Strategies to Avoid the OPM Trap

If you’ve heard it once, you’ve heard it a thousand times: “Wow, you work for the federal government? Must be nice to have such a great benefits package!”

What people outside of public service don’t realize is that those great benefits come with a few strings attached — namely, the fact that sometimes you have to navigate some bureaucracy to access all those benefits.

This is particularly true when you’re ready to retire. Retirement isn’t just something you can decide to do one day and expect everything to fall into place in a few weeks. To maximize your benefits — and even just to get your pension payments in a timely fashion — you need to plan ahead.

Here’s what you need to know to avoid falling into the OPM Trap.

OPM Retirement Basics

The OPM is the Office of Personnel Management, and they hold the keys to the kingdom when it comes to getting your pension payments. This is the massive human resources department for all federal employees, so you’ve almost certainly dealt with them at some point during your career.

When you’re ready to retire, there are plenty of forms to fill out and decisions to make. To ensure that you have time to get all your financial ducks in a row, the OPM encourages federal employees to begin retirement planning as early as five years ahead of their proposed retirement date. Getting an early start lets you:

  • Plan ahead to maintain your FEHB health insurance for the five-year period before you retire, so that you can continue coverage into retirement before Medicare picks up the slack
  • Plan ahead to maintain your FEGLI life insurance coverage
  • Gain a clear understanding of your FERS Annuity (aka pension) eligibility and how your TSP retirement funds, annuity, and Social Security checks will work together to fund your retirement

When you get to a year out from your desired retirement date, it’s time to get serious about planning and applying. At this point, you’ll need to:

  • Review your Official Personnel Folder (OPF) to check dates or service, raises, and more for accuracy
  • Tell your supervisor about your plans
  • Choose an official retirement date
  • Attend a pre-retirement counseling session  to understand your benefits and the process
  • Elect survivor benefits
  • Get an annuity estimate to help you with your planning

Finally, you should apply for your FERS Annuity at least 2 months ahead of your planned retirement date. This allows time for your personnel office to review your files and complete their own round of paperwork verifying your service — this goes faster when your OPF has already been reviewed and is in good order. Your payroll office also has forms to complete, and then they will finally send your application off to the OPM. This all takes time, but the sooner you complete your paperwork, the sooner these offices can complete theirs.

When the OPM receives your file, they will send you a civil service claim identification number for reference — don’t lose it! It’s how you’ll be able to track progress and get any questions about your pension answered.

The OPM Trap

Once the OPM has your application, approval isn’t exactly instantaneous. They have to review all of the submitted paperwork, calculate your FERS Annuity, and finish final processing. This can take a long time.

Though the OPM’s stated goal is to process pension applications within 60 days, the reality is that it usually takes much longer. In July of 2021, average processing time was over 90 days. Since that’s an average, it’s possible that your application could take anywhere from two to six months to complete — or even up to a year.

So what’s the OPM trap?

While you wait for your pension to be fully processed, you aren’t receiving your full pension. Instead, you receive an interim payment, which can be anywhere between 60 and 85% of the actual value of the FERS annuity you’ve earned. These checks begin coming your way within 6 to 8 weeks after you retire. 

The OPM trap gets people when they retire without realizing that their full pension checks could be many months away. First, you’ll wait for up to two months without any pay until your interim check comes through. Then, you’ll wait several more months with partial pay until your pension is finalized.

If you don’t have a plan in place to get you through this dry spell, the OPM trap can be a painful reality check on your first year of retirement.

Strategies to Cover the Interim Payment Period

Clearly, you need to have some cash reserves saved up and ready to go to get you through this period of partial annuity checks. This is definitely a “better safe than sorry” situation.

There are several ways to do this:

  • Savings accounts and money markets: A simple, easy-to-access savings vehicle may be all it takes to see you through, especially if you began planning for the OPM trap a few years in advance. 
  • Your traditional TSP account: If you retire in the calendar year you turn 55 years old, you can begin to take distributions from your Thrift Savings Plan. This is money you’ve been saving for retirement, so it may make sense to begin accessing it while you wait for your pension to be complete.
  • Annual Leave Lump Sum Payment: One of the best ways to keep cash on hand as you wait for your full pension is to use your Lump Sum Payment of Annual Leave. You’re entitled to be paid for your unused leave time at your regular hourly rate, so this can be a great windfall that gives you cash without forcing you to raid your other accounts. This check usually arrives within a month of your retirement. Keep in mind that annual leave lump sum payment will have taxes withheld.

In fact, you can plan ahead to maximize your annual leave payment by taking fewer or shorter vacations in the last years before retirement. 

Pro Tip: Retiring on December 31 will ensure that your lump sum check comes in a fresh tax year, which may help reduce your total taxable income for your final year of employment.

The OPM Trap is real, but it doesn’t have to derail the beginning of your retirement. When you plan ahead for a long delay, you’ll ensure that you can sail through the waiting period without too much trouble.  And if you’ve over prepared, and your interim payment period is shorter than expected, even better!

Need help with your retirement planning? We can help! Federal benefits and retirement planning is what we do, so contact us for a consultation today.