Annual Leave Strategy
HOW DOES ANNUAL LEAVE IMPACT YOUR RETIREMENT?
Written By: Joseph Polakovic & Daniel Vieira
Depending on length of employment and position, federal employees will earn somewhere between 4-8 hours of annual leave each pay period (see rules here), up to a maximum of 208 hours earned per year.
The amount of leave you are allowed to carry from year to year and the amount you can sell back varies depending on your agency or position. The majority of federal employees can only carry 240 hours from one year to the next (some supervisors and higher-level employees can carry more year to year). If you aren’t aware of your leave carryover benefits, you could be losing up to 208 hours of annual leave at the end of the year. Be sure to understand how many hours you earn each year and how much you can carry over so you’re not losing unused hours.
The availability of your annual leave may also depend on your agency. Postal employees are granted all their leave at the beginning of the year, but they still earn their leave each pay period. This allows USPS employees to use their hours before they’ve actually earned them. What that means is USPS employees can actually go negative on their hours and could owe money back when they retire!
Upon retirement, employees will be paid out based on their total earned annual leave balance. The amount you’ll get paid for each hour is determined by your annualized base pay. Since your annual leave is in hours, you’ll need to convert your base salary to an hourly rate to make this calculation. According to the Office of Personnel Management, there are 2,087 working hours in a year. If you divide your annual base salary by 2,087 that’ll give you your hourly rate. For example:
- Karen has 397 hours of annual leave at retirement and a base salary of $71,397/yr
- $71,397/2087= $34.21/hr (Karen’s hourly rate)
- Take her hourly rate and multiply it by her total annual leave hours.
- $34.21 x 397= $13,581.37 gross annual leave payout
Karen will receive a gross annual leave check of $13,581.37 which will be paid to her with her final paycheck. It’s important to know that this comes in Karen’s final paycheck. Similar to our normal income this annual leave check will be subject to income tax. Since it is paid in your final paycheck, the government payroll system will assume that you make that much biweekly for the entire year, likely pushing you to a higher tax rate.
In Karen’s example, a $71,397 base salary equates to a gross pay of $2,746.04 biweekly. If we add her annual leave payout to her normal working biweekly pay, Karen made $16,327.41 for that pay period, so the government will now assume Karen makes $16,327.41 biweekly (which equates to a $424,512 annual salary). With that new, very inflated salary, payroll will automatically withhold 35% tax from Karen’s final paycheck. This is a pretty good deal for the government, they’ll over-withhold taxes and you’ll be giving them a free loan until you’re able to recuperate that when you file your taxes.
Use It or Sell It?
The benefit of using all your annual leave before retirement can be that it adds time towards your service, which in turn adds to your pension calculation. Additionally, while you’re taking annual leave you’re still accruing benefits, which potentially includes more annual leave and your TSP match. Selling it back allows you the opportunity to accelerate your pension and essentially “double-dip”.
Be sure you have a strategy for getting the most out of your annual leave. There can be monetary benefits in using your annual leave before retirement, but at best, those typically aren’t realized until decades into the future. The immediate advantages of selling back as much leave as possible tend to outweigh the strategy of using your leave before retirement. One of the biggest overlooked factors that helps drive this decision is the financial assistance you may need during the interim period, which we’ll discuss in the coming weeks.