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Choosing a retirement date is one of the most important financial decisions you’ll ever make. Your retirement date can determine how much money you’ll need to save to achieve your desired lifestyle — and how many years that money will need to last.
Selecting an optimal retirement date isn’t an exact science. Instead, it involves looking at a number of different factors to determine when you can realistically retire. Whether you’re interested in retiring early or delaying retirement to a later age, it’s important to understand the things that can influence your decision.
Key Points
• Choosing a retirement date influences such things as Social Security benefits timing, the amount of savings needed, healthcare coverage, and potential part-time income strategies.
• Waiting until age 59 ½ before withdrawing from a 401(k) avoids a 10% early withdrawal penalty, making birthday timing an important retirement planning consideration.
• Retiring at month’s end could help maximize final paychecks, eliminate income gaps before pension benefits begin, and help accumulate additional sick, vacation, and holiday pay.
• Unused vacation time can be cashed out before retirement, providing a lump sum payment to supplement retirement funds and ease the financial transition.
• Retiring at year’s end allows collection of a full year’s earnings while maximizing final workplace retirement plan contributions before permanently leaving employment.
The Importance of Your Retirement Date
When preparing to retire, the date you select matters for several reasons. First, your retirement date can influence other financial decisions, including:
• When you claim Social Security benefits
• How much of your retirement savings you’ll draw down monthly or annually
• In what order you’ll withdraw from various accounts, such as a 401(k) plan, an Individual Retirement Account (IRA), pension, or annuity
• How you’ll pay for health care if you’re retiring early and not yet eligible for Medicare
• Whether you’ll continue to work on a part-time basis or start a business to generate extra income
These decisions can play a part in determining when you can retire based on what you have saved and how much money you think you’ll need for retirement.
It’s also important to consider how timing your retirement date might affect things like taxes on qualified plans like a 401(k) or the amount of benefits you can draw from a defined benefit plan like a pension, if you have one.
If your employer offers a pension, for example, waiting until the day after your first-day-of-work anniversary adds one more year of earnings into your benefits payment calculation.
Likewise, if you plan to retire in the year you turn 59 ½, waiting until six months after your birthday has passed to withdraw money from your 401(k) can help you avoid a 10% early withdrawal penalty on any distributions you take.
Choosing Your Date for Retirement
There are many questions you might have when choosing the best retirement date: What is the best day of the month to retire? Is it better to retire at the beginning or end of the year? Does it matter if I retire on a holiday?
Weighing the different options can help you find the right date of retirement for you.
End of the Month
Waiting to retire at the end of the month could be a good idea if you want to get your full pay for that period. This can also eliminate gaps in pay, depending on when you plan to begin drawing retirement benefits from a workplace plan.
If you have a pension plan at work, for example, your benefits may not start paying out until the first day of the following month. So, if you were to retire on the 5th instead of the 30th, you’d have a longer wait until those pension benefits showed up in your bank account.
Consider End of Pay Period
You could also contemplate waiting until the end of the pay period if you don’t want to go the whole month. This way, you can draw your full pay for that period. Working the entire pay period could also help you to accumulate more sick pay, vacation pay, or holiday pay benefits toward your final paycheck.
Lump Sums Can Provide Cash
If you’ve accumulated unused vacation time, you could cash that out as you get closer to your retirement date. Taking a lump sum payment can give you a nice amount of cash to start your retirement with, and you don’t have to worry about any of the vacation time you’ve saved going unused.
Other Exceptions to Consider
In some cases, your retirement date may be decided for you based on extenuating circumstances. If you develop a debilitating illness, for example, you may be forced into retirement if you can no longer perform your duties. Workers can also be nudged into retirement ahead of schedule through downsizing if their job is eliminated.
Thinking about these kinds of what-if scenarios can help you build some contingency plans into your retirement strategy. Keep in mind that there may also be different rules and requirements for retirement dates if you work for the government versus a private sector employer.
Starting a Retirement Plan
The best time to start planning for retirement is yesterday, as the common phrase says, and the next best time is right now. If you haven’t started saving yet, it’s not too late to begin building retirement wealth.
An obvious way to do this is to start contributing to your employer’s retirement plan at work. This might be a 401(k) plan, 403(b), or 457 plan depending on where you work. You may also have the option to save in a Simplified Employee Pension (SEP) IRA or SIMPLE IRA if you work for a smaller business. Any of these options could help you set aside money for retirement on a tax-advantaged basis.
If you don’t have a workplace retirement plan, you can still work on building your retirement nest egg. One tax-advantaged option you might want to consider is opening an IRA.
It’s possible to set up an IRA through an online brokerage, a bank, or another financial institution, and the process is typically fairly simple. First, though, there are a few different types of IRAs you might explore.
Traditional and Roth IRAs offer different types of tax benefits; the former allows for tax-deductible contributions while latter offers tax-free qualified distributions. You could also open a SEP IRA if you’re self-employed, which offers higher annual contribution limits.
If you decide to start any of these retirement plans, it may be helpful to use a retirement calculator to determine how much you need to save each month to reach your goals. Checking in regularly can help you see whether you are on track to retire or if you need to adjust your contributions or investment targets.
Retirement Investing With SoFi
Choosing a retirement date is an important decision, but it doesn’t have to be an overwhelming one. Looking at the various factors that can influence how much you’ll need to save to live your desired lifestyle can help you pin down your ideal retirement date. Reviewing contributions to your employer’s retirement plan and potentially supplementing them with contributions to an IRA could get you closer to your goals.
Not everyone’s journey to retirement is going to look the same, so weighing the different options is important. Thinking about what you want your retirement to look like, and what tools you can use to get there, could help achieve your desired lifestyle.
Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.
FAQ
Is it better to retire at the beginning or end of the month?
Retiring on the last day of the month is typically the best option. This enables you to collect all your paychecks during this period. You may also benefit from collecting any holiday pay that might be offered by your employer for that month.
What is the best day to retire?
The best day to retire can be the end of the month or the end of the year, depending on how pressing your desire is to leave your job. If you can wait until the very last day of the year, for example, you can collect another full year of earnings while maxing out contributions to your workplace retirement plan before you leave.
Is my retirement date my last day of work?
Depending on how your employer handles payroll, your retirement date is usually the day after your last day of work or the first day of the next month following the date you stop working.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
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