Your First Year of Federal Retirement: Month-by-Month Cash Flow Guide

Most federal retirement guides stop at day one — how to apply, when to submit SF-3107, the best retirement dates. But what actually happens to your income after you leave? The first year of federal retirement is financially the most confusing: you receive multiple separate income streams that start at different times, get taxed differently, and interact with each other in ways that catch most new retirees off guard.

This guide walks through what you receive and when, using a GS-14 Step 7, $145,000 high-3, 28-year FERS employee retiring at 58 as the running example throughout.

Month 1: You've Separated — But OPM Hasn't Processed Your Retirement Yet

Leaving federal service and receiving your first full annuity check are two different events, separated by OPM's retirement processing backlog. In April 2026, OPM was processing digital applications (submitted through the Online Retirement Application system) in approximately 50 days, and paper applications in approximately 100 days.¹

During this processing window, you receive interim pay — a partial annuity payment designed to cover your basic living expenses while OPM works through your case.

How interim pay works

• Amount: typically 60–80% of your estimated gross basic annuity
• FEHB premiums are not deducted during interim pay (OPM does not have your coverage cost confirmed yet)
• FEGLI life insurance is not deducted during interim pay
• Federal income tax is withheld, but usually at a default rate
• The FERS supplement is not included in interim pay — it starts only after OPM finalizes your retirement
• The survivor annuity reduction is applied once the case is finalized, not during interim pay

GS-14 example: months 1–2

The Annual Leave Lump Sum: What It Is, When It Arrives, and How It's Taxed

Your accrued, unused annual leave is paid out as a lump sum by your employing agency — not by OPM. It arrives separately from your interim pay, often in the second or third pay period after your retirement date, depending on your agency's payroll processing cycle.

How the lump sum is calculated

The lump sum equals the pay you would have received had you remained employed through the expiration of the leave period — essentially your hourly rate multiplied by the number of leave hours you're cashing out. For GS-14 employees in the DC locality area with 240 hours (maximum carryover) of annual leave:

• Annual salary: ~$145,000 (high-3 approximation)
• Hourly rate: $145,000 ÷ 2,087 hours = ~$69.47/hr
• Lump sum: 240 hours × $69.47 = ~$16,673 gross

If you have OT, step increases, or locality pay adjustments between your retirement date and the end of the leave period, those are included in the calculation.

Tax treatment

The lump sum is fully taxable ordinary income.² Key points:

• Federal income tax: withheld at your current withholding rate
• Social Security (FICA): 6.2% withheld, up to the 2026 Social Security wage base of $184,500³ — if your year-to-date salary already exceeds this (common for GS-14/15 who work into the second half of the year), no FICA is withheld
• Medicare: 1.45% withheld (no wage cap; high earners owe additional 0.9% at filing)
• No FEHB/FEGLI premiums are deducted from the lump sum
• No TSP contributions are made from the lump sum

Month 2–3: OPM Finalizes Your Case — Full Annuity Begins

When OPM completes processing, several things happen at once in your first "full annuity" check:

1. Your gross annuity is established (the real number, not the interim estimate)
2. FEHB premiums are retroactively deducted (the catch-up)
3. FEGLI premiums are deducted going forward
4. Survivor annuity reduction is applied (if elected)
5. Tax withholding based on your W-4P takes effect
6. The FERS supplement begins

GS-14 annuity math at finalization

• Basic annuity: 28 years × 1.0% × $145,000 = $40,600/yr ($3,383/mo)
• 50% survivor annuity reduction (10%): −$4,060/yr → net annuity $36,540/yr ($3,045/mo)
• FERS supplement (if eligible — 28 years and MRA): see next section

Note: the 1.1% multiplier (instead of 1.0%) applies only if you retire at age 62 or older with at least 20 years of service. Retiring at 58, this GS-14 uses 1.0%.

The FERS Supplement: The Income Source That Surprises New Retirees Most

The FERS supplement is OPM's bridge payment that approximates the Social Security benefit you earned during your federal career, paid from your retirement date until age 62. It does not come from Social Security — it comes from OPM, as part of your FERS annuity.

When does it start?

The supplement starts when OPM finalizes your retirement — not on day one. During the interim pay period, you receive no supplement. Expect a retroactive payment covering the missed months once OPM finalizes your case.

How it's calculated

Formula: (Estimated SS benefit at 62) × (FERS years ÷ 40)

For our GS-14: if estimated SS at 62 = $1,800/mo (based on work history), the supplement = $1,800 × (28/40) = $1,260/mo

The earnings test

If you earn wages from a job after retiring, the supplement is reduced by $1 for every $2 you earn above the annual earnings limit. In 2026, that limit is $24,480.⁴ FERS annuity income and TSP distributions don't count as "earnings" for this test — only wages from employment.

The age-62 cliff

The supplement stops permanently at age 62 — regardless of whether you've started Social Security. If you plan to delay SS to 67 or 70 for the larger benefit, budget for a 5–8 year gap where the supplement income disappears before SS begins. The Roth conversion window guide covers how to use this period tax-efficiently.

GS-14 supplement income (months 3+)

This is gross income before federal/state taxes and FEHB premiums.

FEHB in Retirement: The Premium Tax Change You May Not Have Planned For

Your FEHB coverage continues seamlessly into retirement — assuming you meet the 5-year coverage rule. The premiums do not change just because you retired; you still pay the same biweekly employee share (now deducted monthly from your OPM annuity).

What does change is the tax treatment.

Active employee: premiums are pre-tax

While employed, your FEHB premium is excluded from your gross income under Section 125 of the Internal Revenue Code (the "premium conversion" program). A GS-14 paying $3,500/year in FEHB premiums while in the 22% bracket saves approximately $770/year in federal taxes alone.

Retiree: premiums are post-tax

In retirement, your FEHB premiums are deducted from your OPM annuity after taxes. You cannot exclude them from gross income. The premium conversion tax benefit is available only to active employees under IRS rules.⁵

In real terms: the same $3,500 annual premium now costs you roughly $4,487 in pre-tax annuity income (at 22% federal rate) to cover, compared to $3,500 when you were working. The premium is the same dollar amount; you just lose the tax exclusion.

Setting Up TSP Withdrawals

Your TSP account doesn't automatically start sending you money when you retire. You need to set up a withdrawal plan via the TSP website (tsp.gov). Until you do, your account stays invested and untouched — which is fine, and often the right move for at least a few months while you assess your cash flow.

Key rules for retirement-age withdrawals

• Rule of 55: If you separate from federal service in the calendar year you turn 55 or later, TSP withdrawals are penalty-free (no 10% early withdrawal penalty under IRC §72(t)). For LEO, firefighters, and ATC, this threshold is age 50.
• TSP installment payments: You can set up regular monthly, quarterly, or annual payments — fixed dollar amount or based on life expectancy.
• Tax withholding on TSP distributions: TSP defaults to 20% federal withholding on eligible rollover distributions. For installment payments expected to last less than 10 years, 20% is also the default; for payments expected to last 10+ years, the W-4P withholding rate applies. Verify your TSP withholding elections are correct early.
• Roth TSP: Qualified distributions are tax-free. A distribution is "qualified" if the account is at least 5 years old and you are at least 59½.
• No RMDs until age 73 or 75: SECURE 2.0 set RMD age at 73 for those born 1951–1959, and 75 for those born 1960 or later. Roth TSP accounts have no lifetime RMDs (eliminated starting 2024).

See the full TSP withdrawal options guide for installment vs. lump sum vs. life annuity comparisons.

Tax Withholding Setup: Getting This Right Early Saves Headaches in April

In retirement, you have multiple income streams that all require some form of tax withholding or estimated tax payments. Getting this set up correctly in the first month saves you from an unexpected April tax bill — or from over-withholding and giving the IRS an interest-free loan.

1. OPM annuity withholding (W-4P)

OPM defaults to withholding federal income tax as if you were a single filer with no adjustments, unless you submit a Form W-4P. This default is typically too high for married filers and may be too low for single filers with significant TSP income.⁶

To adjust: log in to Services Online (servicesonline.opm.gov) and update your W-4P elections. Changes typically take one to two pay periods to take effect.

2. TSP distribution withholding

Update your TSP withholding elections at tsp.gov to align with your expected effective tax rate. If you're pulling $25,000/year from TSP at a 22% effective rate, you want roughly $5,500/year withheld — adjust accordingly.

3. Social Security withholding (if applicable)

If you've started Social Security benefits, you can elect voluntary withholding on your SS payment using SSA Form W-4V. Options are 7%, 10%, 12%, or 22% — not a custom percentage.

4. Estimated taxes: when you might need them

If your combined withholding doesn't cover your tax liability, you may owe estimated taxes quarterly (Form 1040-ES). The safe harbor rule: if you pay at least 100% of the prior year's tax (or 110% if your AGI exceeded $150,000), you'll avoid the underpayment penalty even if you owe at filing.

A common trigger: the FERS supplement is taxable but OPM may not fully withhold for it in the first months. Check your year-to-date withholding in October and make any adjustments before year-end.

Your First Tax Return as a Federal Retiree

Your first April filing as a retiree looks different from your W-2 years.

Forms you'll receive

• 1099-R from OPM: reports your gross annuity (including the FERS supplement), the taxable amount, and the employee contribution amount used for the exclusion ratio
• 1099-R from TSP: if you took any distributions, reports the amount and withholding
• SSA-1099: if you received Social Security benefits
• W-2 from your agency: covers wages earned before your retirement date (plus annual leave lump sum)

The annuity exclusion ratio

Your FERS annuity is not entirely taxable. You contributed a percentage of your pay throughout your career (0.8%–4.4% depending on when you were hired), and you can recover those after-tax contributions tax-free over your expected lifetime. OPM calculates a monthly tax-free exclusion amount using the Simplified Method (IRS Publication 721). The excluded amount is small relative to the total annuity — for most FERS employees, roughly 5–10% of the annuity payment is excluded — but it reduces your taxable income permanently until your contributions are fully recovered.

OPM reports the correct taxable amount on your 1099-R. You do not need to calculate this yourself — but understanding it helps you verify the 1099-R is correct.

Social Security: the 85% rule

If your "combined income" (AGI + nontaxable interest + 50% of SS benefits) exceeds $34,000 (single) or $44,000 (MFJ), up to 85% of your Social Security benefit is taxable. FERS annuity and TSP distributions count in this calculation. Most FERS retirees with TSP income and full Social Security will owe tax on 85% of SS benefits.

Month-by-Month Cash Flow: GS-14 Year One

Putting it all together for a GS-14 Step 7 ($145,000 high-3, 28 years service, retiring January 3, 2027 at age 58, 50% survivor election, FEHB BCBS Standard self+one ~$350/month, TSP balance $620,000, FERS supplement estimated $1,260/month):

After federal taxes (estimated 15–18% effective rate on this income level), FEHB (~$350/mo), and TSP taxes already withheld, net monthly is approximately $4,900–$5,200 — meaningful, but lower than the gross suggests. State income taxes vary.

Planning for the Age-62 Transition

At 62, the FERS supplement stops — permanently, by law, in the July after your birthday month. Your monthly income will drop by the supplement amount. For this GS-14, that's a $1,260/month reduction.

This happens regardless of whether you've started Social Security. If you delay Social Security to 67 or 70 for the larger benefit, you face a 5–8 year gap. Planning tools:

• Larger TSP withdrawals to fill the gap (watch IRMAA thresholds and bracket management)
• Roth conversions during the low-income window between supplement-end and SS-start
• Cash reserves built from the annual leave lump sum and early retirement cash flow

See the FERS Roth conversion strategy guide for the tax math on this window, and the Social Security timing guide for break-even analysis on 62 vs. 67 vs. 70 filing.

Common First-Year Mistakes

1. Not updating the W-4P. OPM's default single/zero withholding over-withholds for married filers and under-withholds for those with significant TSP income. Update it in month one via Services Online.
2. Spending the annual leave lump sum without accounting for taxes. The lump sum arrives as a large check, but you'll owe income tax + FICA on it. Reserve 25–30% before spending.
3. Not planning for the FEHB catch-up. The $800–$1,500 retroactive deduction from your first full annuity check surprises nearly everyone. Keep a cash cushion.
4. Assuming the supplement starts immediately. It starts at finalization, not day one. Budget for 2–3 months without it.
5. Leaving TSP in the default installment settings. TSP's default withholding rate and default fund allocation may not match your needs. Set a deliberate withdrawal strategy early.
6. Not checking Medicare Part B enrollment window. If you're nearing 65 during your first retirement year, the 7-month Initial Enrollment Period (3 months before your birthday month, your birthday month, 3 months after) is time-sensitive. See the FEHB + Medicare coordination guide.