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 what can influence your decision.
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), 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 or the amount of benefits you can draw from a defined benefit plan, 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, you’d want to wait until six months after your birthday has passed to withdraw money from your 401(k) in order to avoid a 10% early withdrawal penalty on any distributions you take.
What to Consider for Retirement
There are a number of things to consider for retirement that can influence your retirement date. The goal is to figure out how much you’ll need to save to avoid running out of money in retirement. The longer you anticipate living and the earlier you plan to retire, the more money you might need. Here are three of the biggest things to consider when choosing a retirement date.
Income
Income has two dimensions in the retirement discussion. Specifically, you have to consider:
• How much income are you making now?
• How much of that will you need to live in retirement?
One rule of thumb is that most people will need 70% to 80% of their current income to cover retirement expenses each year. So if you’re making $100,000 a year, you’d need to save enough to be on track to generate $70,000 to $80,000 of income per year in retirement. The money you need in retirement ultimately depends on what kind of lifestyle you anticipate living and what your expenses will be.
You can also use income as a guideline for determining how much you should have saved for retirement by age. For example, if you’re determining how much you need to retire, the answer by age might be:
• Three times your income by age 40
• Six times your income by age 50
• Nine to ten times your income by age 60
These are ballpark figures, but by using these guidelines you can measure your own progress to see how close you are to your target. For example, if you’re making $100,000 a year at age 50, then you should have $600,000 saved following this income rule. If you don’t have that much in your retirement accounts yet, that may be a sign you need to rethink your savings strategy and/or your retirement date.
You may want to reconsider all the numbers if you plan to retire early, and perhaps get some professional advice to help you do so.
Lifestyle
Your lifestyle can also affect your choice of retirement date. Someone who wants to live a lavish lifestyle in retirement will obviously need more money than someone who wants to live a minimalist lifestyle.
Consider what kind of lifestyle you live now and what kind of lifestyle you’d like to live in retirement. For example, do you want to travel extensively or stay closer to home? Would you enjoy living in a tiny house or purchase a house in a private community that features a golf course and other high-end amenities?
Also, consider whether you still plan to work after retirement. This can include taking on a part-time job, starting a side hustle or business, or doing consulting work. These activities can bring in extra income to help to fund your lifestyle so you’re less reliant on savings.
Future Expenses
Creating an estimated budget can help you get a sense of what your retirement expenses might be. For example, you may know how much you’ll pay for things like housing, utilities, and food. But it’s also important to consider any future expenses that could require you to spend more each month in retirement.
This includes health care expenses that may not be covered by Medicare. While Medicare can pay for many health-related issues, it doesn’t pay for all of them. Long-term nursing care is a big exclusion.
Purchasing long-term care insurance or a long-term care annuity can provide you with the necessary funds to cover those expenses, should you need nursing care. But if you don’t have either of those options in place, you’ll need to consider how you’ll fit long-term care costs into your retirement budget.
Choosing Your Date for Retirement
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? These are questions you might have when choosing the best retirement date. 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 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 consider waiting to 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 plan. 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, 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 save through an IRA. 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 and your desired lifestyle can help you pin down your ideal retirement date.
Reviewing contributions to your employer’s retirement plan and supplementing them with contributions to an IRA can get you closer to your goals. And opening an IRA with SoFi Invest can be a great way to jump start your retirement savings. With SoFi, you can open a traditional IRA, Roth IRA, or SEP IRA online in minutes. SoFi doesn’t charge management fees, and SoFi members have access to complimentary financial advice from professionals. Don’t make the mistake of putting things off. Get started investing for retirement with SoFi today.
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 can also benefit from collecting any holiday pay that might be offered by your employer for that month. As a note, it doesn’t necessarily matter if the last day of the month is a work day for you.
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.
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