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When you retire or separate from federal service, your unused annual leave is paid as a lump-sum payment. Since the processing time to receive full retirement benefits may take a while, the cash disbursement from annual leave can help provide supplemental income during the transition to retirement.

Payments for annual leave come from your agency and are paid about a month after your departure. Typically, a lump-sum payment will equal the pay you would have received had you remained employed until the end of the period covered by the annual leave.

To determine the total amount of your lump-sum payment, your agency will multiply your number of accumulated and accrued annual leave hours by your hourly rate of pay, plus any other types of pay that you would have received while on annual leave.

The amount of annual leave that is accrued is based on your time of service within the federal government. Employees with at least 15 years of service can earn up to 208 hours of annual leave a year. However, annual leave is subject to a “use or lose” policy and most workers are limited to carrying 240 hours (30 days) from one year to the next.

Generally, it makes sense to retire at the end of a leave year if you want to maximize your lump-sum payment for unused annual leave. The following example helps illustrate how unused annual leave is computed:

Mark retired on December 31, 2020 with 424 hours of unused annual leave. His leave consisted of 240 hours carried over from the previous year and 184 accrued hours from the current year. When he retired, Mark’s basic annual salary was $120,000 – equivalent to $57.50 per hour. At the start of 2021, there was an across-the-board pay increase of 1%.

Step 1. Add Pay Raise to Basic Salary:
$120,000 × 1.01 = $121,200 per year

Step 2. Calculate Hourly Rate of New Salary:
$121,200 ÷ 2,087 = $58.07 per hour

Step 3. Calculate Lump Sum Payment:
$58.07 × 424 = $24,621.68

The total lump-sum payment for Mark’s unused annual leave is $24,621.68.

It’s important to note, if you retire at or near the end of a calendar year, some of the hours in the next year could be multiplied by the old hourly rate depending on the end date of the last pay period. Additionally, federal, state, Social Security, and Medicare taxes are withheld from lump-sum payments, so your net amount will be minus those taxes.

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Jerel Harvey

Jerel Harvey

Jerel Harvey is the Founder and Managing Principal of Fedway Financial, an advisory firm that provides financial planning, investment management, and benefits training to the federal workforce.

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