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WHAT’S THE BEST DAY of the year to retire? Many people think it’s Dec. 31. But I used to think my ideal retirement date would be the day in February when the Cleveland Guardians played their first spring training baseball game. What better way to start my retirement than seeing my childhood baseball team in Arizona get ready for the upcoming season? When I wasn’t watching baseball, I could visit the Grand Canyon and Sedona.
When I think about baseball, I think about my childhood friends in Ohio and all the wiffle ball games we played in our backyards. Although the street I lived on was a row of tiny starter homes, it seemed like every house had at least two children. Nobody was rich, but we all seemed happy.
Still, you shouldn’t select your retirement date based on the opening day of spring training or, for that matter, the start of your golfing or fishing season. Retiring is an irreversible decision that should not be made in haste.
In September 2008, I decided it was time to retire. I felt I had enough money. I wasn’t satisfied with the work I was doing. I have to admit it wasn’t an easy decision. At age 58, I was fairly young to retire, plus I was making more money than I’d ever made. It was hard to let that paycheck go. But I was eager to start a new chapter in my life.
I decided to stay until the end of the year. It made sense. I would have given up some benefits if I left in September. For instance, I would have lost 10 days of holiday pay for Thanksgiving and Christmas. I also wanted to max out my 401(k) plan for the year.
There were also some home repairs and upgrades I wanted to do before I left the company. I didn’t want to retire and face large bills that might affect my retirement budget. I installed new blinds, overhead ceiling lights and double-pane windows. I also replaced an old water heater and electrical panel, and painted my apartment.
I found it’s a good idea to make a list of financial benefits you want to take advantage of before you retire. You should also consider any expenses that could influence your decision. What follows are nine financial situations that might determine your retirement date.
Social Security. You may want to plan your retirement date based on when you start taking Social Security. If you take your benefits before your full retirement age and continue to work, you’ll be penalized if you earn more than $21,240 in 2023. You would lose $1 of benefits for every $2 earned above that amount.
Pension. If you have a defined benefit pension, many financial planners say you should consider retiring the day after the anniversary of your first official day on the job. This may give you another full year of service that’s factored into the pension calculation—without having to work the year. On top of that, if your age is used to calculate your eligibility for retirement and other benefits, you need to consider how your birth date might impact your retirement date.
Retirement account withdrawals. If you’ll immediately need to pull money from your retirement accounts to meet your daily living expenses, think about retiring at the beginning of the year. This way you’re not withdrawing money from your retirement savings when you might already be in a high tax bracket, thanks to the income you earned from your employer.
Also, if you’ll need to immediately withdraw from your retirement accounts, you probably shouldn’t retire until the day you turn 59½, so you avoid the 10% penalty for early withdrawals from your IRA or 401(k)—though there are ways to sidestep that penalty.
Roth contributions. Consider working long enough into the year so you’re eligible to make the maximum Roth IRA contribution for that year. This especially makes sense for individuals who previously hadn’t been able to contribute to a Roth because their income was too high.
What does that mean in practice? In your retirement year, you would work until you have enough earned income to make the maximum Roth IRA contribution. If you’re 50 or older, you need to earn $7,500 in 2023 to make the full contribution and $15,000 for a married couple filing jointly.
Vesting requirements. Check to see when you’re fully vested for your employer’s 401(k) matching contributions, profit sharing plans, pension plans, stock options and any retirement insurance benefits. To maximize those benefits, retire after that date.
Tax implications. If you have deferred compensation, such as stock options, pay attention to the payout schedule. If it’s paid out on the date you retire, you might want to retire at the point in the year when your income is still low, so you avoid triggering a high tax bill.
Medicare. If you won’t have health insurance once you retire, you might wait until age 65, when you’ll be eligible for Medicare. It can be expensive to purchase insurance on your own.
According to Fidelity Investments, the best and least costly option is getting health-care coverage through your spouse’s employer’s plan. You can also try purchasing insurance under the Affordable Care Act. It could be a cost-effective alternative if your income is low enough to qualify for government subsidies. Another way to get affordable insurance is to purchase a policy outside of your state’s health-care exchange. That way, you might find plan options that better fit your budget.
Dental and vision expenses. Medicare doesn’t cover dental work and routine eye care. If you have insurance through your current employer, try to get all major dental work done before you retire and be sure to use your vision coverage one last time.
Mortgage. If you have a mortgage payment that would drain your savings in retirement, you might aim to retire on or after the day your mortgage is paid off. Alternatively, you might be able to eliminate the mortgage by downsizing.
Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor’s degree in history and an MBA. A self-described “humble investor,” he likes reading historical novels and about personal finance. Check out his earlier articles and follow him on Twitter @DMFrie.
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Another retirement date consideration is the date when an annual bonus is paid. I found out just in time that if I retired after the bonus period ended but before it was actually paid, that the company will not pay the bonus. My company’s fiscal year is from July 1 to June 30 which is also the period over which the bonus determined. I had planned to retire as of July 1. If I had, I would have lost the bonus, about 15% of my annual compensation. It seems like this should not be legal, but I found out it is both legal and quite common.
Terrific article Dennis, and a great list. As you and many of the commenters point out its very important to understand your plan rules and make your decision with full knowledge. My companies pension plan gave service credit monthly. It was an “average salary” plan – it used the average of the last three years salary in the benefit formula. For a year to count you had to be employed on December 26.
Remember you can max out a 401k early in the year, but the plan may not provide the entire employer match if you leave before year end.
Also, HSA contributions are pro-rated based on the number of months you were in an eligible plan.
Many variables with all these plans. That why I was ranting about reading all the literature. My pension was calculated daily and you could retire any day and based on hugest five years out of last ten. The 401k match was made every payday and there was immediate vesting in 401k.
Good article. Big yes on getting vision and dental stuff taken care of in the months before you retire. And fully researching how your employer’s pension/401K rules work, especially vesting. Thinking through these points may only make a marginal difference for many people, but thinking is free.
In my case I remember thinking about working long enough into the year to make Roth and HSA contributions. Between 401Ks, HSAs and IRA/Roths, there are a number of ways of adjusting taxes the last year you work.
Where I worked, health insurance lasted until the last day of the month you retire, which meant that if you worked on the first business day of the month, your insurance would last the rest of the month. Three holidays in particular fall at the end or beginning of a month in the “middle” of the year: Memorial Day, 4th of July (in the U.S., obviously) and Labor Day, so retiring on the day after one of those holidays seemed optimal to me.
River trout fishing in the West picks up considerably after the beginning of June, so you’re crazy if you wait until Labor Day to retire. Just sayin.
Retiring right after a paid holiday looks like a bit of a scam, but in my experience the last few days of working before you retire are a bit of a mad scramble, trying to tell your boss and collegues where you are on this or that thing you are working on, and so forth. You are going to be working on that last weekend anyway, might as well do it on a paid holiday while things are quiet.
Also where I worked, vacation days accumulated by the pay period, and upon retirement you were compensated for unused vacation days (up to a certain number), so I wanted to work long enough to “bank” the maximum unused vaction days. I reasoned that I was about to have a long stretch of “vacation” so banking some vacation days I’d get paid for was not too painful. Vacation policy amongst companies obviously varies, but I’d think about that policy as well.
Good list Dennis. Thank you.
I worked for four years from age 68 to 72 after my decades long job ended. My final job provided a 401(k) which had a graduated vesting schedule for employer matching contributions. There was a provision in the plan whereby any plan participant was fully vested on matching employer contributions upon obtaining normal retirement age (NRA). ERISA rules require NRA to not be higher than age 65 so I was fully vested in that 401(k) plan on the day I was eligible to participate. Post my age 70 when I claimed my SS benefit I was able to use my new SS benefit cash to help me to both stuff my 401(k) and be eligible for deductible IRA contributions or a Roth contribution for myself and wife.
My recommendation is to study your 401(k) Summary Plan Description and/or make the appropriate inquiries to know when you are fully vested to avoid the possible loss of employer contributions.
I would also add a task to your list of things to do before retiring from your job the chore of establishing a home equity line of credit (HELOC) account. My HELOC helps me to be more strategic in withdraws from tax deferred accounts. My HELOC also serves as a backstop to my emergency cash in the event of a major life event. It is my understanding that it is difficult to establish a HELOC after you stop working.
My retirement date was picked for me when a family health issue made leaving my job the best decision and I became a short term care giver. I recommend executing your retirement actions sooner rather than later.
I like your suggestion of using a HELOC, we’ve done that ourselves when we got hit with a major roof replacement bill and it really helped smooth out the whole process of moving money around to the right places at the right times. We didn’t have any difficulty in securing the loan, even though we are both (more or less) retired. I think it’s mainly down to the maximum line of credit that one wishes to establish vs the value of your home. When this value is substantially less than the market value of your home, things seem to move along quite smoothly and quickly, at least in our experience. Of course, loans and banking are an ever-changing shell game, so it’s wise to plan for a few bumps and delays in the process, just in case.
The fiscal year begins on July 1 where I work, and that’s when service credit years are calculated for pension purposes. At a retirement webinar that my employer offered, they said that it was better to retire on June 29. Why? Because the pension gets an annual cost-of-living bump, and if you start on June 29, you get the bump right away on July 1. (I’m not sure why it was June 29 and not June 30.)
Interesting list and helpful.
Pension plans may count service with exact dates, not necessarily whole years. That’s how mine works so working to an anniversary date isn’t always necessary.
If you are retiring, or leave a job – you can avoid the 10% withdrawal penalty at age 55, you don’t have to wait until, 59-1/2.
Yes, my pension plan service credit is calculated in months, so retiring on the exact anniversary date isn’t necessary and you don’t leave service time “on the table.”
After age 59 1/2 one can elect substantially equal periodic payments or “SEPP” to provide needed cash flow.
Please see IRS link below for more information.
https://www.irs.gov/retirement-plans/substantially-equal-periodic-payments
If one does go this route, one wants to be sure they understand that once started, a SEPP must be continued for a minimum of 5 years, with no changes, regardless of the age it’s started. If one does change the plan, the IRS can and likely will hit them with retroactive penalties and interest, which can get really expensive really fast.
If one hasn’t figured it out already, this is an option that it would likely be ill-advised to embark on with out expert assistance, and only then in the most dire of circumstances.
Yes, it could be another slippery slope our tax friends created, but it is a solid alternative for the cash-strapped 55+ year old.
I think you mean before 59 1/2….
Yes, before!! I was typing too early, before caffeine 🙂