This common question comes from those who are fortunate enough to have the flexibility to decide. The reality is that the date is often a compromise between you and your employer. A combination of that employer’s benefits, as well as IRS rules, should help you decide which day makes the most sense for you. In today’s article, we are going to cover three options and the potential benefits that come with each.
July 31
As a general rule, the end of the month is good for those with pensions, as those often start on the first day of the month after retirement. In this scenario, retiring on the 31st means that you won’t have a gap in pay.
The midyear strategy has to do with condensing all income into one calendar year so that you’ll see a drop in taxes the following year. This could be accomplished on December 31 if it weren’t for the lump sums that are often paid out in the months following your retirement. This may include bonuses, commissions, unpaid vacation and sick leave.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If you see a significant drop in your tax bracket in the following year, you should evaluate Roth conversions and capital gains recognition. This is a tax sale.
December 31
As above, December 31 has the benefit of a full month of income with the pension starting the next day. This is a common date for federal employees, who are the kings and queens of gaming the retirement system. Retiring on December 31 is likely to maximize your unpaid annual leave check.
There’s a drawback, though: That lump sum will come next year. So, between that and your pension, you are unlikely to see a big drop in income taxes.
January 1
Pensions seem to be a recurring theme. Certain employers’ pension plans credit a year of service, for calculation purposes, on January 1. Similarly, you may get a cost-of-living adjustment by staying until January 1. This varies by employer.
This one makes sense for those who are retiring after required minimum distribution age. The money in your current employer’s retirement plan was exempt from RMDs due to the still-working exception. However, that RMD starts in the year you retire, even if that’s December 31.
In other words, if you retire on December 31, 2023, you will have two RMDs from your employer plan in 2024. The 2023 RMD will have to be taken by April 1, 2024, and the 2024 RMD by December 31, 2024.
If you retire on January 1, you’ll have only the 2024 RMD in December.
Other considerations
Vesting of retirement plans. I have seen six-figure sums left on the table by walking away before employer matches in retirement plans are fully vested. You will always get the money that you contributed. However, the employer match will follow some sort of vesting schedule that you need to outlast in order to keep that money.
Vesting of stock options. Stock options are a retention tool. Any unvested options will be forfeited when you are no longer retained. Here’s the thing: This is a moving finish line. Typically, employers will keep issuing new options on an ever-extending vesting schedule. At some point, you just need to pull off the Band-Aid.
Health care. This maze will be a topic of a future article. The most important thing for our clients is to ensure you have a plan between retirement and Medicare eligibility. Often, COBRA serves as the bridge. If that’s the bridge you want to use, you’ll need to work backward from age 65 to see when you can retire, based on how long your COBRA coverage will last.
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.
If you want one final check of your math, you can use this free software to see where you stand.
Related Content
-
Can the 'Guardrails Approach' Protect Your Retirement Investments?This investing method helps retirees avoid running out of money, even in a highly volatile market.
-
Social Security Is Taxable, But There Are WorkaroundsIf you're strategic about your retirement account withdrawals, you can potentially minimize the taxes you'll pay on your Social Security benefits.
-
Social Security Is Taxable, But There Are Workarounds
If you're strategic about your retirement account withdrawals, you can potentially minimize the taxes you'll pay on your Social Security benefits.
-
Serious Medical Diagnosis? Four Financial Steps to TakeA serious medical diagnosis calls for updates of your financial, health care and estate plans as well as open conversations with those who'll fulfill your wishes.
-
To Stay on Track for Retirement, Consider Doing ThisWriting down your retirement and income plan in an investment policy statement can help you resist letting a bear market upend your retirement.
-
How to Make Changing Interest Rates Work for Your RetirementHigher (or lower) rates can be painful in some ways and helpful in others. The key is being prepared to take advantage of the situation.
-
Within Five Years of Retirement? Five Things to Do NowIf you're retiring in the next five years, your to-do list should contain some financial planning and, according to current retirees, a few life goals, too.
-
The Home Stretch: Seven Essential Steps for Pre-RetireesThe decade before retirement is the home stretch in the race to quit work — but there are crucial financial decisions to make before you reach the finish line.
-
Three Options for Retirees With Concentrated Stock PositionsIf a significant chunk of your portfolio is tied up in a single stock, you'll need to make sure it won't disrupt your retirement and legacy goals. Here's how.
-
Four Reasons It May Be Time to Shop for New InsuranceYou may be unhappy with your insurance for any number of reasons, so once you've decided to shop, what is appropriate (or inappropriate) timing?
