Most of us work for decades to get to the point where we can retire. After years of saving, planning, and dreaming about your golden years, picking the exact date of your retirement may not seem like a big deal. But believe me when I say that the time you retire can have a big effect on your money, benefits, and even your taxes.
As someone who’s helped many clients navigate this transition, I’ve seen how choosing the right time of year to retire can make a real difference Let’s dive into the factors that can help you determine the best time of year for YOUR retirement
Why Timing Matters in Retirement
The date you choose to retire isn’t just symbolic—it can have practical implications for your financial wellbeing. Here are some key reasons why timing matters:
- Tax considerations: The timing of your retirement can affect which tax bracket you fall into
- Benefit maximization: Certain retirement dates may help you maximize pension benefits, bonuses, or unused vacation time
- Healthcare coverage: Gaps in healthcare coverage can be costly, so timing matters
- Social Security benefits: When you claim benefits can impact the amount you receive
- Cash flow planning: Ensuring a smooth transition from employment income to retirement income
Key Factors That Impact Retirement Timing
1. Pension Benefits
If you’re one of the lucky ones with a defined benefit pension plan, your retirement date could significantly impact your benefits. Some pension plans give you credit for an additional year of service if you work just one day into the new year!
For example, if you started at a company on September 1, 2002, you might get credit for 24 years of service if you retire on September 3, 2025, even though you only worked one day into your 24th year.
Each pension plan has unique rules, so check with your HR department or plan administrator to understand how your benefits are calculated. Some plans may require you to work half or the entire year before getting credit for an additional year of service.
2. Retirement Account Withdrawals
The timing of your retirement can impact when and how you tap into your retirement accounts. If you don’t have enough cash reserves and need to start withdrawing from retirement accounts immediately, consider retiring near the end of the year or at the beginning of the new year.
Why? Because taking money out of accounts like 401(k)s or traditional IRAs in years when you have a lot of earned income could push you into a higher tax bracket. This could result in paying more taxes than expected.
Also, be careful when taking money out of your retirement accounts before age 59½ if you’re retiring early to avoid paying penalties. If you take money out of your IRA before this age, you usually have to pay a 10% penalty.
3. Extra Benefits and Compensation
Don’t leave money on the table! Make sure you stay employed long enough to collect any annual bonuses you’re entitled to. Many companies pay annual bonuses in March, so timing your retirement after receiving this bonus could be beneficial.
Another often-overlooked consideration is vacation time. Many employers will pay you for accrued vacation days you haven’t used. This payment counts as income that could impact your taxes, so factor this into your retirement timing decision.
4. Social Security Considerations
When you retire can also impact your Social Security benefits. If you wait until after you reach full retirement age (between 66 and 67 years old) to claim Social Security benefits, your payment increases. However, this increase stops once you reach age 70.
If you retire in the same year that you turn 70, it makes sense to wait to start getting help until after your birthday. This lets you make the most of your payment and may lower your taxes that year.
Popular Retirement Dates to Consider
Based on the above factors, certain dates tend to be popular choices for retirement. Let’s explore some specific retirement dates and why they might make sense for you.
July 31st
People who get pensions usually get paid on the first of the month after they retire, so the end of the month is a good time for them. You won’t have a gap in your income if you retire on the 31st.
The mid-year strategy has tax advantages too. It allows you to condense all income into one calendar year so that you’ll see a drop in taxes the following year. This can be particularly beneficial if you expect lump sum payments (bonuses, commissions, unpaid vacation) in the months following your retirement.
If you see a significant drop in your tax bracket the following year, you might want to consider Roth conversions or capital gains recognition—essentially taking advantage of a “tax sale.”
December 31st
December 31st shares the benefit of a full month of income with pension payments starting the next day. This date is popular among federal employees who are pros at maximizing retirement benefits. Retiring on December 31st can maximize your unpaid annual leave payout.
However, there’s a drawback: That lump sum will come next year, so between that and your pension, you might not see a big drop in income taxes.
January 1st
Some employer pension plans credit a year of service for calculation purposes on January 1st. Similarly, you may get a cost-of-living adjustment by staying until January 1st. This varies by employer, so check your specific plan details.
January 1st also makes sense for those retiring after required minimum distribution (RMD) age. If you’re still working, the money in your current employer’s retirement plan is exempt from RMDs due to the still-working exception. However, that RMD starts in the year you retire, even if that’s December 31st.
For example, if you retire on December 31, 2023, you will have two RMDs from your employer plan in 2024—one for 2023 (which must be taken by April 1, 2024) and one for 2024 (by December 31, 2024). If you retire on January 1, 2024, you’ll only have the 2024 RMD.
Other Important Considerations
Vesting Schedules
I’ve seen people leave six-figure sums on the table by walking away before employer matches in retirement plans are fully vested. While you’ll always get the money you contributed, the employer match follows a vesting schedule that you need to complete to keep that money.
Similarly, stock options usually have vesting schedules. Any unvested options will be forfeited when you leave. Companies often issue new options on an ever-extending vesting schedule as a retention tool, so at some point, you just need to make the decision to move on.
Healthcare Coverage
Healthcare is a critical consideration, especially if you’re retiring before Medicare eligibility at age 65. You need to ensure you have a plan for healthcare coverage between retirement and Medicare.
Often, COBRA serves as a bridge, but it has time limitations. If COBRA is your bridge plan, work backward from age 65 to determine when you can retire based on how long your COBRA coverage will last.
Is There Really a “Best” Time?
While there are definite advantages to retiring at certain times of the year based on your specific situation, it’s important not to get too caught up in gaming the system. The most important thing is ensuring you have enough saved for a comfortable retirement.
As one financial expert notes, “People spend too much time trying to game this system. Of course, you don’t want to leave free money on the table, but it’s more important to ensure that you have enough than it is to decide between December 31 and January 1.”
My Personal Take
I’ve helped dozens of clients through this transition, and I can tell you that while optimizing your retirement date is important, it shouldn’t overshadow the bigger picture. The best retirement date is one that:
- Maximizes your financial benefits
- Aligns with your personal readiness to retire
- Gives you confidence about your financial future
- Feels right for you emotionally and psychologically
Sometimes clients get so caught up in finding the “perfect date” that they lose sight of what retirement is all about—enjoying the next chapter of your life!
Steps to Determine Your Optimal Retirement Date
To find your own best time of year to retire, follow these steps:
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Understand your pension plan (if applicable): Talk to HR about how service years are calculated and when benefits begin.
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Review your retirement accounts: Understand the tax implications of withdrawals and required minimum distributions.
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Check your employer benefits: Look into bonuses, stock options, and vacation payout policies.
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Analyze your tax situation: Consider how your income and withdrawals will affect your tax bracket.
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Plan for healthcare coverage: Ensure you won’t have gaps in coverage.
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Consult with professionals: A financial advisor can help you analyze your specific situation and recommend the optimal retirement timing.
Final Thoughts
The best time of year to retire is ultimately a personal decision based on your unique financial situation, employer benefits, and retirement goals. While certain dates like July 31st, December 31st, or January 1st offer particular advantages, what matters most is that you’ve prepared adequately for retirement.
Remember, retirement planning isn’t just about picking a date—it’s about ensuring you have the resources to enjoy this new phase of life. With proper planning and consideration of the factors we’ve discussed, you can choose a retirement date that optimizes your finances and sets you up for a successful retirement.
Have you thought about when you’ll retire? What factors are most important in your decision? I’d love to hear your thoughts in the comments below!
Disclaimer: This article is for informational purposes only and should not be considered financial advice. Please consult with a qualified financial advisor or tax professional regarding your specific situation.
The Best Time of Year to Retire?
FAQ
What month of the year is the best time to retire?
While those scenarios may lead to a person pushing retirement to later in the year, on the flip side, many choose to retire in January if they will be withdrawing money out of retirement accounts. This is especially true if this retirement revenue stream will be considered taxable income.
What is the $1000 a month rule for retirement?
The “$1,000 a month rule for retirement” is a simple guideline to help you estimate the savings needed to generate consistent monthly income in retirement, typically requiring $240,000 in savings for every $1,000 of desired monthly income. This rule, based on a 5% annual withdrawal and 5% annual return, suggests that withdrawing $1,000 a month from a $240,000 portfolio would provide that amount of income without depleting your savings.
Is it better to retire at the end of the year or the beginning of the year?
Social Security and Pensions: If you retired early and your earnings this year are lower than in previous years, you might want to wait until the end of the year to get your Social Security Income (SSI). Consult a financial advisor for your estimated SSI.
What is the 3 rule for retirement?
The 3% rule for retirement says that you should take out 3% of your total retirement portfolio balance in the first year, with adjustments made for inflation to make sure that your savings last longer. This is especially true for early retirees or people who want to be cautious with their money.
When is the best time to retire?
For those who want to spend time outside, retiring during a month when you can might be a good idea. Talking to a financial advisor can be a helpful way to determine the best time for you to stop working. They can help walk you through key decisions and understand where there are gaps in your plan.
Should you retire early?
Retiring early in the year might allow you to benefit from lower tax rates, retiring later could maximize your Social Security payments, and aligning your retirement date with the end of a fiscal year could maximize employer benefits, such as bonuses or retirement plan contributions.
Is December a good time to retire?
“A December retirement month allows you to take advantage of full contributions to your retirement accounts such as 401 (k)s or IRAs in your final working year,” said Jeff Busch, a financial advisor at Elysium Financial in South Jordan, Utah. A late-year retirement also allows you to maximize an employer match on your 401 (k).
Should you retire at the end of the year?
Retiring at the end of the year allows you to maximize your income. This can boost your final year’s earnings but could push you into a higher tax bracket, especially if you’re already taking Social Security benefits or withdrawing from retirement accounts.
Should a late-year retirement be a good idea?
A late-year retirement also allows you to maximize an employer match on your 401 (k). On the other hand, workers with significant earnings in a calendar year may want to wait until January to retire. That strategy may result in lower taxable income for the year of retirement.
Should you retire in the middle of the year?
If you plan to start withdrawing from retirement accounts or receiving Social Security benefits, retiring in the middle of the year can provide a strategic tax advantage by reducing your taxable income, which may keep you in a lower tax bracket.