When to Retire: December, January, or Mid-Year?
By Marjorie L. Rand, CPA, CFP®, RICP®
When planning for retirement, we often think in terms of age—deciding on a specific year based on how old we’ll be. But as that year gets closer, another question comes into focus: What’s the best time of year to retire?
The timing of your retirement can have a significant impact on your finances, from your savings to your tax situation. It also requires careful thought about when certain benefits or provisions will take effect.
In this article, I’ll walk you through key milestones and considerations to help you decide whether retiring in December, January, or midyear makes the most sense for you.
When to Retire: Your Vesting Schedule
One key in figuring out when to retire is knowing your vesting schedule: the dates when certain benefits kick in, like retirement contributions, matching, stock options, and profit-sharing. Employers stagger vesting dates to give employees an incentive to stay.
For example, your employer may have a five-year vesting schedule for matching your contributions to a 401(k) plan. In this plan, the employer may increase their matching funds by 20% every year—0% in the first year, 20% in the second, and going up until year five, when they receive 100% in matching contributions.
Work anniversaries play the chief role in setting up your vesting schedule. Some employers, however, may set specific vesting months that are the same for all employees. Take a minute to verify the exact dates your employer has set up so you can gauge the best time for you to retire.
Retiring in December
In what circumstances would December be the best time to retire? When you’re choosing when to retire, take end-of-year events into account.
Some employers tie their vesting schedules to end-of-year performance reviews, locking in a full year of vesting in 401(k)s, stock options, or pensions. December is also when annual bonuses are handed out, so retiring after your bonus is received allows you to leave with more savings.
If your employer matches your 401(k) contributions, it may be better to retire in December to get the maximum matching you qualify for. This is especially beneficial if you’re at or close to 100% vesting.
Retiring in January
Many companies offer full vesting at the end of every year. By retiring in January, you can lock in the benefits of full vesting without generating taxable income in the new year.
If you intend to start using Social Security benefits immediately, you may receive another year of service credit if you wait to retire in January. This could increase the amount of your monthly benefits.
Retiring Mid-Year
Some employers delay handing out year-end bonuses until the first quarter of the new year. In that case, retiring after those bonuses are distributed is the better decision.
If you retire mid-year before earning a full year of income, you may be able to convert to a tax-advantaged Roth IRA without being forced into a higher tax bracket. Your after-tax contributions to a Roth IRA are calculated according to your income for that year. Quitting before the third quarter would reduce your annual taxable income, keeping you out of a higher tax bracket.
Get Advice on When to Retire
Deciding the best time of year to retire is a highly personal choice, influenced by your unique financial situation, benefits, and goals. Factors like vesting schedules, tax implications, and Social Security benefits can all play a significant role, and understanding these details is essential for making the most of your hard-earned savings.
At Rand Financial Planning, I specialize in helping clients navigate these complex decisions. Whether you're trying to determine how to maximize your 401(k) match, time your Social Security benefits, or minimize taxes through strategic retirement timing, I’m here to guide you every step of the way. Together, we can create a personalized plan that aligns with your goals.
Retirement is one of life’s most significant transitions, and having a trusted financial partner can make all the difference. If you’d like to discuss how I can help you plan for this exciting next chapter, schedule a 20-minute introductory call. You can reach me at 908-895-2406 or marge@randfinancialplanning.com. Let’s work together to make your retirement as smooth and rewarding as possible.