Before you jump into what hopefully will be a long and fulfilling retirement, the last year of work is sure to be filled with decisions that can have a big impact on your finances. One of these is choosing your retirement date—the actual date you will leave your job. While that may sound small, the timing can affect a host of things that underpin your plans for life after work.
For example, leaving on the last day of your company’s fiscal year may entitle you to a full bonus, but working until the end of the calendar year may ease your mind with a steady paycheck and benefits. It could also allow you to maximize savings and contributions to a workplace retirement plan. Similarly, your choice of retirement date could affect your final pension amount, how much you may pay in taxes the year you retire, or even when you decide to claim Social Security.
How to determine when to retire
Here are 6 considerations to help you decide when to retire:
- Retirement plan contributions. It’s your last chance to add tax-advantaged dollars to your workplace plan. This may take some strategy if you plan to accelerate your contributions or make decisions about what type of contributions to make. For example, you may need to increase your contribution rate to maximize the benefit potential if you will only be working part of the year. If you think your tax rate will be lower this year due to partial year earnings, then you may also want to consider making your contributions to a Roth account.
- Bonus eligibility. You may be entitled to additional compensation based on work performance, so timing matters. For example, your bonus may be reduced or even eliminated if you retire prior to the end of your company’s performance year. Consider checking with your HR department to help determine what impact your retirement date may have on any bonus compensation.
- Pensions and vesting. Most pensions use a formula to calculate your benefits, including the number of credited years you worked at a particular company, along with your average final salary. Contact your HR department to find out how your proposed retirement date could affect the number of credited years and months and your final average salary. Sometimes working just a bit longer to finish a calendar year or reach a milestone of 20 or 30 years can make a big difference.
Meanwhile, vesting refers to your actual ownership in various employer compensation plans beyond pensions, potentially including stock options, matching money, profit sharing, performance shares, and nonqualified deferred compensation (NQDC), which allows you to defer a portion of your income to a future date, based on a very specific date that’s difficult to change once you’ve chosen it. Vesting details vary from employer to employer and may be related to things like your hiring date and full years of service. Make sure you fully understand your company’s rules to avoid losing non-vested money.
- Health care decisions and timing. Health care decisions around retirement can be complex and costly, and if you retire before age 65 (when Medicare eligibility kicks in) bridging the gap to Medicare requires careful consideration. If you have employer-based coverage, it will typically end soon after you leave, which makes it critical to understand your coverage options. These could include COBRA, a marketplace plan, or joining a spouse or partner’s plan if applicable.
If you're retiring at or after age 65, then be sure to enroll in Medicare before you lose employer coverage. Learn more about Medicare enrollment windows.
Find out more about health care coverage options in Viewpoints: 4 retirement health-care decisions to get right
- When to claim Social Security. Your benefits are determined by your lifetime earnings record (which could be affected by your retirement date) and the age when you start claiming Social Security. However, if you retire before full retirement age—that’s 67 for people born in 1960 or later—it’s important to make sure your financial plan can support the years without the guaranteed income from benefits. Such a plan might include withdrawals from taxable accounts and savings. Remember, each additional year that you wait after age 67 will also increase your benefit amount, up to age 70.
- Taxes. Once you stop working, you may enter a stretch called the retirement “income valley,” a period of no or low income before Social Security benefits and required minimum distributions (RMDs) begin. Because your tax rate may be lower during this time, you could consider some strategic tax moves, such as taking withdrawals from tax-deferred accounts and considering Roth conversions—which could help reduce or smooth your taxes in later years.
Learn more about tax planning prior to retirement in Viewpoints: 6 retirement tax moves most people miss
The bottom line on choosing when you should retire
Retirement planning can be complex, so it’s always a good idea to consider working with a financial professional. Weighing the different factors that go into choosing a retirement date can help lay the groundwork for a successful retirement, well after you’ve earned your last paycheck.