When Is the Best Time to Retire?

Pay careful consideration to these six factors before you pick a retirement date.

by Heather Johnson - September 11, 2017

You may have given some thought to your ideal retirement age, but have you narrowed it down to exactly when you should retire? The date you retire — and how you plan for it — may impact a number of key financial components, including your Social Security benefits, health insurance payments, and your 401(k) balance.

Before you start planning your good-bye party, consult with your Financial Advisor to determine the best time to retire. Here are six factors that can all influence when you can — and should — retire.

1. Health insurance

According to the Kaiser Family Foundation 2016 Employer Health Benefits Survey, an employer-sponsored family health plan averages $18,142, with workers contributing $5,277 annually toward their premium. Single premiums average $6,435 annually, with workers contributing $1,129 on average.

That’s a significant savings over paying 100% of the premium on your own. For most retirees, Medicare plays a significant role in their health insurance, but you won’t be eligible until age 65. If you’re going to retire before that age, look into COBRA and, if available, your employer’s retiree coverage.

Wells Fargo Advisors Senior Vice President and Product Manager Donna Peterson says that under COBRA, retirees can keep their group health insurance coverage for at least 18 months. “Depending on your age, this may help you bridge the gap to Medicare or give you better timing for signing up for an individual policy,” she says. Note that if you continue insurance coverage under COBRA, your employer may require you to pay 102% of the full cost, so you’ll have to determine if that’s less expensive than getting an individual policy.

If your employer offers retiree medical coverage, weigh all options to determine what works for your budget. “You have to determine from a timing and cost perspective the best health care strategy,” says Peterson.

2. Social Security

When you apply for Social Security benefits, you may have to wait up to four months before you receive your first payment. If you’re age 62 or older and want a seamless paycheck-to-Social Security transition, apply three months before you retire.

Full retirement age — the age when you start receiving 100% of your eligible benefits — is currently 66 for adults born between 1943 and 1954. Your monthly Social Security check can vary greatly based on how long you wait to retire — the Social Security Administration has several calculators to help you determine what impact your decision may have. Use that information to help coordinate your best retirement date.

3. 401(k) savings

As of its 2017 regulations, the IRS allows participants age 50 and over to contribute up to $24,000 annually to an employer-sponsored retirement plan — $18,000 plus a $6,000 catch-up contribution.

Once you retire, that option — and any company match — likely will not be available, so be sure to understand how that impacts your overall retirement savings.

“Put in as much as you can afford, up to the maximum allowed, or at least enough to get the company match,” says Peterson. “You may end up with a sizable chunk of additional money in your account for that year.”

Remember, it can take up to five years, depending on the company, to become fully vested. Wait for it. You’ll receive 100% of the company matching funds instead of a fraction of that.

4. Required Minimum Distributions (RMDs)

As you approach age 70, remember you’re required to take money out of some types of savings vehicles. You have to take your first RMD from Traditional, SEP and SIMPLE IRAs by April 1 of the calendar year after you turn 70.5.

The RMD from your current employer’s plan can be delayed if the plan allows and you don’t own 5% or more of the company. If you’re worried about your retirement savings and can work past 70.5, you can delay retirement and add to your portfolio, possibly even delaying RMDs at the same time.

5. Bonuses and work milestones

If you’re approaching a milestone with your employer, such as a 25-year anniversary, wait to retire until you’ve hit the mark, especially if it comes with a bonus or extra vacation days. Similarly, if you receive an annual bonus at a certain time of the year, don’t forget to consider that when you’re looking for a date to retire. The number of years or hours of service you have at your job may also play a role in calculating pension benefits.

6. Market fluctuations

Although it’s as difficult to predict as the weather, the economy can affect when you retire. “It can be very hard to recover from a market downturn early in retirement when you’re taking withdrawals from your portfolio,” says Peterson. “If you can delay retirement, you’ll be so much better off in terms of what you can live on and can leave as a legacy.”

If you can’t wait out a downturn or you retire and then the economy takes a turn for the worse, Peterson suggests reducing your spending and relying more on liquid assets such as savings and CDs.

Many adults look forward to starting a new life in retirement. But giving careful consideration to the timing of the big day may give you a financial boost to make that life even better.

Heather Johnson writes about small business, finance, real estate, and other topics from Oakland, California.

Image by iStock

Additional Resources

Read how many adults are readjusting the definition of “retirement age” by working longer.