Many federal employees retire at the end of December or early January before the start of a new leave year. There are two reasons to retire during that period of time that time, namely:
(1) By retiring before the start of the new leave year, a retiring employee can maximize their lump-sum payment for unused annual leave hours, and
(2) Both the lump sum payment (which is fully federally and state taxable) and the employee’s last paycheck will be directly deposited into the retiring employee’s bank account during January.
The retired employee may then pay less federal and state income taxes on the lump-sum payment because the retired employee will most likely be in a lower federal and state tax bracket in the new calendar year starting January 1st. The logic is that the retired employee’s retirement income (CSRS or FERS annuity, traditional TSP withdrawals, and maybe Social Security income) in the first year of retirement will likely be less compared to the retired employee’s salary income earned during the last year of federal service.
This column presents a comparison of two retirement dates for an employee retiring at the end of leave year 2024. The first retirement date is December 28,2024 (for most federal agencies, the end of pay period 25 for leave year 2024) and the second retirement date is January 11,2025 (for most federal agencies, the end of pay period 26 for leave year 2024). The purpose of the comparison is to see which retirement is economically more beneficial for the retiring employee.
In order to perform this comparison, the following assumptions are made:
• The employee’s current year salary (their SF 50 salary) is equal to $125,000.
• The retiring employee is a FERS-covered employee, age 62, with 32 years of federal service.
• The retiring employee carried over from leave year 2023 a total of 240 hours of unused annual leave hours and has not used any annal leave throughout leave year 2024.
• The retiring employee has six months of unused sick leave which will be added to the 32 years of FERS service for the purpose of calculating the retiring employee’s FERS annuity.
• The retiring employee’s high-three average salary is $123,000, and
• Federal employees will receive a 2.2 percent government -wide pay increase effective the first day of the 2025 leave year, January 12, 2025.
Calculating a Lump-Sum Payment for Unused Annual Leave
In general, a lump-sum payment equals the pay the retiring employee salary would have received had he or she remained employed until the expiration of the hours covered by the annual leave.
The retiring employee’s agency calculates a lump-sum payment by multiplying the number of hours of accumulated and accrued annual leave by the retiring employee’s applicable hourly rate of pay. Additional included are other types of pay the retiring employee would have received while on annual leave (excluding any allowances that are paid for the sole purpose of retaining an employee in federal service such as retention allowances and physicians’ comparability allowances).
To compute the retiring employee’s hourly rate of pay, the agency takes the employee’s annual gross salary (as shown on the employee’s current year Form SF 50), and divides that amount by 2087 hours. Once the hourly rate of pay amount has been calculated, it will be adjusted by the government-wide pay increase (and locality pay adjustment) applicable to the annual leave hours occurring taking effect on the first day of the new leave year. The following presents the calculation of the lump sum payment for unused annual leave for the two retirement dates:
Retirement Date: December 28, 2024
Number of unused annual leave hours: 440 (55 days).
(240 hours carried over from leave year 2023 plus
200 hours of annual leave accrued and unused
during leave 2024).
Retirement becomes effective January 1,2025 and first FERS annuity check will be dated February 1, 2025.
Hourly wage rate for leave year 2024: SF 50 salary/2087
= $125,000/2087 hours = $59.89/hour.
Number of workdays remaining in leave year 2024 following retirement on December 28, 2024:
12/30/24 through 1/10/2025 equals 10 days or 80 hours.
Lump sum payment for unused annual leave for the remaining days of leave year 2024 following retirement on December 29,2024 is:
80 hours x $59.89/hour = $4,791.57.
Effective January 12, 2025, hourly wage rate of $59.89 will be adjusted by a government-wide pay increase of 2.2 percent. For the remaining 55 days less 10 days or 45 days of unused annual leave hours, the lump sum payment is calculated as:
$59.89/hour x 1.022 = $61.21/hour
55 days – 10 days = 45 days (360 hours)
360 hours x $61.21/hour = $22,035.60
The lump sum payment for the 55 days of unused annual leave equals $4,791.57 + $22,035.60 equals $26,827.17.
Retirement Date: January 11, 2025
Number of unused annual leave hours: 448 (56 days).
(240 hours carried over from leave year 2023 plus
208 hours of annual leave accrued and unused
during leave 2024).
Retirement becomes effective February 1,2025 and first FERS annuity check dated March 1, 2025.
Hourly wage rate for leave year 2025 starting January 12,2025 = $61.21 (see above).
448 hours of unused annual leave are paid at the 2025 hourly wage rate.
Total lump sum payment for 56 days of unused annual leave equals:
448 hours x $61.21/hour = $27,422.08
The following table summarizes differences with the two retirement dates:
Summary and Conclusions
By retiring December 28, 2024, the retiring employee receives one more monthly annuity check equal to $3,664. But the retiring employee’s lump sum payment for unused annual leave will be $27,422 less $26,827 or $595.
Therefore, the net dollar advantage for retiring December 28,2024 rather than January 11,2025 is $3,664 less $595 o $3,069.
Key Takeaways
1. Retiring at the end of December (with an effective retirement date of January 1st resulting in the additional FERS annuity check) is more advantageous than retiring at the end of the leave year in the second week of January.
2. The larger the government-wide pay increase taking effect on the first day of the new leave year, the smaller the difference in the net dollar advantage to retiring at the end of December.
3. The one advantage to retiring at the end of the leave year is that it allows the retiring employee to contribute one more time to the Thrift Savings Plan.
4. With both retirement dates, the retiring employee’s last paycheck and lump-sum payment for unused annual leave will be directly deposited into their bank accounts in January. Assuming the retired employee will be fully retired in the new year (2025) (and therefore likely in a lower marginal tax bracket), the lump-sum payment for unused annual leave will be federally and state taxed to a lesser extent.