By Brian Baker
Retirement, is something nearly everybody dreams of one day. It is an accomplishment to be able to retire well after spending decades saving and investing.
But how can you determine the right time to retire? Your retirement income, as well as your taxes due can be affected by the time you retire. The best year for you to retire depends on your personal circumstances. However, it is important that you consider these key factors before you make your decision.
These areas could have an impact on when you retire.
Although defined benefit retirement plans are largely obsolete, certain workers still have access to them. These retirement plans pay a fixed amount each year, based on a formula. This calculation typically takes into account the years of service at the employer, and employees are rewarded for being loyal to the same employer.
Each plan has its own pension system. However, some plans will give credit for extra years of service if you only work one day in the following year. For example, if you started working at a company on Sept. 1, 2001, you may get credit for 22 years of service if you retire on Sept. 3, 2022 even though you only worked one day into your 22nd year.
Other plans could differ from yours and require that you work for half of the year or more before receiving credit for another year. Make sure you understand how pension benefits are calculated so that your retirement date maximizes payouts.
When you need to tap your retirement accounts
If you do not have sufficient cash in your savings to last the first month of retirement, and you would like to begin taking out of retirement funds immediately, then you might want to retire near the end or beginning of the next year.
That’s because taking money out of accounts like 401(k)s or traditional IRAs in years when you have a lot of earned income could push you into a higher tax bracket, causing you to owe more in taxes than you expected.
Also, if you’re retiring early, you may need to be careful about making withdrawals from retirement accounts to avoid early withdrawal penalties. Withdrawals made before age 59 1/2 from IRAs typically come with a 10 percent penalty, so you’ll want to avoid making any withdrawals that could trigger the extra charge.
More Benefits Coming Your way
You should also consider any additional benefits that may be available to you. You should make sure that you are able to receive any annual bonuses. Also, consider how this income might impact your tax situation. Many companies offer annual bonuses starting in March. If you are unable to generate income for a long time, your income may allow you to remain in the lower bracket of tax.
Some people don’t realize the potential income that could result from vacation time accrued, but not used. Ask your employer whether you owe money on accrued vacation time and when it will be paid. These vacation days count as income and could affect the tax you owe.
Social Security Considerations
When you retire can also have an impact on your Social Security benefits. If you wait until after you reach full retirement age, which is between 66 and 67 years old, to claim Social Security benefits, your payment will increase when you do start receiving benefits. But the increase in payments stops once you reach age 70, so if you turn 70 in the year you retire, you should wait until after your birthday to start receiving benefits. This will reduce taxes and increase your payments.
An overview of Social Security benefits, and the impact on your payment if you return to work after retirement.
Other Matters to Consider
You’ll need to consider how you will pay for your healthcare expenses in retirement. It is a common mistake for many people to forget about medical costs in retirement, even though it can be a substantial expense for most.
You might consider adding to your retirement account one more time, before you go into retirement. It might not seem like it matters much, but those contributions can turn into a sizable sum after another 20 to 30 years of compounding. Money invested when you’re in your 60s can help pay for end-of-life care in your 80s or 90s.
Your specific situation will determine the right time to retire. You should remember that retirement income, as well as a substantial amount of earned income, could make you more tax-exempt. You should also account for any income like accrued vacation payments or annual bonuses.
If you are a participant in a defined-benefit plan, make sure you know how many years you must work before you can get credit for the additional year. Don’t leave any money behind as soon as you get out of the office.
(c)2022 Bankrate.com. Distribution by Tribune Content Agency, LLC.
The Epoch Times Copyright (c) 2022 The views and opinions expressed are those of the authors. These statements are intended for informational purposes only. They should not be taken as an offer or recommendation. The Epoch Times is not a source of investment, tax or legal advice, nor does it provide financial planning, estate planning, and other personal finance advice. The Epoch Times is not responsible for any errors or delays in the information.