Sick Leave and Annual Leave at Federal Retirement

How FERS converts your unused sick leave into annuity credit, why your annual leave pays out as cash, and how to time your retirement to maximize both.

Sick leave: how it converts to service credit

When you retire from federal service, OPM adds your unused sick leave balance to your years and months of creditable service — but only for the purpose of calculating your FERS basic annuity.¹ It does not count toward eligibility (reaching MRA, 20-year thresholds, etc.). You still need to meet the underlying service requirements on your own.

The conversion formula

OPM uses a standard federal work year of 2,087 hours.²

• 2,087 hours of unused sick leave = 1 full year of additional service credit
• 174 hours of unused sick leave = 1 full month of additional service credit
• Hours between thresholds are dropped — only whole months are credited

How it affects your annuity

The FERS basic annuity formula is: 1% × high-3 × (years of service + sick leave credit). For employees retiring at 62 or older with 20+ years, the multiplier is 1.1%.

Example: GS-14 retiring with 28 years of service, high-3 of $130,000, and 2,000 hours of sick leave:

• 2,000 hours ÷ 174 = 11.5 months → 11 full months credited (0.917 years)
• Effective service for annuity: 28 + 0.917 = 28.917 years
• Annual annuity increase: 1% × $130,000 × 0.917 = ~$1,192 more per year — for life
• At a 25-year retirement, that's over $29,000 in additional lifetime income just from banking sick leave

The breakpoint where sick leave stops mattering is at each 174-hour boundary. Check your current balance and see how close you are to the next full month.

FERS vs. CSRS history

CSRS employees have received sick leave service credit since the beginning. FERS employees did not receive sick leave credit until the National Defense Authorization Act of FY2010 made it permanent for FERS retirements on or after January 1, 2014.³ Before that change, FERS employees forfeited their sick leave balance at retirement with no compensation. If a generalist advisor trained before 2010 is advising you, verify they know this applies to you.

Strategy: should you bank or burn sick leave?

The honest answer: use sick leave for actual illness and medical care — that's what it's for. OPM does not allow sick leave to be gamed as a savings vehicle, and misuse is a disciplinary matter. What the strategy question really asks is: if you have the choice of working through mild illness vs. calling in sick, what's the financial calculus?

• Each full month of sick leave credit on a $130,000 high-3 is worth roughly $108/month in additional annuity — compounding over a 25-year retirement, that's ~$32,000 in present value at 3% discount.
• If you're within 30 hours of a monthly threshold, and you have legitimate sick leave needs (dentist, physical, prescription refills, mental health days you're entitled to use), timing them before retirement can capture a full extra month of credit.
• If you're nowhere near a threshold, the marginal value of banking sick leave is zero until you cross it.

Check your balance in the OPM retirement estimator or ask your HR office for your current sick leave balance and how many hours you are from the next full-month threshold.

Annual leave: the lump-sum cash payout

Unlike sick leave (which converts to service credit), unused annual leave is paid out in cash when you retire.⁴ You receive a lump-sum payment equal to what you would have earned had you stayed employed for the period covered by that leave.

How the lump sum is calculated

Your hourly rate is your annual basic pay ÷ 2,087. The lump sum equals that hourly rate multiplied by your hours of unused annual leave. Locality pay, any applicable special pay rates, and cost-of-living adjustments that occur during the "paper" leave period are included.

Example: GS-14 Step 5 with $135,000 in total pay retiring with 240 hours of annual leave:

• Hourly rate: $135,000 ÷ 2,087 = $64.69/hour
• Lump-sum payment: 240 hours × $64.69 = ~$15,525 gross (before taxes)

This is ordinary income — withheld and taxed like regular pay. Plan for federal and state tax withholding. Many retirees see 22–32% come off the top depending on their bracket for the retirement year.

The 240-hour carryover cap

Most GS employees can carry a maximum of 240 hours (30 days) of annual leave into the next leave year.⁵ Leave above 240 hours at the end of the leave year is "use-or-lose" — it's forfeited. Exceptions:

• SES and equivalent: 720-hour carryover cap
• Overseas assignments: 360-hour cap for qualifying employees
• Emergency restoration: forfeited leave can be restored if exigency of business prevented using it — must be scheduled in writing before the third biweekly pay period before leave year end

Retirement timing strategy: when to retire to maximize both

The two pools reward different retirement-date strategies, and they can conflict.

Annual leave timing: end-of-year retirement is optimal

Annual leave accrues each pay period (4, 6, or 8 hours depending on your years of service). If you retire mid-year, you forgo the leave you haven't yet accrued. If you retire at the end of the leave year, you have your full 240-hour cap banked and you've maximized the accrued balance.

The 2026–2027 federal leave year ends on January 9, 2027.⁶ Retiring on or around January 9, 2027 means:

• You capture 26 full pay periods of annual leave accrual
• Your 240-hour balance at the end of leave year is fully preserved for the lump sum
• You also accrue FERS service credit for the month of January 2027 if you retire after the third day (OPM retirement date rules)

Sick leave timing: check your threshold

Your sick leave balance on the retirement date is what OPM uses. If you're 30 hours from a full-month threshold, it may be worth scheduling legitimate medical appointments, annual physicals, dental cleanings, or other covered sick-leave uses before your retirement date to cross the threshold. Each full month of credit at $130K high-3 is worth ~$1,300/year more annuity — for life.

The tension between the two

To maximize annual leave, you want to retire as late in the leave year as possible. To maximize sick leave credit, you want to cross a monthly threshold before you go. Both are valid goals — they just operate independently. The right answer depends on your specific balances, your high-3 salary, and your projected retirement date.

A concrete illustration:

Illustrative. Assumes $130K total pay, $130K high-3, 1% annuity multiplier. Actual amounts depend on grade, step, locality pay, and leave year timing.

What a federal-benefits specialist models

Most generalist advisors won't know to run this analysis. A specialist familiar with FERS typically models:

• Your exact sick leave balance and how many hours remain to your next full-month threshold
• Whether delaying retirement by 1–3 months crosses a sick-leave threshold and at what annuity premium
• Annual leave accrual rate and how it interacts with your target retirement date
• The after-tax value of the annual leave lump sum relative to the value of retiring earlier
• How sick leave service credit interacts with the 1.1% multiplier if you're close to 62 with 20+ years

These decisions interact with your FERS supplement timing, Social Security strategy, and TSP drawdown plan. Modeling them in isolation produces suboptimal outcomes.

Sources

1. OPM — Creditable Service for FERS Retirement. Sick leave credited toward annuity computation only, not eligibility.
2. OPM Retirement Facts 8 — Credit for Unused Sick Leave (RI 83-8). 2,087-hour work year; 174 hours per month.
3. OPM FERS Information — Creditable Service. FERS sick leave credit made permanent for retirements on or after January 1, 2014 per National Defense Authorization Act, FY2010.
4. OPM Fact Sheet — Lump-Sum Payments for Annual Leave. Calculation method, taxability, and processing.
5. OPM Fact Sheet — Annual Leave. 240-hour carry-over maximum for most full-time employees; SES 720-hour cap.
6. OPM — Leave Year Beginning and Ending Dates. 2026–2027 leave year ends January 9, 2027.

Values verified as of April 2026. OPM guidelines and leave-year dates subject to change; verify current-year figures with your HR office or OPM retirement specialist before making decisions.