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When to Retire

Dennis Friedman

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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