Leave is a major part of the military compensation package. When a member is transitioning out of the military, they are often faced with the decision to take terminal leave or sell the remainder of their leave balance back for a financial payment. Many members may decide to do one thing or the other based on popular opinion, or what someone they knew did. I don't think that is a very good way to go about your military transition, so the goal of this blog post is to explain the aspects of this decision and how you may or may not want to use some or all of your leave before transition.
Leave Payments are Taxable Income
Leave payments are taxable income to the member, which is something that is forgotten a lot of times. Here is how to calculate the payment and take-home pay of a member: (Base Pay / 30) * Days of Leave at Sell Date * (1- Marginal Tax Rate)
So for an O-3 with 4 years of service and 20 days of leave in the 22% marginal bracket, this would be ($6470/30) * 20 * 0.78 = $3,364.40 or $168.62 per day.
Here is an example of what this looks like in excel with a table breaking down the different ending balances of leave and what they are worth:
Value of Projected After Tax Leave Balance
As you can see the actual take-home income is much lower than the gross due to taxes. This has to be a consideration when deciding if it is worth it to sell any portion of your leave balance. It also might be worth considering what this taxable income would do to your tax bracket and how it might affect your eligibility for certain tax credits, IRA contributions, and other tax-related items. I find it most helpful to break down the value on a per-day basis as it shows you exactly how much each day is worth and allows you to make more educated decisions regarding your terminal leave. Building a table such as this allows you to not only project and plan how much leave you might end up with, but put numbers behind the decision to take or not to take terminal leave or to what extent.
Money is worth more to some people, so a $150/day payment to someone who is financially free isn't going to mean as much to another member that is in debt and severely needs money. A day of leave is also clearly worth more to the higher-ranking individual due to the higher base pay. Time is also worth more to some people than others. Someone who is single or has family that is unavailable right now might prefer to work the last two months and take the money, while another person might benefit from terminal leave. The point is that the value of a day of leave is very specific to each individual and no blanket statement or rule can be applied to every situation.
Taking Terminal Leave Is Not Optimal Unless You Move Cities AND Start Another Job
Terminal leave includes taking leave over holidays and weekends covering up to your last 60 days in service. I see this as a very poor strategy for those who will be staying in the same city, or won’t be starting a job right away. However, if you are leaving and moving to a different city AND starting a job right away, this will make more sense. You are reaping the benefits of terminal leave of not having to be in one location, as well as starting your new job and life in another city.
If you are not starting a new job and are just going to be taking some time off, then the government is getting that time back for lots of days that you would get off anyways (holidays, weekends, and Family Days). This is why the conventional wisdom of saving 60 days of leave to take as terminal leave is not optimal for many members.
You should want to maximize the usage of leave days. What I mean by this is to use terminal leave only for the time that you will be traveling, vacationing, or starting a new life in another city, and sell back only the days that you won't or can't use. The rest of the days can be taken optimally during your last year of service to avoid taking leave over weekends and family days, which leads to the most optimal use of your leave balance.
The Best Option
This decision does not have to be simply taking all of your terminal leave versus selling it back. The optimal decision is that you take your leave days during the weeks leading up to transition with commander approval. Absent moving cities AND changing jobs, I find this to be the optimal decision and leads to the most flexibility for the member and the most optimal balance of both time and money. It gives you the ability to do 2 things:
- Not have to take leave on days that you have off anyways. Depending on what months you are transitioning, this could be a lot of days between weekends, family days, and holidays.
- Still get to take time off to spend with family, vacation, or even do some work on your next job provided that it is a telework position.
- Still get paid at the end for any unused days.
Instead of taking 60 days of terminal leave and being bored for any of it, and taking off when you would have off anyways, an approach might be to:
- Take 20 days of leave to vacation and relax with family (ideally not on weekends and family days)
- Work 20 days (work will likely not be very difficult towards the end of service during out-processing)
- Sell 20 days in the end that you would not use anyways, or take these as terminal if you are starting a new job in a new city
This is a much more balanced approach that I think would lead to better outcomes for most families.
Conclusion
I think the optimal solution for most will be to take leave days in the months leading up to the transition to job search, work, and take time off with family. This allows you to preserve your weekends, holidays, and family days that you will get off anyways. If you don’t need to or want to take the time off and would rather take the money, then you can sell some or all of the days. I tend to think that the money isn’t worth it and that the time off is the way to go. Terminal leave is only optimal if you are going to be geographically leaving the area and will have a second income.
Ultimately, it comes down to how taxing your current job is, when your new job starts, how much you value money vs. time, and what your goals are for your family. There is no one-size solution, but I hope this discussion helps to frame the quantitative and qualitative considerations that are important when deciding what to do with your excess military leave at transition.