There are any number of online articles that discuss whether you should sell or take terminal leave. Ryan Guina’s Cash Money Life article is a very good primer on why this should be considered on a case-by-case basis, and why each decision on whether to take terminal leave is a personal one. This article aims to put numbers on paper. This should allow you to visualize the difference between taking and selling your terminal leave.
How do I decide whether to take or sell terminal leave?
First of all, terminal leave is one small aspect of your entire financial situation. To learn more about how it fits in the bigger picture, I encourage you to sign up for the 30 Day Financial Transition Challenge.
Part of the terminal leave decision is within your control. However, there may be circumstances that require you to stay until the last possible day. If so, you may find yourself being forced to sell back leave, even if that’s not what you wanted to do. If this is the case, then deal with it, make your adjustments, and move on.
However, there are a lot of people wondering what they should do if given the choice. This goes back to your personal circumstances, opportunities, cash flow needs, and other considerations. Instead of a set of rules to go by, below are a set of questions you should ask yourself:
- How much money do I get if I sell my terminal leave? Run the numbers, just like above, based on the amount of leave you have accumulated (don’t forget the taxes). If it’s significant ($10,000 or more), you may also want to see if this puts you into a higher tax bracket (i.e. in example 1, Sgt X could easily break through the 15% tax bracket which tops out at $37,650 for single filers). If this seems difficult, you might want to talk with an accountant. Your goal here is to get a number. That’s it.
- What are my available options? You could be comparing your number to another job, school, or some other opportunity that may require you to start before you’re officially out. Or, perhaps you already have a job lined up, and would like the additional time to spend with friends and family before you start. Whatever it is, you should think about what option B (as well as options C or D) look like.
- When possible, compare apples to apples. However, you decide what really matters. Perhaps that job doesn’t pay as much as you would earn by selling your leave back. However, it might be worthwhile if you’re helping future company by filling a position that’s been vacant for months. You might get the clock running on something that matters to you, like automatic salary increases (think GS civilian salaries where your first step increase occurs at the end of year 1). You might just appreciate the peace of mind that happens because you’ve finally ‘cut the cord’ on your old career. Whatever it is, you pick what criteria it is that you’re going to decide against.
- Make your terminal leave decision, then move on. You’ve got so many things going on that you can’t afford to second-guess yourself. Don’t worry about if you got the most money from your accrued leave. Make your decision, schedule it, then move on to the next priority item that is on your to-do list.
Next, let’s take a look at two terminal leave case studies, where the decision is pretty clear in each situation. Your particular situation might not be this straightforward, but looking at the numbers might help you put things into context.
Case #1: E-5’s End of Enlistment
Sgt X, an Army E-5, is separating after a little more than 4 years from Fort Hood, so he can go to college, using the post-9/11 GI Bill. He has 30 days of leave, and is trying to decide whether to sell it back or to use terminal leave. He has deployed to a combat zone, and ½ of his accrued leave is considered combat zone tax exclusion (CZTE) leave. His EAOS is 30 June, and his first class doesn’t start until September, so he’s got plenty of time. In this case, the primary concern is calculating how much Sgt X would receive in exchange for his 30 days of leave, and whether he feels that this money is worth it. Since his base pay is $2,614.20 (or a daily pay of $87.14), we should use that as the basis of calculation.
Normally, you pay taxes on leave that you sell back to the government. However, leave earned in a CZTE is not taxable when sold back, so Sgt X would only be taxed on ½ of his sold back leave. Let’s assume that Sgt X is in the 15% tax bracket, which is fairly reasonable for his paygrade, and that he pays no state income tax. In this case, he is entitled to $2,418.14:
CZTE: $87.14 X 15 days = $1,307.10
Taxable: $87.14 X 15 days = $1,307.10 – 15% ($196.06) = $1,111.04
Total: $1,307.10 + $1,111.04 = $2,418.14
Now, Sgt X has to decide whether his time is worth $2,418.14. First of all, he might not receive this amount. He would have to check with his pay office to see what his tax withholding rate is. If taxes are withheld at a higher rate, he might receive less than his entitlement. Then he’d have to wait until the next year to file his tax return and apply for a refund. This might not meet his cash flow needs, but in his case, he might not have a whole lot of other priorities besides getting as much money as he needs before he starts college.
Case #2: O-5’s Retirement
Commander Y, a Navy O-5, is retiring after 20 years in Washington, D.C. He has a job lined up at $105,000 per year and his employer wants him onboard as soon as possible. Commander X hasn’t deployed recently, so he doesn’t have any CTZE leave, but he does have 60 days accrued leave (includes leave he will have earned at his date of retirement). He also has a family.
In this case, we need to calculate what his entitlement would look like if he sold his leave back, then compare that to how much he would have earned at $105,000 per year. Let’s assume that as a family man, Commander X is in the 25% tax bracket. He has a decent job lined up, so he’s leaning towards taking terminal leave, but wants to know if he’d be better off staying in and selling it back. His base pay is calculated at O5 > 18 years ($8,388.90).
- If he sells his leave: Calculate 2 months’ pay (16,777.80), and subtract 25%. This gives you a total of $12,583.35
- If he takes his terminal leave to start work early: Calculate 2 months’ pay at $105,000 ($17,500), and subtract 25%. This gives you a total of $13,125 in civilian pay. This is more than what he would have earned by selling his terminal leave back. Additionally, he has two extra months to accrue employer benefits (401(k), health savings plan, etc.).
In Commander X’s case, there is a monetary & non-monetary incentive for him to take terminal leave instead of selling it back.
Terminal leave is just one of many financial issues you need to address as you transition from active duty. If you’re looking for a systematic approach to take control of your entire financial situation, take the 30 Day Financial Transition Challenge.
If you are feeling overwhelmed by everything, you should talk to your command’s financial counselor, or find a fee-only financial planner. Working with a professional should help you achieve the peace of mind you deserve as you transition.
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