Unless you’re an accountant, you don’t look forward to tax time much. Well, maybe sometimes for the refund, but this year, you’ve got your sights set on something more important.
You’ve put in dozens of years of service and you’re retiring!
But, you want to do it when you can maximize your tax benefits.
What month should you plan to retire? In the United States, the best month to retire for tax purposes is January, especially if you’ll begin taking money out of your retirement accounts to cover your living expenses. Retiring in early January means you’d typically be withdrawing your retirement funds at a lower tax rate because you’ve stopped working.
In today’s article, we’ll discuss when is the ideal time of year to retire for tax purposes, how to financially prepare for retirement, and when to let the Social Security Administration know you’re calling it quits.
You don’t want to miss it!
Is There A Better Time Of Year To Retire For Tax Purposes?
Now that you’re planning to retire, money matters to you more than it ever has.
That’s why you’re carefully and strategically planning when you’ll retire, as you want to enjoy the max financial benefits.
Many people choose to retire at the end of the tax year, usually in December. This has its advantages and disadvantages, so let’s talk about both.
The Benefits Of Retiring At The End Of The Tax Year
More Gift Allowances
Do you plan on gifting pension lump sums to your family members, such as adult children or grandchildren, after you retire?
You might have a higher gift allowance rate if you haven’t used your allowance from previous years.
Potentially Higher Pension
Every retiring employee looks forward to their pension, as the funds here will support your new retirement lifestyle.
The longer you work at a company, the greater the pension rate, but that depends on the employer and the pension plan, of course.
GoBankingRates.com advises that you should always quiz your employer on this before you get too excited, but depending on your pension plan, in some cases if you work even one day extra into the next year, you may be able to get an additional full year of service credit tacked on to your pension.
That can only help your monthly benefit amount!
As an example, let’s say you started work on March 1st, 1987. Now you’re retiring in 2023.
If you wait until March 2nd, 2023, you might be able to get a pension for working 37 years instead of 36.
Lower Income Tax Rate
Do you already pay a lot in federal income tax?
As we discussed in the intro, your pension income tax rate will typically be higher if you retire during the tax year if you’ve worked most of the year.
Retiring at the start of the following tax year typically would lead to a lower tax rate on the money you withdraw from your retirement accounts, so it can make quite a difference to wait.
The Downsides Of Retiring At The End Of The Tax Year
It’s More Stressful
In many cases, there is a lag time between that final paycheck and the first social security check or pension check.
If you retire during the often pricey holiday season, it could be more stressful to go with no income for a bit (or to pull retirement funds out of your investments, at a higher tax rate).
It’s A Bit Of A Confusing Time To Retire
Many employees who decide to step away from a company wait to retire until the end of the year in December. This way, they can start their next chapter during a new year.
Retiring at the end of the year can throw your employer for a loop, though, as it can sometimes be difficult to get your replacement on board and trained, due to holiday vacations and time off.
We’re not trying to dissuade you from retiring then. It’s your life, your career, and your retirement (and you may not really care whether you inconvenience your employer. We get it.).
You could retire on February 31st if you wanted to (which is just a metaphor, of course). If you give your employer adequate notice, that’s what matters most.
What Day Of The Month Is Best To Retire?
Since you’ve already planned your retirement month with so much consideration, you should extend that to your retirement day.
Of all the 30 or 31 days in an average month, on which should you plan to retire?
The answer is the last day of the month.
Why that day? For several reasons.
If the month has a calendar holiday, then your employer could offer you additional holiday pay.
You’ll also maximize the number of paychecks you receive by working until the end of the month rather than dipping out in the beginning or middle of the month.
January is a great month to plan your retirement date, as the month has 31 days, so you’ll have more working days on the calendar before you say goodbye.
What Should I Do The Year Before Retirement?
Few people make retirement a spur-of-the-moment decision. Instead, they plan it out for a long time to come.
We don’t mean putting savings into an Individual Retirement Account (IRA or a 401(k), either.
That’s important, but in the year before you want to retire, there’s so much more to do. Let’s go over everything now.
Find New Hobbies Or Interests
If you work a lot now, then the thought of having no work for potentially the rest of your life sounds perfect.
You imagine how well-rested you’ll feel, how refreshed, and how much time you’ll have for any activity you want.
Yet the reality is often very different. A few months into retirement, if that, many new retirees find themselves bored, listless, and even depressed.
The retirement years bring about a lot of life changes.
You no longer see your coworkers, so if you were close with them, that change can sting.
You also lose a sense of purpose and pride since you’re not getting up every day and contributing to the workforce.
Having a plan for how you’ll engage all your spare time and creating that plan before retirement will help ease you into this transition time.
Think about what interests and hobbies you have or which ones you’ve always wanted to get into.
Perhaps you buy some equipment or gear needed to start a hobby or wait on that, but either way, you’re laying the groundwork for a successful, happy retirement.
Plan Your Travel Destinations
Many older adults choose to travel in retirement because they never had the time before. This is another area that can do with some preplanning.
The sheer weight of being able to travel almost anywhere can paralyze some new retirees, keeping them from going anywhere!
Determine Where You’ll Live
In retirement, can you afford to keep your house?
If you’ve already paid it off, then more than likely, that’s where you’ll decide to stay.
However, if you’re still making house payments, then you might have to consider moving to a more affordable place.
If not that, then you could always refinance your home to make your monthly mortgage payments more affordable.
Don’t disregard moving to a retirement community or some other form of housing that may not only be more affordable, but may also provide you with a more active, easier and safer lifestyle.
Discuss Your Partner’s Retirement
If you’re half of a marriage or partnership, then it’s not only your retirement you have to concern yourself with. Your partner will plan to retire someday.
Do you two want to retire together, or do you need one of you to remain in the workforce to support the other? If so, for how long?
If you and your spouse or partner haven’t discussed retirement plans yet, or ever, take this time now to have the conversation.
Knowing pertinent details like expected retirement income, how much is set aside in a retirement fund, and what (if any) pension benefits will be coming in will prevent resentment from building up.
Choose When You’ll Take Social Security Benefits
Now that you’re retiring, you’re likely eligible to collect Social Security benefits. If you’re over the age of 62, you can technically do it before you retire, but you might wish to wait.
This is because if you draw Social Security benefits while still earning a paycheck, “you will be penalized if you earn more than $18,960 in 2021 or $19,560 in 2022,” according to the GoBankingRates.com article I referred to earlier in this article.
Anyhow, it’s nice to know that if you wait to start getting your Social Security, you’ll have an extra windfall of cash after you stop getting your income checks.
Some retirees even hold off years into their retirement until they’re 70 or older, as then you get the max amount of Social Security benefits.
At the end of the day, you have to do what’s right for you, but thinking about when you’ll begin accepting those benefits is something to ponder for a while.
Move To Medicare (Or Consider It)
For adults 65 and older, Medicare has become the primary mode of health insurance, especially with no employer to pay for your insurance anymore.
TIP: if you’ll be retiring before you’re old enough for Medicare and you won’t have coverage through your employer, you’ll need to figure out your medical insurance plan (and budget for those likely higher premiums!) in the years between retirement and qualifying for Medicare.
Then, be sure you put it in place before you retire!
Medicare has four different parts with various coverages, depending on what you select. The rate of premiums you’ll pay also varies.
If you’ve never looked into Medicare before, do it the year before you retire (clearly, you can skip this step if you’re over 65 and already on Medicare).
You don’t have to make any health insurance decisions right this very moment, as you still have time and you’ll want to use your employer-paid health benefits for as long as you can.
Still, knowing what kind of Medicare plan you’re interested in and what you’ll pay when the time comes can make this part of your life a lot less stressful.
Reassess Your Retirement Budget
You might have created a loosey-goosey retirement budget back when retiring still felt like a distant dream.
Now that you’re a year out, it’ll be here before you know it, so it’s time to go back and revise your retirement budget.
Don’t be surprised if you sit down and change the budget yet again once you’ve begun living your retirement lifestyle.
If you think you may not have as much money upon retiring as you originally thought, you might consider working on a part-time basis for a while after you retire, so you can continue to build up your cash reserves.
What Not To Do Before Retirement
Although you’re both nervous and excited about retirement, it’s important to temper your emotions so you don’t make any of these major mistakes.
Don’t Quit Your Job Early
Did your boss ask you for yet another project when your plate is fully stacked?
Do you find yourself facing the wrath of a coworker or manager for purely no other reason than they have no one else to vent to?
Work frustrations don’t just disappear even though retirement looms in the distance.
It’s easy to think that you should just quit now because you’re going to retire in eight months or a year and a half anyway, but now is not the time to leave your current employers, tempting though it may be!
You have a retirement plan (or you should, anyway), and prematurely quitting isn’t part of that plan. Hang tight, take a deep breath, and remind yourself that retirement is just around the corner.
Soon, you won’t have to deal with any workplace drama.
Don’t Go On A Spending Spree
Taking a big family vacation six months before your retirement? Going to a casino and risking it all? Investing in a new technology or company?
My former office manager did just this. They remodeled their home, bought brand new furniture for several rooms in the house, and splurged on a two-week European cruise in the year before she retired.
Then her husband got laid off prematurely and half their income immediately went out the window.
She had to work a year longer than she’d planned and they ended up taking out a reverse mortgage so she could retire.
Trust me, you don’t want to be in the same boat.
In fact, we’d recommend you think long and hard about doing things like this even when you’re retired, because you’ll have less money to go around.
Don’t Fail To Budget
As we said in the last section, it’s fine if your retirement budget changes shape a few times, especially once you’re actively retired.
However, don’t use that as an excuse to skip budgeting or put it off until you retire.
You need to have an idea of what retirement costs are while you’re still working to determine if it’s feasible for you.
Don’t Stop Saving Money
Money doesn’t come in at the same rate once you’re retired. Yes, you might get your Social Security benefits and other checks, but it’s not a full income.
While you’re still working and making the most money you may ever earn in your life again, sock away as much of it as you can!
Max out your contributions to your retirement accounts (such as your Roth or traditional IRA), too.
My husband is planning to retire this summer and we’re still putting our full allowed amount into our retirement accounts while we have the extra money to do so.
Doing the same will result in a higher account balance in your retirement savings, but should also reduce your tax burden for the calendar year (check with your financial advisor to be sure this is correct for your specific financial situation).
When Should I Let Social Security Know I Am Retiring?
You put in your retirement application with your current employer, but when is it a good idea to contact Social Security to inform them?
It doesn’t have to be before your retirement or even at the beginning.
When you’re ready for your Social Security retirement benefits to start, contact the Social Security Administration.
Within four months, you should start receiving monthly payments (assuming you have reached the minimum retirement age of 62).
You can delay getting your social security income until you reach your full retirement age (see the calculator here).
Some people have saved enough money that they don’t need to start collecting social security right away.
If they don’t begin taking it, the benefits continue to increase each year until the person reaches 70 years of age.
Each year you delay taking social security results in a higher income once you begin getting payments.
Retirement Planning Books We Recommend
These retirement planning books can help you feel confident about your upcoming plans to leave the workforce goodbye.
The Ultimate Retirement Guide for 50+: Winning Strategies to Make Your Money Last a Lifetime (by Suze Orman)
Suze Orman is revered as a financial guru, so you know her retirement planning guide will be spot on.
In this book, she outlines “rules” and provides tips for what do to retire with confidence and control of your funds.
Retirement Planning For Dummies Paperback
The Dummies books are famous for simplifying their subject and this book is no different.
It will help you to understand the different retirement account types, what you need to do to get to a comfortable retirement, and gives you online tools for easy planning.
How to Make Your Money Last: The Indispensable Retirement Guide (by Jane Bryant Quinn)
Personal finance columnist, Jane Bryant Quinn, gives plenty of advice in this book for ways to “squeezing higher payments from your assets” to last your lifetime.
Easy to read and to the point, Quinn’s book gives you actionable ideas to stretch your retirement funds so you can navigate your Golden Years in confidence.
Do you plan to retire soon? It’s such an exciting time, but there’s also so much to do and many financial decisions to make. We hope this guide helps you navigate this time a little more surefootedly so you can get started on the rewarding road to retirement!