Timing my retirement date

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Box of Rain
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Joined: Sun Dec 24, 2023 8:39 pm

Timing my retirement date

Post by Box of Rain »

I'm wondering about timing of the retirement date.
I am late 50's, aiming to retire somewhere around mid 2025 to early 2026.
Sooner the better! but want to get the timing right for finances, taxes. I am assuming one would want to retire as of Dec 31, or very early in a new year so that IRA withdrawals (as well as taxable interest/dividends) would be taxed based on a lower total income. Am I thinking about that correctly? If I retire Sept 1st, then the money I need to live on is taxed at an income level that includes all my W2 income from January to August. But then again, I will be getting that dividend and interest income from Sept 1 to Dec anyway, and paying taxes on it based on the whole year's W2 income, so maybe it doesn't matter if I leave work Sept 1st after all? I'm probably not explaining that well enough.
For reference, at my job, health insurance stops the minute you walk out the door. That very day. Also, vacation time and FSA account totals are prorated to amount of work time in a year. And, we do not get paid for unused vacation, conference, or sick days when retiring, so those things don't enter into the timing decisions.

[Title edited to clarify OP's question. Moderator Pops1860]
Pops1860
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Re: Timing my retirement date

Post by Pops1860 »

This post has been split from viewtopic.php?t=427780 into a new topic, as it addresses a specific question related to a different situation. Moderator Pops1860
The power of accurate observation is often called cynicism by those who do not have it. ~George Bernard Shaw
sailaway
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Re: Timing my retirement date

Post by sailaway »

Can you front load any tax sheltered accounts?

Do you need to control income for ACA?

I would work long enough to defer all my income plus meet my tax bracket goals. It helps that Megacorp matches contributions, not percent salary. This shouldn't affect how much tax you pay on traditional withdrawals, because the more you earn, the less you withdraw that year.
Topic Author
Box of Rain
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Re: Timing my retirement date

Post by Box of Rain »

I will be buying the retiree health insurance from my current employer. More expensive than ACA, but I believe it is better coverage than what I could get from the ACA. We have mandatory 401K with 5% of salary going into it with 5% of salary being matched by employer for a total of 10% of salary each year, on a paycheck to paycheck basis. Longer I work that year, more can go into the 401K. Also have 403b with my voluntary contributions including 50+ catch up, no match from employer. Will fill that the year I retire by contributing whatever amount per paycheck is needed to get to the yearly max before date of retirement. Don't participate in the 457 plan for reasons too complicated to discuss here. We don't qualify for HSA (employer has no HDHP options). Do put money in an FSA, will be allowed to use pro-rated amount for whatever part of the year I worked. Not sure if I can submit claims on remaining balance once I leave my job. Doubt it.
RetiredAL
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Re: Timing my retirement date

Post by RetiredAL »

If you go to year end, consider working 2 months the next year just so you have some wages to contribute to a Roth. Most important, do what makes you happy.

I retired on May 1st, so I had wages for DW and my Roth's. I also did some consulting work for them them during the following 2 years, so I did our Roth's then too. At the same time, I started IRA to Roth conversions.
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Peter Foley
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Re: Timing my retirement date

Post by Peter Foley »

I too advise working a bit into the next year. Create a low income tax year that allows you to increase your retirement contributions to IRA and Roth. Roth conversions in that year might be advantageous as well.
chance
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Re: Timing my retirement date

Post by chance »

I'm planning on retiring sometime in the next year and have also been thinking about this. Originally the plan was to do it at the end of the year. But then I began to realize there are benefits to pushing it into the early part of the next year, as some other posters have mentioned.

My company pays bonuses near the end of the calendar year so I definitely want to wait until then. But working a couple of months into the next year allows me to: (1) front load 401k contributions to get another year's worth in my 401k, (2) front load my HSA contributions as well and benefit from the company match, (3) get some earned income to contribute to backdoor Roth IRA for one more year, and (4) do all of this while minimizing taxes. Finally, I don't mind working so much when it's winter and crappy weather outside and this times my retirement date with spring approaching and opportunities to get outside which is another bonus. So the plan will be sometime next year around April. Will also leave early in the month to get that full month's worth of health insurance.

Anything I'm missing?
Topic Author
Box of Rain
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Re: Timing my retirement date

Post by Box of Rain »

I will probably not do the Roth conversions during last year of working full time.
My tax rates in retirement will be quite a bit lower than my tax rates during working years.

I could work into the next year, but I would only do that to max the 403b contributions to the limit from first two months of paychecks. Could probably be below the Roth IRA income limit for rest of the year, but the amount one can contribute to a non-workplace Roth IRA in a year is a fraction of one month's spending for me. And, I don't know if I can contribute anything to a Roth IRA outside of work in a year where I had a 401K at work during that year.

I think that I am really trying to decide between Sept 1st and Dec 31, for 2025.
desiderium
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Re: Timing my retirement date

Post by desiderium »

You might explore how you will manage taxation in retirement. Ira withdrawals are straightforward taxable income, but do you have taxable savings to support retirement? You may be able to manage things in a way that will permit taking some capital gains tax free or possibly doing Roth conversions. This can get complicated and is highly individual. See a classic BH thread on this topic: viewtopic.php?t=87471

You might also go back and look at ACA coverage and health insurance costs. ACA plans can have varying levels of coverage and you may be able to find one that is similar to your employer's plan. If you can keep your income low, you may find the subsidies compelling, though there are changes scheduled for 2026 that will reduce this benefit for some. I imagine there will be political news stories to follow on this subject in 2025.

Retirement is a big life change. I would prioritize your physical and mental health as well as your deferred wants over optimizing your departure date. It just won't make any meaningful difference in the long-term survival of your portfolio.
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Svensk Anga
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Re: Timing my retirement date

Post by Svensk Anga »

Box of Rain wrote: Sun Mar 24, 2024 9:07 am Don't participate in the 457 plan for reasons too complicated to discuss here.
If it is because of having only high expense choices, that need not hold you back. My wife had lousy 403b and 457b options, so we ignored them and loaded up my excellent 401k. Then very late in her career, we did use the 403b and 457b. These were immediately rolled to an IRA once she retired. Fee levels that are unacceptable to a Boglehead for a decades-long horizon might be tolerable for tax rate arbitrage for a couple years, especially in peak earning years.
Topic Author
Box of Rain
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Re: Timing my retirement date

Post by Box of Rain »

457 for me has a few issues, unrelated to each other.
However, one compelling reason I stayed away from it is that the money in a 457 is owned by the employer. It is designated to be paid to the employee when the employee wants to withdraw it, and the employee can direct how it is invested, but unlike vested 401K or 403b funds, the 457 funds are owned by the employer and fully available to the employer's creditors. I work for a large hospital that has been crying poverty for many years with increasing intensity lately. In 1997 I went to work for a large hospital system that pretty quickly thereafter went bankrupt. Someone on this forum has a tagline in the signature of their posts that says something like (not exact words), "How did you go bankrupt? Slowly at first, then very quickly." I wince whenever I see that line because that is sooooo true to life. Having gone through that once, I am not trusting any money to my current employer while they repeatedly tell all of us how broke they are.
There are other reasons, unrelated to that, but even if I could overcome the other reasons, no way would I trust this employer with money in a 457 plan.
p1db
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Re: Timing my retirement date

Post by p1db »

I retired in Feb 2022. Later that year I turned 55.
I chose to time it that way because it gave me the option to exercise the “rule of 55” under which I can make withdrawals, if needed, from my 401k without penalties before I reach 59½.
It also gave me a chance to make traditional deductible IRA contributions in 2022 for myself and spouse and then in 2023 convert those to Roth. That conversion was tax free since I did not have any substantial taxable income in 2023.
placeholder
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Re: Timing my retirement date

Post by placeholder »

I worked through january of the final year to both have some some roth ira money and to be able to put the prior year bonus into the 401k .
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9Iron
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Re: Timing my retirement date

Post by 9Iron »

Many employers cover Health insurance through the end of the month. Therefore, you should work a few days into the month.

If bonus payments or Restricted Stock / Stock Options apply in your case, then you want to stay to qualify for those payments.

Understand when vacation accrues at your organization and if they are obligated to pay out unused vacation ( I worked at a company that gave the entire year accrual on 1/1, everyone worked on 1/2 to qualify, no one retired on 12/31).

If applicable , understand the rules on FSA accounts.
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Watty
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Re: Timing my retirement date

Post by Watty »

Box of Rain wrote: Sun Mar 24, 2024 6:34 am If I retire Sept 1st, then the money I need to live on is taxed at an income level that includes all my W2 income from January to August.
Just to be clear so there is no confusion.

If you would make $100K if you work for an entire year but then retire midyear after having only made $50K then;

Your payroll withholdings for the first half of the year would be withheld as if you are going to have $100K in taxable income unless you make special arrangements. Thigh might put you into a highest tax bracket.

When you do your taxes your actual income with be $50k which might put you into a lower tax bracket. For taxes this will be the same as if you had a lower paying job and worked an entire year and only earned $50K. If you do end up in a lower tax bracket you would get a tax refund.
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murrays
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Re: Timing my retirement date

Post by murrays »

I retired in January which meant that we had to sign up for 5 months of insurance once COBRA ended 18 months later resulting in new deductibles, out of pocket amounts, etc. In hind site, it would have made sense to work into June which would have extended COBRA to the end of the following year.
Applerunner
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Re: Timing my retirement date

Post by Applerunner »

I'm trying to figure out the same situation though my retirement date is a little further out then yours and I will be getting a pension and subsidized health care. I'll be 53. For me, the earliest I could retire would be Dec 1. I am thinking about going Feb 1st so I could make deposits into my 403b/Roth. I'm curious how this would effect my taxes and I plan to ask my accountant. It would definitely be more advantageous for me to go in June of that year because I would get 3 months free coverage of my health care, slightly more money in my pension and a slightly higher cash out of my sick leave. However, I feel like I have enough money to sustain myself in retirement and enough to give my heirs. I don't care too much about the money at this point unless it is shockingly different. I'm ready to reduce my stress levels and bring back some time to my life.
Marq1
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Re: Timing my retirement date

Post by Marq1 »

I would think that you would just live partially off savings (non IRA) accounts with minimal to no withdraws for as long as possible then the tax hits don't come till your well into RMD territory!
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