By Steve Seals
You’ve been dreaming of retirement for years—the travel, the freedom, and finally having time to do the things you love! But when exactly is the right time to hang up your hat? Is December, January, or maybe the middle of the year a better time to retire?
Let’s explore the pros and cons of each scheduling option to help you make the most informed decision for your specific circumstances.
Vesting Considerations
The first consideration for deciding when to retire is knowing your vesting schedule.
Your vesting schedule is when certain perks accrue, such as profit-sharing, stock options, matching, and retirement contributions. To encourage employees to stay, employers often stagger vesting dates.
For example, your employer might match your contributions to a 401(k) plan over a five-year vesting timeline. That means the employer may increase their matching payments by 20% annually under this plan, with 0% in the first year, 20% in the second, and reaching 100% in the fifth year.
On the flip side, some employers choose uniform vesting months for all employees. To determine the ideal time for you to retire, take a moment to confirm the precise dates your employer has set up.
December Retirement Considerations
Now that you have a better understanding of how your vesting schedule affects your retirement timing, let’s take a look at the pros and cons of retiring in specific months.
Under what conditions is December the ideal month to retire? End-of-year events are the biggest factors to consider.
Some companies lock in a full year of vesting in pensions, stock options, or 401(k)s by tying their vesting schedules to end-of-year performance reviews. Annual bonuses are also given out in December, so you can retire with more money saved if you wait until after you receive your bonus.
Also, if you’re close to 100% vesting and your employer matches your 401(k) payments, it would be wise for you to retire in December. This way you can get the most out of the matching plan your employer offers.
Lastly, consider that December might be a better month to retire if you can pay your retirement living expenses with pensions and Social Security without drawing from your retirement fund. Remember, distributions from pre-taxed retirement accounts are considered taxable income after the age of 59½.
January Retirement Considerations
A lot of businesses provide complete vesting at the end of each year. That means by retiring in January, you can lock in the gains of full vesting without generating taxable income in the following year.
Also, some companies wait until the first quarter of the following year to distribute year-end bonuses. If that’s the case for your situation, it might be wiser to retire once those bonuses are paid out.
Waiting until January to retire could also earn you an additional year of service credit if you plan to begin receiving Social Security payments right away. Additionally, your monthly payment could rise as a result of the annual cost-of-living increase.
Mid-Year Retirement Considerations
Another option for when to retire is mid-year, but be aware of the unique benefits and disadvantages.
For example, one pro is that retiring mid-year allows you to potentially reduce your tax liability. You could save money by lowering your salary this year and possibly moving into a lower tax bracket.
Mid-year retirement can also facilitate a more seamless transition into retirement. Your employment obligations can be gradually reduced, enabling a more leisurely and less sudden retirement. For people who find it difficult to adjust to abrupt changes in their lives or who would rather retire gradually, this can be especially helpful.
Mid-year retirement does, however, come with certain downsides. For instance, you could potentially lose out on profit-sharing incentives or year-end bonuses. Furthermore, your health insurance coverage can change, which could have an effect on the cost of your medical care.
To learn how retiring in the middle of the year (and other timing options) can affect your entire financial package, it’s important to consult with a professional financial advisor.
We’re Here to Help You
Planning for retirement can be overwhelming, but it doesn’t have to be. To have confidence in your decision about when to retire, it’s essential to have a knowledgeable and experienced financial partner on your side.
At Seals Financial Planning & Investments, we don’t take the privilege of being your trusted financial ally lightly. No matter your life stage, we’re committed to helping you make financial decisions today that can shape your vision for tomorrow.
Please give us a call at (859) 230-3476 if you would like to schedule a time to meet.
About Richard Stephen (Steve) Seals
Steve Seals is owner and independent Registered Investment Advisor Representative at Seals Financial Planning & Investments VI, LLC, a financial planning services firm based in Lexington, KY. As an independent Registered Investment Advisor Representative with about two decades of experience in the investment and insurance industries, Steve’s firm is founded on getting to know each client personally, allowing him to provide sound financial advice throughout their career and into retirement. With the mission of guiding clients on the path of success, Steve is fueled by his commitment to excellence and goes the extra mile to make sure clients are fully satisfied. He believes in maintaining a positive mindset, creating partnerships with a purpose, and always striving for significant outcomes.
Born in Jenkins, Kentucky, Steve grew up with a love for basketball and serving his community. After high school, he served nine years in the United States Marine Corps, then earned a bachelor’s degree in accounting. He was eventually able to put his degree and desire to help others to work as a fiduciary financial planner. Prior to founding his own firm in 2014, Steve learned from working with Edward Jones, US Bank, University of Kentucky Federal Credit Union, and CUSO Financial. He also received his Security Series 63 and 65/66 through Keystone Financial Group, LLC, and holds various life, health, and variable insurance licenses.
Steve and his wife, Angie, have three daughters (Lauren, Peyton, and Ashton) and two grandsons (Kenyon and Kai). Steve holds a private pilot’s license, and the family enjoys sports, spending time at the lake, and traveling. To learn more about Steve, connect with him on LinkedIn.
