The One Retirement Trap That Keeps Catching Experienced Federal Employees Off Guard—Even With Planning

Key Takeaways

• Even experienced federal employees with well-organized retirement plans can miss the financial and benefit consequences tied to the exact retirement date they choose.

• Retirement eligibility rules, annuity start delays, and benefit coordination timelines can easily derail financial stability if not addressed early.

The Overlooked Timing Mistake

Many federal employees nearing retirement assume that once they reach eligibility, they can pick any departure date with confidence. While technically true, this assumption hides one of the most common traps: retiring at the wrong time of year or month can delay your annuity start date, create health insurance coverage gaps, and result in missed income you can’t recover.

This is especially relevant for employees under the Federal Employees Retirement System (FERS), where your first annuity payment does not start immediately upon retirement. Instead, there’s a built-in delay that can cause a financial blind spot.

Why Timing Matters More Than You Think

FERS Annuity Start Date Rules

Under FERS, your annuity doesn’t begin the day you retire. It starts on the first day of the following month after your official retirement date. That means if you retire on July 2, your annuity won’t begin until August 1. That’s nearly an entire month with no federal paycheck and no retirement annuity income.

CSRS Works Differently

For employees under the older Civil Service Retirement System (CSRS), retirement on or before the third of the month allows annuity to begin the following day. But most employees are now under FERS, so this subtle difference rarely gets the attention it should.

One-Month Delay Can Cost More Than You Think

If your high-3 average salary is $100,000, your monthly annuity might be around $1,800. Losing that income for even one month can disrupt your financial planning, especially if you have major expenses, such as relocating or transitioning to private insurance.

Hidden Healthcare Coverage Gaps

Healthcare continuity is another major risk area. FEHB (Federal Employees Health Benefits) coverage continues into retirement only if you meet certain criteria:

• You must be enrolled in FEHB for the 5 years immediately before retirement, or from your first opportunity if less than 5 years.

• You must immediately begin receiving an annuity.

If your annuity is delayed due to poor timing, some carriers may consider that a break in coverage. Even though FEHB allows continued participation, claim processing or reimbursement may be affected. In rare cases, you may even need to front costs until annuity payments kick in and your coverage status is fully reinstated.

Missed Opportunities with TSP Withdrawals

If you’re counting on accessing your Thrift Savings Plan (TSP) funds during the transition, here’s where another timing trap appears.

• TSP withdrawals can be initiated after you separate, but processing times vary.

• If you retire late in the month, your personnel office may not finalize your separation records until well into the next month.

This administrative lag can delay TSP withdrawals, leaving you with a multi-week or even multi-month cash flow gap. In 2025, TSP withdrawal processing continues to take 30–60 days depending on whether forms are submitted online or by mail.

Medicare and FEHB Misalignment

Many retirees in 2025 are coordinating FEHB with Medicare. This combination can reduce out-of-pocket costs and preserve full coverage. But you must plan the exact timing of Medicare Part B enrollment:

• Initial Enrollment Period (IEP) is the 7-month window around your 65th birthday.

• If you miss this and don’t qualify for a Special Enrollment Period (SEP), you must wait for the General Enrollment Period (Jan 1 to Mar 31), and coverage doesn’t begin until July.

So, if you retire without enrolling in Part B and aren’t yet eligible for a SEP, your FEHB plan may change cost-sharing rules, and you may face coverage issues or higher out-of-pocket costs for months.

TSP Required Minimum Distributions (RMDs)

If you turn 73 in 2025 and are no longer working, you’re subject to Required Minimum Distributions (RMDs) from your TSP. These must be taken by December 31 of each year. Missing the RMD deadline results in a significant penalty — 25% of the amount not withdrawn.

Delaying retirement until late in the year without taking your RMD in time can trigger this penalty. It’s an easy trap to fall into, especially for those who retire in October–December and are still adjusting their financial transition.

COLA Assumptions and Reality

Cost-of-living adjustments (COLAs) are another misunderstood detail.

• FERS retirees don’t receive full COLAs until age 62, even if they retire earlier.

• CSRS retirees receive full COLAs regardless of age.

So, if you’re planning to retire at age 57 under MRA+10, you won’t see a COLA until you turn 62. This can make a significant difference in your retirement income during the first five years, especially in inflationary periods.

Sick Leave Conversion Rules

Sick leave accrual under FERS does not count toward your eligibility to retire, but unused sick leave does count toward your annuity computation.

• Every 174 hours of unused sick leave equals one extra month of service credit.

• But it only matters if you’re already eligible to retire based on age and service.

If you miscalculate your eligibility date and retire even one day too early, you may lose months of service credit from sick leave that would otherwise increase your annuity.

Lump-Sum Annual Leave Trap

When you retire, any unused annual leave is paid out as a lump sum. But this too comes with caveats:

• If you retire late in the calendar year, your leave payout may push your income into a higher tax bracket.

• Lump-sum leave payments are not credited toward TSP contributions or matching, so that money is taxed as regular income with no deferral advantage.

In 2025, with higher federal income tax brackets due to inflation adjustments, this is more critical than ever to plan around.

Survivor Benefit Election Consequences

Another key area often overlooked is the timing of your survivor benefit election:

• If you don’t elect survivor benefits for your spouse at the time of retirement, they will lose eligibility for continued FEHB coverage after your death.

• This decision must be made before your annuity is finalized. Once it is processed, your choice is generally irrevocable.

Survivor benefits also reduce your monthly annuity permanently, so timing and communication with your spouse are essential before finalizing this piece.

The Processing Time Trap

Even though opm (Office of Personnel Management) continues digitizing the retirement process in 2025, retirement application processing still takes 60 to 90 days.

During this time:

• You may receive only interim payments, often 60–80% of your full annuity.

• FEHB coverage continues, but there may be issues with verifying eligibility until your annuity is finalized.

• Any mistakes in your paperwork can extend processing time and delay full payments.

This makes retiring at the start of a quarter (January, April, July, October) more efficient because agencies and OPM often sync their processing cycles accordingly.

How to Avoid the Trap in 2025

1. Time Your Retirement for the End of a Month: If you retire on January 31, your annuity begins February 1. But retiring on February 2 delays it until March 1.

2. Finalize Medicare Enrollment Before Retirement: Especially if turning 65 in 2025, ensure Medicare Part B is active before your FEHB plan shifts cost-sharing expectations.

3. Check Sick Leave Totals Closely: Confirm you’ve met the full eligibility criteria before planning to apply unused sick leave toward your annuity computation.

4. Evaluate Your Tax Year Implications: Avoid retiring too late in the year if your lump-sum leave payout might elevate your income tax liability.

5. Apply Early: Submit your retirement application at least 3 months before your desired date to reduce the risk of delays in OPM’s processing.

6. Coordinate TSP Withdrawals and RMDs: Know your deadlines for Required Minimum Distributions if you’re 73 or older in 2025.

7. Consult a Professional: This is one of the most effective ways to avoid these traps. Even small missteps can cost thousands.

Small Timing Errors Can Undermine Big Retirement Plans

Planning your retirement isn’t just about hitting eligibility requirements. It’s about understanding how one small detail — like the day of the month you choose to retire — can ripple through your annuity start date, health benefits, tax situation, and access to savings. The trap isn’t lack of planning. It’s not planning around the precise timing that governs so many critical pieces.

For that reason, it’s essential to consult with a licensed professional listed on this website who can walk through your personal timeline, financial projections, and benefit elections in detail before you lock in your final date.