When to Retire from the Federal Government

FERS retirement timing decisions that compound. Each one individually seems minor — combined, they can add up to $20,000–$50,000 in real dollars over the first few years of retirement.

1. Annual leave: the use-or-lose deadline and lump-sum payout

When you retire, you receive a lump-sum payment for all unused annual leave — calculated at your final pay rate (basic pay + locality pay) and taxed as ordinary income.¹ This is the most commonly underestimated retirement asset for federal employees with long tenure.

• Carryover cap: Most career employees may carry over a maximum of 240 hours of annual leave into a new leave year (5 U.S.C. § 6304). SES members can carry 720 hours; overseas employees 360 hours.
• Use-or-lose deadline: The 2026 federal leave year ends January 9, 2027. Leave exceeding the carryover cap is forfeited at year-end. To avoid losing excess leave, it must be used (not just scheduled) before the year-end cutoff.
• Dollar example: If you earn $140,000/year and retire with 240 hours of annual leave, that's roughly $16,100 tax-before (240 ÷ 2,087 hours × $140,000). At $180,000 it's ~$20,700. Worth timing your retirement to maximize this balance, not minimize it.
• Implication: If your annual leave balance will hit 240 hours before the leave year ends, retiring before year-end preserves that balance. Retiring in February after the new leave year resets your balance to near zero costs you the prior year's accumulation.

2. Annuity start date: end of month vs. mid-month

Your FERS annuity starts on the first day of the month following your retirement date — regardless of whether you retire on the 1st, the 15th, or the last day of the month.²

• Special rule: If you retire on the 1st, 2nd, or 3rd of a month, your annuity starts the day after retirement.
• Implication: Retiring on January 31 vs. January 15 gives you an identical annuity start date (February 1) — but you receive 16 more days of employment pay on the January 31 exit. Always retire at or near the end of the month.
• Last day of pay period vs. last calendar day: For leave accrual purposes, you want to retire after the last full biweekly pay period (to receive that period's leave accrual). The last day of a pay period is usually a Saturday — retiring that Monday or at end of that pay period maximizes leave earned.

3. High-3 salary timing: the permanent multiplier

Your basic FERS annuity is 1% × high-3 average salary × years of service (1.1% if you retire at 62+ with 20+ years). The high-3 is the average of your three highest consecutive years of basic pay (including locality).³

• What counts: basic pay + locality pay. What does NOT count: overtime, Sunday premium, night differential, performance awards, bonuses.
• Step increases and high-3: Each General Schedule step increase modestly raises your base. Retiring before a step increase that would have raised your high-3 costs you that increment permanently. For a GS-14 step increase worth $3,000/year, spread over a 3-year high-3 average, that's $1,000/year added to annuity base — and 1% of that = $10/year more annuity, forever.
• Promotion timing: If you receive a promotion 18 months before retirement, only 18 months of the new higher salary flows into the high-3. Waiting until you have 36 months at the promoted grade maximizes the high-3 impact. For a promotion worth $20,000/year in salary, timing it right can add $3,000–$5,000/year to your lifetime annuity.
• Locality pay changes: Locality pay is included in basic pay for high-3 purposes. A late-career reassignment to a higher-locality area (e.g., San Francisco vs. Rest of U.S.) raises your high-3 — but only if you stay 3 years at the new rate.

4. FERS supplement timing: hit MRA before retirement

The FERS Special Retirement Supplement (SRS) bridges the gap between early retirement and age 62, when Social Security begins. It is only available to employees who retire with an immediate, unreduced annuity before age 62:³

• MRA (age 55–57 depending on birth year) + 30 years of service — supplement begins at retirement
• Age 60 + 20 years of service — supplement begins at retirement
• VERA/VSIP early retirement — supplement deferred until you reach your MRA (see VERA/VSIP guide)

What does not qualify: MRA+10 (reduced-annuity) retirement — no supplement at all. If you retire at MRA with 10–29 years, you lose the supplement entirely.

For a GS-14 with 28 years of service, the FERS supplement could be worth $1,200–$1,800/month from age 57 to 62 — that's $72,000–$108,000 over 5 years. The difference between qualifying and not is simply whether you hit 30 years of service by your MRA.

5. Sick leave conversion: timing for clean months

Unused sick leave is converted to additional service credit at retirement: 174 hours = 1 month of additional service (2,087 hours = 1 full year).⁴ Partial months are dropped — only complete months count.

• Don't retire with 150 hours of sick leave. 174 hours = 1 month (worth 1% × high-3 more annuity, forever). If you have 150 hours and could accrue 4 more biweekly (you earn 4 hours/pay period for most career employees), waiting one pay period adds a full month of service credit.
• Example: If your high-3 is $130,000 and you're retiring with 29 years, converting an extra month via sick leave effectively makes it 29 years and 1 month. That adds $130,000 × 1% × (1/12) ≈ $108/year to your annuity, every year, for life. Small but real.
• See the dedicated guide: Sick Leave & Annual Leave at Retirement for the full conversion table.

6. FEHB: the five-year rule you cannot undo

To carry Federal Employees Health Benefits into retirement, you must have been continuously enrolled in FEHB for the five years immediately preceding your retirement date — or since your first eligibility if shorter.⁵

• This rule is binary and strict. A resignation and rehire that breaks the 5-year continuous window can permanently disqualify you from FEHB in retirement.
• If you are considering phased retirement, a bridge job, or VERA early-out: verify your FEHB enrollment continuity before separating. A brief gap can cost you premium-free coverage worth hundreds of thousands of dollars over a 25-year retirement.
• Time on TRICARE can count toward the 5-year period under certain conditions, but only if you were also enrolled in FEHB at retirement.

7. TSP Rule of 55: withdrawals before age 59½

The standard 10% IRS early withdrawal penalty applies to TSP distributions before age 59½ — unless you qualify for the Rule of 55: if you separate from federal service during or after the calendar year in which you turn 55, you may withdraw from TSP without the 10% penalty.⁶

• Year-of-separation rule: You don't need to be 55 on your separation date — just in that calendar year. Retiring in January of the year you turn 55 in December qualifies.
• Public safety officers (law enforcement, firefighters, air traffic controllers, customs and border protection officers) have a more favorable rule: penalty-free withdrawals if you separate during or after the year you turn 50.
• Roth TSP note: Roth TSP contributions can always be withdrawn penalty- and tax-free. Roth TSP earnings are penalty-free after age 59½ (or 55 with separation rule). SECURE 2.0 § 325 eliminated Roth TSP lifetime RMDs starting 2024, so Roth TSP held in TSP has the same no-RMD treatment as Roth IRA.
• If you retire before the year you turn 55 and need TSP income before 59½, a 72(t) SEPP plan is one option — but this requires careful planning and locks you in for 5 years or until 59½.

A practical retirement timing checklist

For a FERS employee planning to retire in the next 12–24 months:

Why this requires a specialist

Each decision in isolation is manageable. The complexity is in the interactions: retiring in October vs. December changes both your annual leave balance and your high-3 if you have a step increase scheduled. Timing a promotion 30 months before retirement vs. 20 months changes the math. The sick leave and leave year interplay depends on your exact accrual rate and hours. A federal-benefits specialist runs your actual numbers across all six variables simultaneously — and has seen the edge cases.

Sources

1. OPM — Lump-Sum Payments for Annual Leave. Payment calculated at final pay rate; taxed as ordinary income.
2. OPM FAQ — When Do My Benefits Begin? Annuity starts first of month following retirement; special rule for 1st–3rd of month retirements.
3. OPM — FERS Basic Annuity Formula, High-3, and Supplement Eligibility.
4. OPM — FERS Voluntary Retirement, Sick Leave Credit. 174 hours = 1 month additional service; partial months dropped.
5. OPM — FEHB in Retirement: 5-Year Enrollment Requirement.
6. TSP — Information for Participants Leaving Federal Employment (Rule of 55; age 50 for public safety officers).

Values and rules verified as of April 2026. Annual leave carryover cap and leave year dates per 5 U.S.C. § 6304 and OPM leave year calendar.