Which Day of the Year Should I Retire?
“Take this job and shove it.” We have all been there. But before you choose which month or day of the year when you will retire, consider the following first…
Bonus
Do you usually get a year-end bonus? Or maybe a mid-year bonus? Obviously you may want to stick around until your bonus is paid out.
Medicare Coverage
The most cost efficient path tends to be to move straight from your employer’s medical insurance coverage to Medicare. So if you turn age 65 (Medicare age) on October 15th, you may not want to retire in February of the same year. Consider waiting until you are age 65. If you don’t, you may need to temporarily endure the costlier choice of using a policy under the Affordable Care Act.
Roth Contribution
Many older workers earn too much money to be able to contribute to a Roth IRA. But if you retire earlier in a calendar year, you may suddenly qualify to put $ in a Roth because you pass the earnings test. Work long enough in the year to at least max out your Roth IRA, but not so long that your earnings exceed the earnings test limit.
Pension Decisions
When we say pension, we mean the classic “defined benefit pension”. Basically a stream of income payments which you will receive over time during retirement. The size of your check can be easily impacted by your retirement date. Instead of retiring shortly before your work anniversary date, consider retiring the day (or month) after your work anniversary date. So if you were hired on June 1st, 2000 and you intend to retire in the year 2025, consider retiring on June 2nd of 2025 (or any date thereafter). That will likely give you another full year of service in terms of the pension calculations, resulting in larger pension checks.
Eyes and Teeth
Traditional Medicare doesn’t pay for normal vision and dental care. If you can, attempt to have your dental and vision services performed while you are still on your company’s insurance plan. Always wanted a root canal? Here’s your chance ;)
Home Equity Line of Credit (HELOC)
A HELOC can be a great cash flow lifesaver, if used prudently. For example “oh no! We need to replace the roof and weren’t expecting it.” But once you retire, it will likely be much more difficult to get approved for a HELOC since you cannot show any work income on your application. Consider securing a HELOC prior to your retirement date.
Vesting, aka “the golden handcuffs”
Do you have any of these at your work?: Restricted Stock Units, Stock options, Profit sharing dollars, 401(k) match dollars, Employee Stock Purchase Plan, Pension assets, etc. If you do, odds are they have a vesting schedule. Until the assets have fully vested, the unvested portion is the company’s and not yours. Consider choosing your retirement date by factoring in when the max amount of those dollars are vested.
Social Security
Remember, if you start collecting social security before your Full Retirement Age (FRA – which is between age 66 and 67 for most people), and you continue to work, you may get penalized. In 2023 if you are collecting before FRA and earning more than $21,240 from working, you will see your social security get diluted by $1 for every $2 you earn over that limit. For example, age 64 and earning $40,000 from working: that is $18,760 over the limit. This will result in a social security reduction of -$9,380 for that year.
Taxes
This is big if you have assets such as non-qualified stock options (NQSO), or deferred compensation. Assets which can potentially generate a big tax bill when they are exercised, or when they are paid out to you. It might be best if you retire early enough in the year that your income from working is lower for that tax year, which means you start out in a low income tax bracket. That way the taxable activity which is triggered by your exercising of NQSOs or receipt of deferred compensation is likely taxed at lower tax rates. Puts more money in your pocket.
Withdrawals from Retirement Assets
If you plan on retiring, and then soon thereafter pulling money out of pre-tax retirement accounts to pay the bills, you almost certainly want to retire after you turn age 59 ½. Prior to age 59 ½, most pre-tax retirement account withdrawals will also get hit with a 10% premature distribution penalty.
Authors: Keith Wagner & Rick Wagner
The views expressed herein are those of the author and do not necessarily reflect the views of Raymond James & Associates or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
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