What is the Best (actual) Day to Retire?

In Asset Allocation, Personal Finance, Retirement Planning by Chip Hymiller

For most people there is only one retirement date—the last day of your working life. 

For those who have never experienced this day and the weeks and months leading up to it, I will tell you that most people find this period full of stress, anxiety and all those emotions people experience when undergoing a life transition. 

It’s bitter sweet!

But have you ever thought about the actual day you will retire?  How will you make that decision and what factors will you consider when circling your retirement date on the calendar?

Over the 20+ years in working with clients, here are the days some of our clients have retired:

  • The day a work project finally ends.
  • The day their mortgage was paid off.
  • The day their children moved (and they moved too!).
  • The day “this golf season” starts.
  • The due date of a grandchild.
  • The week after their bonus is paid.
  • The day a spouse begins chemotherapy.

Deciding on the best day to retire is different for everyone, but because most people normally have at least some flexibility in this decision, doesn’t it make sense to also consider various financial implications when choosing the day?

After all, retiring is normally a pretty irrevocable decision and much is at stake.  Making the very most of the final months, weeks or even days prior to retiring can have an enormous financial impact over your retirement period.

There may be a number of financial considerations when deciding on a retirement date.  Here are several:

Managing the tax impact of deferred compensation plans. 

For those who have deferred compensation plans, the day you retire can be the triggering event of the deferred comp payout schedule.  It is important to understand the payout schedule as well as the tax impact that will arise from these plans.  At times, it may be beneficial to delay retiring in order to reduce the amount of income tax due on distributions from deferred compensation plans into subsequent years when your personal tax rate is lower.

Make maximum use of 401(k) deferrals. 

If you plan to retire early in the year, it is possible to adjust your 401(k) deferral levels so that you can contribute the full amount of your pay into an employer-sponsored 401k plan. Your contribution, along with the employer match, can be a meaningful benefit and a springboard into your first year as a retiree.

Work long enough to be “Roth IRA eligible.”

For many, making Roth contributions has never been an option due to income phase-out rules.  However, in your retirement year, it may make sense to retire at the point that you have enough earned income to make a full contribution to a Roth IRA.  In 2019, you would need to have earned income of at least $7,000 to make a full Roth contribution ($14,000 for married filers to maximize both spouses Roth IRAs).

Be aware of vesting requirements for employer-provided benefits. 

Some employees are subject to vesting requirements on 401(k) matching contributions, profit sharing plans, pension plans, stock options, employee stock purchase plans and even insurance benefits in retirement.  It is important to be aware of the exact day you are fully vested and retire after that day!

Understand how your tenure and years of service can impact your retiree benefits. 

Sometimes, after a specific number of years of service, retirees become eligible for special medical coverages, or retiree health insurance benefits.  It is important to be aware of these dates when deciding on your retirement date.

Coordinate your retirement date with pension and Social Security decisions. 

The decision of when to commence pension and Social Security retirement benefits is one that has both cash flow and tax considerations.  The day you choose to retire can make a difference in the optimal date to begin receiving these retirement benefits.

There are normally many facets to consider when deciding on the day to retire.  While deciding to move on to the next (most exciting) chapter of your life can be filled with trepidation, don’t you think it would be beneficial to approach the financial elements of this time strategically? We sure do!

In fact, systematically evaluating all of your options and thinking through scenarios that can increase your financial strength entering retirement will undoubtedly provide you with the peace of mind to approach this important life transition with confidence.

Pick your day strategically!

Please do not hesitate to contact our office if you have any questions.