Most federal employees experience mixed emotions on the day they retire and for several weeks thereafter. Most are very happy the day has finally arrived and celebrate in grand style. But in the background there is usually some anxiety about continuing life without a paycheck being deposited in the bank every 2 weeks.
My job is to help federal employees reduce and hopefully eliminate concern over cash flow at retirement by knowing what to expect and planning accordingly.
It is important to understand 1) how and 2) when the final payments will be made to you. It is also critical that sufficient funds are on hand to supplement income while the FERS/ CSRS annuity payments are finalized and start on a regular basis.
The following is a summary of the timing of payments from different retirement income sources:
Retiring employees who worked from the last pay date to retirement date will be paid on the next pay date. The amount of the pay will depend on how many days were worked from the last pay cycle.
A FERS employee must not work any days in a month to be eligible for an annuity payment for that month. However, a CSRS can work up to the 3rd of the month and still be eligible for an annuity payment for that month. The initial payment will be made covering the first eligible month, and will be distributed in the first part of the following month. For example, the first annuity payment to a FERS employee who retired on March 31 would be made in the first part of May.
Depending upon the backlog at OPM, the new retiree will receive an “Interim” annuity payment, which is approximately 70% of the final payment for the first 2 -10 months. The “Interim” annuity payment is a low-ball estimate while OPM calculates the employees’ final payment. Once the amount is finalized, a payment will be delivered representing any underpayment.
As such, it is important to have funds on hand to get through the first month and to make up any shortfalls from the “Interim” annuity during the next several months.
Annual Leave Check
Unused annual leave is paid out as a lump sum at retirement, and can be received anywhere from 2 to 6 weeks after retirement. For employees who have carried over the full 240 hours and have relatively high balances, the amount of this payment can be significant. Again, this check will not arrive right away and if it is a significant amount, plan for more taxes to be withheld. Some federal employees plan a retirement date in January for tax purposes. Income in retirement is usually lower and can reduce income tax rates.
Workers who have at least 40 quarters of employment are eligible to receive Social Security at age 62. This may not be the case for all CSRS employees. Age 62 is the earliest that benefits can be applied for and will result in lower monthly payments than if a worker waits to take benefits. But there are many factors to consider, including need and life expectancy.
Social Security benefits must be applied for and payments will begin in the following month. If you plan on taking Social Security benefits at retirement, you may want to file a month or so before your retirement date.
For additional information on Social Security options, please go to www.SSA.gov
FERS Special Retirement Supplement
FERS employees who retire on an immediate annuity under the age of 62 may also be eligible for the FERS Special Retirement Supplement. In order to receive the supplement a FERS retiree must be MRA with 30 years of credible service, or 62 with 20 years. The supplement is paid by OPM and “supplements” what retirees are not able to receive from Social Security. When the employee is eligible for Social Security at age 62, the supplement will cease.
The supplement will be paid in the same payment as the FERS annuity, but it is not paid until after OPM finishes the final annuity calculations. The back payments of the supplement will be paid at the same time as the make-up payment from the “Interim” annuity.
Thrift Savings Plan
Most federal employees looking to retire have saved diligently via the TSP account and have taken advantage of the 5% employer match. As such, the TSP is usually the largest liquid asset for federal retirees.
When considering income in retirement, it is important to understand the restrictions on the withdrawal options with the TSP account. Only one partial withdrawal is allowed and the only other options are monthly distributions (via a MetLife immediate annuity or a stated amount) or a full withdrawal.
Here again, at retirement the funds in the TSP account are not immediately accessible. It takes approximately 2 weeks for The TSP to be notified of retirement by the OPM. If there is a backlog, it may take longer. The timing of submitting Form TSP 70 (to withdraw or transfer funds) is also critical. Filing too early can actually cause delays.
Employees who are 59 ½ and are still working have access to TSP assets via an “age-based withdrawal”. This can be a great option for short-term planning at retirement and long-term planning thereafter. The benefit of this option is that you can move some, or all, of the TSP to a more flexible and accessible account like an IRA prior to retirement. If the funds are transferred directly to the IRA there are no tax consequences and no withholding. Once transferred, the funds can be ready for use right away. This strategy allows the retiree to have more investment choices and greater flexibility and control over withdrawal options.
The TSP has certain rules and procedures that must be followed to obtain access to funds and avoid penalties. Please make sure you are working with someone familiar with the process before committing to a strategy.
Personal Savings and Investment Accounts
Obviously these types of account will be the most advantageous on retirement day. In planning for the first few months of retirement it is advisable to have 2-3 months of expenses sitting in a money market or savings account. They can be accessed when needed and replenished when final annuity and any leave time payments are made.
Some retirees may not have sufficient cash on hand at retirement to carry them for several months awaiting full annuity and/ or leave checks to arrive. One way to generate savings is to reduce TSP contributions to 5% and redirect funds to more accessible savings and/or investment accounts.
“Retirement Day” is a big personal event and a major accomplishment. I hope that you will take the time to get with a qualified advisor, familiar with your federal benefits, and plan the process.