Costly Mistakes Federal Employees Make in the Final 5 Years Before Retirement

The last five years of a federal career are the most financially consequential  and the most error-prone. By this point, the decisions are no longer abstract. The retirement date is in view, the Thrift Savings Plan (TSP) balance is at its peak, and small missteps that once seemed harmless can reduce lifetime income, sometimes by tens of thousands of dollars depending on salary, service history, TSP balance, and retirement timing.

The challenge is that the Federal Employees Retirement System (FERS) rewards precise timing and punishes assumptions. A pension built on the wrong salary window, a supplement clawed back by a part-time job, or a TSP rollover mishandled by a single check can each cost more than most federal employees realize. Below are five of the most expensive mistakes we see in the home stretch  and how to avoid them.

1. Misunderstanding How the High-3 Actually Works

The FERS pension formula is deceptively simple: your high-3 average salary, multiplied by your years of creditable service, multiplied by a 1% or 1.1% multiplier. The variable that trips people up is the high-3.

Many employees assume the high-3 is automatically their final three years of service. Usually it is  because that's when pay peaks  but not always. The high-3 is the highest average basic pay over any 36 consecutive months of a federal career, and that window is not always the most recent one.

That distinction matters enormously for anyone who takes a lower-paying position late in their career. Step down from a GS-14 supervisory role to a GS-13 in your final two years, or relocate from a high-locality area to a lower one, and an earlier 36-month window may actually produce a larger pension than your most recent years. The pension calculation is based on the highest 36 consecutive months of basic pay, so employees should verify that their service and salary history are accurate before retiring. Conversely, timing a retirement just after a scheduled pay raise  rather than just before  can lift the high-3 average and add to the annuity for life.

It's also easy to overestimate the high-3 itself. Basic pay includes base salary and locality pay, but it excludes overtime, bonuses, awards, and other premium pay. Build a retirement budget around a salary figure that includes a year of heavy overtime, and the real pension will come in lower than expected.

The fix: Request a FERS benefit statement, verify that every period of service and salary rate is recorded correctly, and review your federal retirement planning strategy before locking in a retirement date.

2. Ignoring the FERS Supplement Earnings Test

Many FERS employees who retire before age 62 with an immediate, unreduced annuity may qualify for the FERS Special Retirement Supplement (SRS)  a monthly benefit that bridges income until Social Security eligibility at 62, though eligibility depends on the retirement category and does not generally apply to MRA+10 retirements. It is one of the most valuable benefits in the system, and one of the most misunderstood.

The first trap is assuming everyone gets it. Employees who retire under MRA+10 provisions do not qualify for the supplement at all. Waiting to reach full, unreduced eligibility versus retiring early under MRA+10 can be the difference between a substantial bridge benefit and nothing.

The second trap is the earnings test. The supplement is subject to a Social Security–style earnings test: for 2026, every $2 earned above $24,480 in wages or self-employment income reduces the supplement by $1. A retiree who takes a part-time or consulting job after leaving federal service can see the supplement sharply reduced  or wiped out entirely. The good news is that not all income counts. TSP withdrawals, investment income, rental income, and the FERS pension itself are not part of the earnings test  only earned wages and self-employment income are. OPM generally reviews earnings through the annual FERS Annuity Supplement Earnings Report, so reductions may be based on reported earnings from the prior tax year.

A few additional realities catch people off guard. The supplement ends the month you turn 62, whether or not you actually claim Social Security at that point. The supplement itself does not receive cost-of-living adjustments. And it is taxable as ordinary income. Budgeting as though it continues past 62  or forgetting it's taxable in the year of retirement  leads to unpleasant surprises.

The fix: Confirm eligibility for an immediate, unreduced annuity, model any planned post-retirement work against the $24,480 threshold, and treat the supplement as a temporary, taxable bridge rather than permanent income.

3. Forgetting the Gap Between Gross and Net Pension

One of the most common planning errors is building a retirement around the gross pension figure. The number that actually lands in a retiree's account each month is the net pension  after federal tax withholding, any survivor benefit election, FEHB and FEGLI premiums, and other reductions.

The difference can be dramatic. A survivor benefit election alone permanently reduces the annuity, and federal health and life insurance premiums continue in retirement. Many retirees are genuinely shocked when they compare the pension they expected to the deposit they receive. The math isn't hidden in red tape  it's simply that several reductions stack on top of one another, and a plan built on the top-line number overstates real spendable income.

The fix: Run the pension calculation all the way down to net, factoring in the survivor benefit decision, insurance premiums, and taxes, before committing to a retirement budget.

4. Mishandling the TSP at the Worst Possible Time

The TSP is often the largest single asset a federal employee owns at retirement, which makes mistakes here especially expensive. Two errors stand out in the final years.

The first is allocation drift. Sitting entirely in the G Fund for safety can leave a portfolio unable to keep pace with a retirement that may last 30 years; sitting too aggressively in equities just before retirement exposes the balance to a downturn at the worst possible moment. The right balance depends on the full income picture  pension, supplement, Social Security, and other assets  not on a single rule of thumb.

The second is the rollover itself. Moving TSP funds to an IRA or other account incorrectly  taking an indirect distribution where the payment is made to the individual, rather than using a direct rollover or transfer to the receiving IRA or plan  can trigger withholding and, if not completed properly within 60 days, taxes and possible penalties. Coordinating TSP withdrawals with the rest of the income plan also affects the tax bill, since withdrawal timing influences which bracket the income falls into.

The fix: Set an allocation tied to the overall retirement income plan, and structure any TSP rollover as a direct transfer to avoid withholding and penalty traps.

5. Getting the Retirement Date and Claiming Sequence Wrong

Timing is where many of these mistakes compound. The exact retirement date affects the high-3, eligibility for the supplement, the final annual leave payout, and the start of the pension. Retiring a few weeks earlier or later  or before versus after a pay adjustment or a service milestone  can change lifetime income.

The Social Security claiming decision adds another layer. Because the FERS supplement ends at 62, retirees face a real choice about whether to claim Social Security then or delay for a larger benefit later, and the right answer depends on the rest of the income plan. Even small details help: every 174 hours of unused sick leave is roughly equal to one month for annuity computation purposes, which can nudge the pension upward  though sick leave generally cannot be used to meet retirement eligibility requirements.

The fix: Treat the retirement date as a financial decision, not just a calendar choice. Map out how the date interacts with the high-3, the supplement, leave payouts, and the Social Security claiming sequence as part of a broader federal employees wealth management plan before submitting paperwork.

The Bottom Line

The final five years before federal retirement reward planning and punish guesswork. The high-3, the supplement earnings test, the gross-versus-net gap, TSP handling, and retirement-date timing each can materially affect lifetime retirement income. None of these decisions has to be made alone.

Federal Pension Advisors connects federal employees with experienced, independent advisors who specialize in FERS, TSP, and federal retirement planning. A no-cost consultation early in those final years can help federal employees identify timing, tax, pension, and TSP issues before they submit retirement paperwork.

Federal Pension Advisors is a marketing and referral platform operated by Revenx LLC. It connects consumers with independent, licensed financial professionals. It is not a registered investment adviser, broker-dealer, insurance agency, tax advisor, or law firm, and does not provide investment, legal, tax, or individualized retirement advice. This article is for educational purposes only. Federal retirement rules, tax laws, Social Security limits, and TSP procedures can change. Figures cited, including the 2026 FERS supplement earnings limit, should be verified with OPM, SSA, IRS, and TSP guidance before making retirement decisions.