Retirement is a goal nearly everyone hopes to reach someday. People spend decades working, saving, and investing to meet their retirement goals — and achieving those goals is a real accomplishment.
But how do you know when’s the best time of the year to retire? The time of year you choose can potentially have a big impact on your retirement income and the taxes you owe. A financial advisor can help you figure out the best time to retire based on your specific situation.
For example, retiring early in the year may help keep your tax rate low, while retiring later in the year can boost your savings and the Social Security benefits you earn. Some people may need to target a specific retirement date to maximize payments from their employer, such as bonus payouts or pension benefits.
Ultimately, the best time of year to retire will depend on your individual circumstances, but you should consider some key things before making a decision. These areas can have a big impact on the best time of year for you to retire.
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4 factors that can impact retirement timing
1. Pension benefits
Although mostly a thing of the past, some workers are part of defined benefit retirement plans, which pay workers a set amount of money during their retirement years based on a formula. The calculation is typically based on the number of years worked at the company, with employees being rewarded for their longevity with the same employer.
Each plan is unique in how it determines your pension benefits, but some plans may give you credit for an extra year of service as soon as you work a single day into the next year.
For example, if you started working at a company on Sept. 1, 2002, you may get credit for 24 years of service if you retire on Sept. 3, 2025 even though you only worked one day into your 24th year.
Other plans may differ and could require you to work half or the entire year before you get credit for an additional year of service. Be sure to know the details of how your pension benefits will be calculated and choose a retirement date that maximizes your payout.
2. When you need to tap your retirement accounts
If you don’t have enough money in cash to make it through the first months of retirement and would need to start taking withdrawals from your retirement accounts immediately, you may want to consider retiring near the end of the year or the beginning of the year.
That’s 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, causing you to owe more in taxes than you expected.
Also, if you’re retiring early, you may need to be careful about making withdrawals from retirement accounts to avoid early withdrawal penalties. Withdrawals made before age 59 ½ from IRAs typically come with a 10 percent penalty, so you’ll want to avoid making any withdrawals that could trigger the extra charge.
3. Extra benefits coming your way
You’ll also want to take into account any “extra” benefits you may have coming your way. Make sure you stay long enough to collect any annual bonuses you may be entitled to, while also considering how that income could impact your tax situation. For example, many companies pay annual bonuses in March. So if you retire after generating just a few months of income, you may be able to stay in a lower tax bracket for the year, depending on your other income.
One thing people sometimes fail to consider is the income they may receive as a result of vacation time they’ve accrued but not used. Find out from your employer if you’re owed money for accrued vacation days and when that money will be paid. This, of course, counts as income that could impact the taxes you owe.
4. Social Security considerations
When you retire can also have an impact on your Social Security benefits. If you wait until after you reach full retirement age, which is between 66 and 67 years old, to claim Social Security benefits, your payment will increase when you do start receiving benefits. But the increase in payments stops once you reach age 70, so if you turn 70 in the year you retire, you should wait until after your birthday to start receiving benefits. That helps reduce your taxes for that year and maximizes your payment, too.
Here’s more information about Social Security benefits and how going back to work after you’ve retired can impact your payments.
Other things to consider
You’ll also want to think about how you’ll pay for healthcare costs during retirement. Many people neglect to account for medical expenses during their golden years, despite it being a significant cost for most people.
You might also consider maxing out your contributions to your retirement accounts one last time before you retire. It might not seem like it matters much, but those contributions can turn into a sizable sum after another 20 to 30 years of compounding. Money invested when you’re in your 60s can help pay for end-of-life care in your 80s or 90s.
Bottom line
Choosing the best time of year to retire will depend on your specific circumstances. It’s important to remember that having a significant amount of earned income and drawing on retirement accounts could push you into a higher tax bracket. Don’t forget to account for income such as accrued vacation payouts or annual bonuses you may be entitled to.
If you participate in a defined benefit plan, double check on exactly how long you have to work to get credit for an additional year of service. You won’t want to leave money on the table just as you’re headed out the door.