as some of the other strategies.

End of the Month

This is probably the most common strategy. And here’s the thought process behind it. Whenever a FERS employee retires, their annuity (pension) starts the first day of the following month. For example, if you retire on March 2nd or March 31st, it doesn’t matter. Your retirement starts April 1st either way. What this means is that if you retire on March 2nd, you will never get any money (either working salary or retirement annuity) for the period from March 3rd to March 31st. On the contrary, if you retire on March 31st, your retirement starts the very next day, and you’ll never be in a status of “out of pay”.

In other words, there won’t be a gap between your working pay and your retirement pay.

End of the Year

Here is another popular one. Just look at the mad rush of OPM applications submitted each year. Why is this so popular? Well, aside from the natural psychological component of the end of the year just being a natural stopping/starting place, there are some other, financial advantages to this strategy. Primarily, these reasons revolve around annual leave. Most FERS employees can carry over 240 hours of annual leave. If someone carries over 240 hours into their last year, they can retire with those 240 hours plus whatever they’ve accrued in their last year. At 8 hours a pay period, that could theoretically be 208 additional hours (26 pay periods x 8 hours a pay period). For a total of 448 hours of A/L that would be cashed in for a check from your agency.

There are a couple of peripheral advantages to this end of the year strategy as well. If one is retiring at the end of the year, they are by default, also retiring at the end of a month, so you get the benefit of that strategy as well. Leaving on 12/31 means your pension starts 1/1 and you won’t have any days that aren’t covered by a paycheck.

Lastly, there MAY be a tax benefit with this strategy as well. By retiring on 12/31, your annual leave lump sum payout check will arrive in the following year. You may be in a lower tax bracket, depending on a number of factors, one of the main ones being if you are working, and how much you are earning.

If you are interested in this strategy, you need to understand something. There is typically a difference between the end of the calendar year, and the end of the leave year. Typically, the leave year ends somewhere in the first week of January. While this maxes out your annual leave, it means that your annuity does not start until February 1st. Let’s look at an example because this can be a little confusing.

For 2020, the leave year ends January 2, 2021. Employees have until that date to take use-or-lose before it expires. Which means employees retiring can retire on that date and accrue the full 208 hours for the year. The problem? Retiring on 1/2/21 means that your retirement annuity starts on 2/1/21. So you won’t get any money from 1/3/21 to 1/31/21. This may be a consideration for you, or it may not be. If you start your new job on 1/3/21, then perhaps you don’t care that you’re missing out on almost 4 weeks of government pay. But I bring it up so you can be aware of it.

Before the End of the Year (the Social Security strategy)

Here’s another strategy some people have taken advantage of, and it is applicable only to high-earners. If you don’t already know, you don’t pay Social Security tax on ALL your earnings, only on the first $137,700 (for 2020). Since Social Security tax is 6.2%, that means no one pays more than $8,537.40 for 2020 ($137,700 x .062 = $8,537.40). Once you pay that much, the rest of the income you earn during that year is tax-free from a Social Security standpoint. Here’s how you could use that to your advantage:

Let’s say you earn enough to have paid all $8,537.40 by say, November 15th and you retire. If you get that huge lump-sum A/L check in that same year (which MAY come before 12/31), it will not be subject to the 6.2% tax, meaning you net a little bit more than if you retired on December 31, and received that check the following year.

This would be a very specific set of employees that this may be applicable to, but I put it out there because I have seen people put this strategy to work for them.

Turning 50 (or 55)

NOTE: SECURE ACT 2.0 of 2022 changed this for SCE’s. They no longer have to work into the year they turn 50 if they have 25 years on. Now it is 50, or 25 years at any age.

For you that are eligible to retire, you may want to work 1 day into the next calendar year on purpose. If you are a Special Category Employee (SCE), you can have penalty-free access to your TSP if you retire in the year you turn 50. You don’t have to actually be 50, you just have to turn 50 in that year. (For non-SCE’s, the rules are the same, but the age is different. It’s 55 for you guys). Example:

Let’s say Mike is an ATF agent who has 25 years on and is 49 years old in December of 2020. He is currently eligible to retire. He may be considering retiring on 12/31/20. However, he’s not 50 years old until July of 2021. If he retires 12/31/20, he won’t have penalty-free access to his TSP until he is 59 1/2. If he worked one day into 2021, he’d be able to access his TSP without paying the extra 10% tax for the early withdrawal penalty. That may be way more important to him than leaving 12/31/20 and maxing out his final annual leave check. Working 1 extra day means he doesn’t have to wait almost 10 years to get his TSP without paying a penalty.

SUMMARY

These are the most common strategies, but you may know of even another one. As you can see, some of these are competing strategies. You could combine one or two, but it would be impossible to satisfy all of them (some are mutually exclusive). I guess the ideal date to retire from FERS would be if 12/31 was the end of the leave year and also happened to be the end of a pay period. And you were first eligible on that day. And you were 50. That would be perfect.

Short of that, what’s the best strategy to go with? That all depends on what your priorities are. If you become eligible in June, you may just want to retire then. Particularly if you have another job that wants you to start right away. As far as pay period vs month, I believe it is better to retire at the end of a month than at the end of a pay period. I would prefer to get the full month’s pay, even if it means not accumulating 8 hours of annual leave, (assuming the end of the month fell in the middle of a pay period.)

Let’s look at all of this from another perspective. Are you making a big mistake if you choose one strategy over another? Said another way, “What’s the worst that can happen?” You may miss out on accruing an extra 8 hours of annual leave. You may miss out on being in pay status for a few weeks, or you may miss out on maximizing the annual leave lump sum payout. Are any of those really that bad? I don’t think so. Certainly, none of them would be something you would be kicking yourself over for the rest of your life.

The only one that could have a long-lasting affect would be retiring prior to 50 (for SCE’s) or 55 (for Regular FERS), and having to wait 10 years to be eligible for penalty-free TSP access. NOTE: SECURE ACT 2.0 of 2022 changed this for SCE’s. They no longer have to work into the year they turn 50 if they have 25 years on. Now it is 50, or 25 years at any age.

And even then, there are ways to counteract this issue (see my paper on Early TSP Withdrawals).

My advice? Give it a little bit of thought, but don’t stress over this decision. Think about what works best for you. Then just go for it, and don’t look back!