Vacation accrual and retirement planning

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Vacation accrual and retirement planning

Postby Bob's not my name » Mon Jul 01, 2013 9:45 am

I'm a long way from retirement (13-15 years), but I was looking into my employer's vacation policy to see if I was forfeiting any and I learned something interesting.

First, I know there's lots of hysterical journalism about how Americans get far less vacation than our role models the French, but not since early career have I had a job with insufficient vacation. In my new job I get four weeks' vacation with eight weeks of carryover, a personal day, seven sick days, nine holidays, a generous comp time policy, three months of short term disability at full pay, another three months of short term disability at 2/3 pay, excellent long term disability insurance coverage, scholarships for my youngest kid, and double digit 403b matching. Pretty good benefits. Near retirement I'll be getting five weeks' vacation and I'll be allowed ten weeks of carryover.

Anyway, because the comp time policy is so generous I typically use only a week of my four weeks' vacation each year, even though I take three weeks of vacation. I've maxed my carryover, so I'm in use-it-or-lose it mode, which means taking about six weeks of vacation every year or forfeiting some.

The interesting thing I discovered is that my employer allows a retiring employee to defer payment for unused vacation until the year following retirement. What this means in practice is that if I retire in late summer I can have that year at about 2/3 my regular income (effectively about 1/2 if I max my 403b and my wife's TIRA) and the following year at about 1/4 of my regular income from 13 weeks of accrued vacation. Since my marginal rate has been over 40% for years now, this looks terrific. I can probably be in the 15% federal bracket in my retirement year with little headroom, and in the 15% bracket in my first full year of retirement with lots of headroom for Roth conversions. For the next 5-10 years, depending on whether they change the RMD and SS rules to acknowledge increases in longevity, I'll be able to continue making Roth conversions in the 15% bracket.

Is this vacation pay deferral a common benefit for retiring employees in the U.S.? Have any bogleheads milked it for tax advantage? It will save me thousands in income taxes. However, if the deferred vacation pay is subject to SS tax that'll blunt the advantage.
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Re: Vacation accrual and retirement planning

Postby livesoft » Mon Jul 01, 2013 9:51 am

My company saw the huge liability it had from accrued deferred vacation, so it paid it out in cash (causing income taxes) and then limited future accruals. Everyone started to take their vacations after that.
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Re: Vacation accrual and retirement planning

Postby Bob's not my name » Mon Jul 01, 2013 10:05 am

Yeah, that happened at my former employer, and the cash was nice (albeit taxed heavily). My new employer does have accrual limits, but as noted they're pretty high.

Several times during my career I have enjoyed accrued vacation pay when changing employers, either by actually taking months off between jobs or by effectively receiving two paychecks for a month or so, one from the new job, one from the old. Not since I was in my twenties have I been able to use all the annual vacation my employers have allowed me. I consider the carryover to be an additional short term disability coverage -- with 8 weeks of carryover and 4 weeks accruing each year, I generally have almost six months of full pay STD (that's Short Term Disability, not the other thing) at any given time, plus another three months at 2/3 pay.
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Re: Vacation accrual and retirement planning

Postby letsgobobby » Mon Jul 01, 2013 11:30 am

I get 7 weeks vacation as of this fall, after ten years with my employer, and lots of other good benefits, but additional time off or the ability to accumulate lots of time or be paid out for unused time are not among them. No sick days, no jury duty, no personal days, no moving days, no additional time for CME. Just six holidays.

And no sabbatical. I think that more than anything hurts our retention of mid career physicians.
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Re: Vacation accrual and retirement planning

Postby Sidney » Mon Jul 01, 2013 11:34 am

My company quit allowing any deferred vacation years ago. Use it or lose it in the year granted. I thought this was becoming the norm.
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Re: Vacation accrual and retirement planning

Postby VictoriaF » Mon Jul 01, 2013 11:38 am

If you get an unused vacation compensation in the year following retirement, it may qualify you for an IRA contribution for that year, if the employer sends you a W2.

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Re: Vacation accrual and retirement planning

Postby Watty » Mon Jul 01, 2013 12:01 pm

Is this vacation pay deferral a common benefit for retiring employees in the U.S.?


Probably very uncommon at least in the public sector and there is a lot of pressure building for government job benefits to be more in line with the public sector.

Another strategy would be to take all your vacation just before your official retirement date so that your other benefits will be continued for the additional weeks too. This could save you several months of Cobra payments if you will be paying for that.

I don't know if it is calculated this way everwhere but at some compnaies I have worked for your health and dental insurance was paid thorugh the end of the month that you left the company. This means that if you time your retirment to be on the 1st day of a month then you may also get almost a full months extra coverage.

If you will be retiring in the middle of the year your final years income will be about half of your normal income so that would put you in a lower tax bracket then too.
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Re: Vacation accrual and retirement planning

Postby Bob's not my name » Mon Jul 01, 2013 12:06 pm

VictoriaF wrote:If you get an unused vacation compensation in the year following retirement, it may qualify you for an IRA contribution for that year, if the employer sends you a W2.
This occurred to me, too. I was wondering about the 403b, which seems unlikely, but the IRA would be nice.
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Re: Vacation accrual and retirement planning

Postby Bob's not my name » Mon Jul 01, 2013 12:09 pm

Watty wrote:I don't know if it is calculated this way everwhere but at some compnaies I have worked for your health and dental insurance was paid thorugh the end of the month that you left the company. This means that if you time your retirment to be on the 1st day of a month then you may also get almost a full months extra coverage.
Yes, I've exploited this when changing jobs.
Watty wrote:
If you will be retiring in the middle of the year your final years income will be about half of your normal income so that would put you in a lower tax bracket then too.
Exactly. Furthermore, if you retire at the end of a calendar year (which many people seem to do, I'm not sure why) then you're kind of throwing away the deferred vacation pay benefit.
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Re: Vacation accrual and retirement planning

Postby Wagnerjb » Mon Jul 01, 2013 1:10 pm

Bob: I am a year or two away from retirement, after 30 years with a MegaCorp. As I sharpen the pencil and look at our vacation (and other) plans, I see a strong incentive NOT to take your unused vacation as a lump sum payment. I earn 6 weeks of vacation per year, and we can bank up to 3 weeks (the rule has been lowered to 2 weeks, but I am grandfathered with 3 weeks in the bank).

One of my colleagues told me of his plan, and I think this is the "best practice" use of vacation. He will work until Thanksgiving, then stop. He will use his unused current year vacation to stay on the payroll until January 1st 2014. On January 1st, he is granted the full year's 6 weeks vacation for 2015. He uses the 6 weeks of 2015 vacation pay and his 3 weeks of banked vacation to stay on the payroll until late February 2015. Not only does this strategy allow him to earn the 6 weeks vacation for 2015, but it boosts his pension. We have a traditional pension plan, and virtually everybody in the company takes the Lump Sum payment. A 30-year employee in the traditional pension plan - with a salary of say $150,000 - will see his Lump Sum value grow by maybe $6,000 or $7,000 per month of service. This is because of the severe back-end nature of the traditional pension plan. Bottom line is that by staying on the payroll for an additional 3 months, this guy grows his pension payment by $20,000 and he also earns the 6 weeks vacation - another $15,000 or so.

There are personal tax issues that each employee is exposed to, and other tax planning issues (due to taxable lump sums, such as stock options or RSU's) may overwhelm the vacation strategy. But the additional $35,000 in my example is pretty compelling.

By the way, when I talked to a senior person in HR they strongly encouraged me to take the unused vacation as salary rather than a lump sum payment. Clearly, they understand the impact on the pension too. Not only that, but you get benefits (medical, etc) during the time you are on vacation.

Best wishes.
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Re: Vacation accrual and retirement planning

Postby Bob's not my name » Mon Jul 01, 2013 1:22 pm

Interesting. I don't think any of those factors play in my situation. Vacation is earned over the course of a year, there's no pension, there are no stock options or RSU's, and I don't think the deferred vacation pay gets you anything in terms of benefits.
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Re: Vacation accrual and retirement planning

Postby Wagnerjb » Mon Jul 01, 2013 2:27 pm

Bob's not my name wrote:Interesting. I don't think any of those factors play in my situation. Vacation is earned over the course of a year, there's no pension, there are no stock options or RSU's, and I don't think the deferred vacation pay gets you anything in terms of benefits.


I understand everything except the comment about the deferred vacation. We get heavily subsidized medical insurance as employees, but not as a retiree - especially if you retire before age 65. The value of the company subsidy might be as much as $1,000 per month. If you retire and take your unused vacation as a lump sum, you immediately are on your own for retiree medical insurance. But if you stay on the payroll (even though you have stopped working) you continue to get the subsidized medical benefits for those two or three months. Obviously, this is a much smaller value than the pension...but it shouldn't be overlooked in the calculations.

What about a bonus? Do you have the "must be present to win" rules? We don't. If a person retires in June, the following February (when bonuses are paid out), he will get 50% of the bonus since he worked 50% of the prior year. He gets the check even though he retired already. By taking vacation as salary on the payroll, you also increase the size of your bonus in the following year.

Best wishes.
Andy
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Re: Vacation accrual and retirement planning

Postby Bob's not my name » Mon Jul 01, 2013 2:50 pm

No bonuses.

There is medical insurance for retirees. I haven't looked into the details, since they're likely to change before I retire. I'll keep it in mind, though. Thanks.
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Re: Vacation accrual and retirement planning

Postby dm200 » Mon Jul 01, 2013 3:05 pm

While none of us can accurately predict the future, my opinion is that this option has a significant risk of being phased out or eliminated. Therefore, I would not count on it for retirement planning.
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Re: Vacation accrual and retirement planning

Postby Bob's not my name » Mon Jul 01, 2013 3:13 pm

Ha. You don't have to decide until your retirement date, and I'm certainly not counting on the several thousand dollars in taxes I'd save to make or break my retirement plan. As you may have noticed from my posting history, I'm just mildly obsessed with mitigating taxes. I find the partial year of earned income scenarios presented by the graduation year, retirement year, and unemployment year to be pretty interesting for tax mitigation.
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Re: Vacation accrual and retirement planning

Postby origami » Mon Jul 01, 2013 5:16 pm

Bob's not my name wrote:First, I know there's lots of hysterical journalism about how Americans get far less vacation than our role models the French, but not since early career have I had a job with insufficient vacation. In my new job I get four weeks' vacation...


As a foreigner working in the US for 11 years I can tell you, that you seem to have a typical American lifestyle where life/work balance is skewed heavily towards work (by international standards). In my opinion quality of life does suffer in this case for a lot people. There is just NO NEED to work that much.
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Re: Vacation accrual and retirement planning

Postby travellight » Mon Jul 01, 2013 6:11 pm

I'm also trying to figure out smartest maneuvers for my banked vacation. I have. 70 days now. Last year I took a lump sum payout of that year's accrual but paid with taxes in the highest bracket. It is difficult to take the vacation.
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Re: Vacation accrual and retirement planning

Postby Bob's not my name » Mon Jul 01, 2013 6:12 pm

origami wrote:
Bob's not my name wrote:First, I know there's lots of hysterical journalism about how Americans get far less vacation than our role models the French, but not since early career have I had a job with insufficient vacation. In my new job I get four weeks' vacation...


As a foreigner working in the US for 11 years I can tell you, that you seem to have a typical American lifestyle where life/work balance is skewed heavily towards work (by international standards). In my opinion quality of life does suffer in this case for a lot people. There is just NO NEED to work that much.
I'm an immigrant.
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Re: Vacation accrual and retirement planning

Postby Epsilon Delta » Mon Jul 01, 2013 7:43 pm

Wagnerjb wrote:One of my colleagues told me of his plan, and I think this is the "best practice" use of vacation. He will work until Thanksgiving, then stop. He will use his unused current year vacation to stay on the payroll until January 1st 2014. On January 1st, he is granted the full year's 6 weeks vacation for 2015. He uses the 6 weeks of 2015 vacation pay and his 3 weeks of banked vacation to stay on the payroll until late February 2015. Not only does this strategy allow him to earn the 6 weeks vacation for 2015, but it boosts his pension.

One employer I worked for had the rule that would convert this "terminal leave" into a lump sum and cancel benefits if you gave notice that you intended to leave immediately after a vacation. So some employees would take all their vacation, coming back for a day or two and then leave. Management got annoyed that people weren't giving notice, but they never changed their policy.
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Re: Vacation accrual and retirement planning

Postby origami » Tue Jul 02, 2013 2:48 am

Bob's not my name wrote:I'm an immigrant.

And 4 weeks of vacation is a lot?
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