We can spend a significant part of our lives saving money for a financially secure retirement. For that reason, it can be somewhat overwhelming yet exciting when the time comes. However, deciding to retire is a significant life decision that requires serious financial considerations.
Apart from planning the best moment to retire, it’s crucial to determine the ideal time of the year to leave the workplace. After all, the date you start your retirement can affect many factors, impacting your retirement income. Some of them include taxes and Social Security benefits.
We want to help you plan out the ideal retirement, so here we list several factors to consider and other valuable tips regarding the best time of the year to retire.
Do You Have a Pension?
In the case of employers and government jobs that offer a defined benefit pension plan, it would be a good idea to retire on the day following the anniversary of your first workday. If you don’t know the exact date, you can confirm it with your job’s human resources department.
It gives you an additional year of service credit toward your pension calculation without the need to work beyond that date. Some plans may factor their employee’s ages when calculating retirement eligibility and monthly benefits, so it’s vital to inform yourself of your company’s retirement policies.
Are You Saving Money?
Some personal financial advisors may advise you to save enough money in a cash account to cover the first couple of years of retirement expenses. This way, you don’t need to withdraw money from your retirement accounts should the stocks take a downturn or any other situation. You could also work part-time.
People that don’t have ample cash reserves, or don’t have them at all, might plan to pull from their retirement accounts a short while after retiring. If you’re in that situation, it might interest you to retire at the beginning of the year or its very end.
This prevents you from taking too much money out of your retirement account in a year where you could have earned enough income to push you toward a higher tax bracket.
At What Age Are You Retiring?
Age 65 is considered by many the unofficial retirement age, but some opt to retire early or later when the required minimum distribution rules become applicable. The ideal time often depends on your personal circumstances, so here is some helpful information about retiring at different ages:
Leaving your daily job before age 65 has some perks. Many employees reaching their 50s and early 60s may feel burned out, so retiring might be refreshing for them.
On average, men retire at the age of 64. Meanwhile, the average retirement age for women is 62. Whether you choose to travel, take up new hobbies, or find a less stressful part-time job, it’s an excellent opportunity to rest and recharge.
Although there’s research indicating that working longer may keep you healthier and more content, some suggest the opposite as well.
For instance, The National Bureau of Economic Research found that retirement may improve life satisfaction and health. The research factored in the people who retire due to health risks and issues.
Still, there’s a caveat. Few people can support early retirement. While you become eligible for Social Security at age 62, you don’t qualify for full retirement benefits until a bit later, when you’re 66 or 67 years old, according to the Social Security Administration.
Claiming benefits early significantly reduces the amount you get. If you’re married, it also impacts the benefit your spouse gets.
They only receive 35 percent of the total amount, compared to 50 if you wait until age 66 or 67. Coordinating a little with your spouse can boost the total sum you collect from Social Security services.
If you still choose to take early retirement, you need a substantial sum of money to supplement your Social Security funds. The amount usually corresponds to about 25 times your annual expenses.
Keep in mind that the earlier you retire, the more you need. Moreover, you don’t receive Medicare coverage until you’re 65 years old, so you might need to pay for another health insurance. Unfortunately, most of them come at a steep price.
For instance, people eligible for the Affordable Care Act pay a monthly average of $456 in premiums. In comparison, Medicare Part B is only $148.50, and it gets you coverage with a low $203 deductible per year.
Full Retirement Age
Many people consider the upper 60s the best retirement time. By this point, you’re usually old enough to have enough plenty of financial reserves and young enough to relish the job-free years.
Waiting until this time also lets you support tax-advantaged investment accounts. For instance, investors who are 50 years or older can make a catch-up contribution to their IRA or 401(k), providing $7,000 to either of them or a Roth IRA. Should you use a 401(k) for your investment, you can provide up to $26,000 annually in salary.
At full retirement age, you’re eligible to get full Social Security benefits. However, this age depends on the year you were born. Currently, the full retirement age applies between ages 66 and 67.
For example, according to the Social Security Administration, people born in 1960 or later apply for full retirement age once they turn 67 years old. Meanwhile, those born before 1954 have already reached the required age of 66. Between 1955 and 1959, the differences are only a couple of months.
It’s important to note that if you opt to receive your Social Security payment 36 months before your full retirement age, your benefits are permanently reduced by five-ninths of 1 percent each month. If you begin taking them more than 36 months before, it’s further reduced by five-twelfths of 1 percent each month.
For example, let’s assume you stop working and start your benefits when you reach age 62. If your retirement age is 67, the benefit reduction calculation is based on 60 months.
The first 36 months equal a 20 percent reduction (five-ninths of 1 percent times 36,) and the remaining 24 months equal 10 percent (five-twelfths of 1 percent times 24.) Overall, your benefits would be reduced by 30 percent by the time you reach full retirement age.
You can also earn delayed retirement credit (DRC) if you choose to retire between full retirement age and age 70, which is when the Social Security Administration enforces the required minimum distribution rule.
For example, if you began your benefits at age 68, you would get a DRC of 8% multiplied by two, which is the number of years you waited. It corresponds to a 16 percent increase in benefits.
Also, if you wait until you become 65 years old, you become eligible for Medicare. It comes at a fraction of the cost compared to other health insurance plans for older adults.
However, you might have to pay premiums if you fail to sign up for Medicare in the six-month window around your 65th birthday.
If you like your job, you may enjoy some advantages if you continue working until you reach age 70 and avoid collecting your Social Security benefits. After all, you can maximize the amount you receive this way. For those born after 1960, it can reach up to 124 percent of the original amount.
Should you plan well, you might have enough money saved to enjoy the things you like without worrying too much about outliving the assets.
Unfortunately, delaying it isn’t always a choice. The National Institute of Retirement Security noted that many Americans aren’t prepared for retirement.
Four out of five have less than a year’s worth of savings in retirement accounts, and more than half don’t own retirement account assets. Additionally, if you include every working individual, not just those with accounts, the median retirement balance becomes $0.
Are You Receiving Your Required Minimum Distributions?
The SECURE Act, which became valid on December 20, 2019, made some changes to the Required Minimum Distributions (RMD) rules.
It pushed back the age required to withdraw money from their accounts from 70 and a half to 72 years old. In addition, it also gives you the means to continue adding to your traditional IRA after reaching that age.
These rules apply to all employer-sponsored retirement planning programs, including 401(k), 403(b), 457(b), and profit-sharing plans. They also apply to traditional individual retirement arrangements (IRAs) and other IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.
You have to receive the first RMD on April 1 of the year after becoming 72 years old. For subsequent years, including the one in which you received your first payment, you have to take it by December 31.
Are You Planning to Work Part-Time After Retiring?
Many people who retire choose to continue working and earning money as a freelancer or a contractor. A person who works part-time and opts to receive Social Security benefits before reaching the full retirement age (66 or 67 years old, depending on your birth year) may find them reduced based on their earnings.
For example, suppose you’re under 66 or 67 for the entirety of 2021. In that case, the Social Security Administration considers you retired if you have a month where your income is $1,580 or less, and you didn’t perform significant self-employment services.
If you reach the age in 2021, the Social Security Administration considers you retired if your income is lower than $4,210, and you didn’t perform self-employment services.
If you expect to earn more than $1,580 a month before reaching the full retirement age, you should at least wait until your birthday passes to claim the Social Security benefits.
Do You Have Paid Vacation Days?
If you have accrued vacation pay with your employers, find out whether they provide this money once you retire. This pay is considered income, and it’s subject to the earning rules described before. For that reason, you might want to wait until after receiving the funds to quit work and pull out your Social Security benefits.
Are You Turning 70 Years Old During the Year?
As we’ve mentioned, if you wait until you reach your full retirement age to begin collecting your Social Security benefits, you can increase your monthly income. However, it only applies until age 70, which is when you reach the maximum DRC.
If you’re turning 70 years old at any point during the year you’re planning to retire, then you should consider filing for Social Security after your birthday. After all, waiting any longer doesn’t benefit you in any way.
Final Note/Wrapping Things Up
There are numerous things to consider when deciding the best time of the year to retire. It might be advisable to consult with a personal finance or tax advisor, bearing in mind that they could offer significantly more detailed guidance tailored to your circumstances.
You could also use an online financial planner for retirement. These website calculators let you grasp how ready you are for retiring at the selected year based on the current age, income, savings, investment, interest, expected increases, etc., you input. They don’t require any personal data at all.
Regardless, you need to save enough money if you want to retire and enjoy your monetary benefit. Early retirements require a substantial amount of it, while later ones do not so much. It’s a process that takes decades, so it’s essential to know what to expect and do things properly.