Best Time of Year to Retire

Two of our clients successfully transitioned into retirement last summer. Last week, I met with another client who is set to retire in the spring of 2025. In this and previous meetings, she specifically mentioned her desire to retire in the spring or early summer. I’ve noticed a pattern of people wanting to retire in the warmer months.

Perhaps the reasons behind these decisions are obvious to some, but I wanted to spend some time in this newsletter uncovering both financial and non-financial factors that influence such choices.

Non-Financial Reasons

Most would agree that our environment, particularly the weather, impacts our mood. Some enjoy winter and the unique activities it brings, though it also comes with shorter days and early sunsets. When you're excited to start the next chapter of your life, winter’s challenges, such as bundling up, driving more, and staying indoors, can take away from that excitement.

Given that retirement also brings other unique non-financial challenges, you might want your surroundings to be as uplifting as possible. So, all else being equal, consider retiring in the first part of the year.

After all, especially for those who delayed retirement, how many more summers do you have to enjoy?

If retiring early in the year isn’t feasible and you need to leave the workforce in winter, consider taking an extended vacation as soon as you retire, ideally to a warmer climate.

Financial and Tax Reasons

There are, of course, numerous financial reasons to retire at a specific time of year.

This newsletter isn’t intended to be a comprehensive guide and I’m omitting certain considerations specific to government employees, partnerships, and business sales.

Here are some points I would like you to consider when choosing your retirement date:

• Retiring early in the year provides more options for Roth conversions. This can be particularly beneficial if you expect retirement income to be less than half of your prior year’s income.
• If your retirement year income is low, consider tax gain harvesting (the opposite of tax loss harvesting). In certain situations, this may allow you to reduce or even eliminate capital gains taxes.
• Based on how Social Security benefits are taxed, it may be more advantageous to start receiving benefits after your earned income ceases (i.e., in the year following retirement). Additionally, delaying benefits increases the amount you receive.
• If you have a pension, which is becoming less common, plan to retire in the month when your benefit would be maximized.
• If you have a 401(k) or 403(b) plan with a vesting schedule, consider waiting until your employer contributions are fully vested.
• Even if you are retiring in the first part of the year, consider maximizing your retirement plan contributions.
• If your company issues bonuses at a specific time, consider waiting until you receive this bonus before retiring (this is a common retirement date target).
• If you’re planning an early retirement and won’t qualify for Medicare yet, consider using your employer’s health plan for any medical procedures. Although you’ll likely be offered a COBRA plan, it tends to be expensive. If you plan to enroll in a state exchange and apply for a plan under the Affordable Care Act (ACA), be sure to understand your coverage options and costs beforehand.
• Finally, if you’ve accumulated a significant amount of paid time off (PTO), consider using it before retirement to “test drive” your new lifestyle. In some cases, it may make sense to delay retirement until the following year, so any PTO payout is taxed at a lower rate.

Even though most of what I covered in this newsletter is not likely to dramatically impact your retirement, it can certainly help you optimize your transition. So, it's worth taking some time to think about exactly when you prefer to retire.