In today’s episode, you’ll learn more about:
- Why your retirement date shouldn’t be chosen arbitrarily.
- Bonuses, stock compensation, pension milestones, and other benefits you could leave behind.
- How your final paychecks can potentially be used to maximize 401(k) and HSA contributions.
- Why employer matching and true-up provisions matter.
- How to bridge health insurance between work and Medicare.
- Why retiring in December versus January or February can produce different tax-planning opportunities.
- Why retiring from work and starting Social Security or a pension don’t have to happen at the same time.
- How to balance financial optimization with actually being ready to retire.
Listen Now:
The Smart Take:
Thinking about retiring in 2027? Before you pick your last day of work, there are several financial planning opportunities worth considering.
Your exact retirement date can affect more than just your final paycheck. Bonuses, pension benefits, employer retirement contributions, health insurance, Medicare, taxes, Social Security, and even Roth conversion opportunities can all be influenced by when you leave your employer.
In this episode, Tyler Emrick, CFA®, CFP®, walks through seven things to consider before deciding exactly when to retire.
The best retirement date isn’t necessarily the date that produces the largest portfolio balance. It’s the date that makes the most sense after considering your benefits, taxes, healthcare, retirement income, and the life you want to live.
Go Inside the Episode:
0:00 – Intro
2:42 – What are you leaving behind at work?
4:45 – Have you maxed out contributions?
6:25 – Getting every dollar of employer money
8:02 – What happens to health insurance?
9:23 – What about taxes?
12:17 – Starting pension and Social Security
14:39 – What does your financial plan say?
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The Hosts:
Kevin Kroskey, CFP®, MBA – About – Contact
Tyler Emrick, CFA®, CFP® – About – Contact
Episode Transcript:
Tyler Emrick:
When should you actually retire? For a lot of people, the answer is surprisingly arbitrary. The end of the year, 65th birthday, or simply the day you’ve decided you’ve had enough. But your exact retirement date can have a bigger financial impact than you might think. Moving that date by just a few weeks or months could affect bonuses, pension benefits, 401k contributions, health insurance, taxes. I mean, the list goes on. Even some of the planning opportunities available during your first few years of retirement. Today, we’ll walk you through seven things you should check before putting your final retirement date on the calendar.
Walter Storholt:
Hey, we’re back for another episode of Retire Smarter. I’m Walter Storholt as always, joined by Tyler Emrick. He is a certified financial planner and a chartered financial analyst and one of the wealth advisors at True Wealth Design, based in Northeast Ohio, but serving clients all across the country. And great episode today, Tyler. It might sound like one of the basic questions, and it’s because it is one of the basic questions that people ask-
Tyler Emrick:
It is.
Walter Storholt:
… but it’s a really important one because it unlocks a thousand other questions and things to solve. And it shows that somebody’s finally getting really serious about retirement when they start looking at that date a little bit, right?
Tyler Emrick:
They do. Absolutely. It’s a fun conversation to have for sure. But just as anything, something that might seem very simple and not really that impactful, when you start kind of peeling back the onion a little bit and getting down into the nitty-gritty, there could be some opportunity here. Not everyone is going to have opportunity around this, but for those of you that do, seeing it taking advantage of it can really have some everlasting impact.
I mean, what prompted me to even think about it was one, an article in Fidelity kind of came up and was talking about some of the intricacies and details of putting in your retirement date and the thought that goes in behind it. And I was like, that’s something we help out with all the time with the families that we work with. So we just kind of got it in this nice little list format and we’ll kind of go through and check it off as you’re listening. And some of these hopefully will be applicable to you. I mean, we are coming up towards the end of the year, Walt. So a lot of people think, all right, hey, holidays, get out, enjoy the holidays with family or maybe start the new year and retire. So we’re kind of coming up on that time of the year and some of that retirement season.
Walter Storholt:
Yes, that would be my gut. September, October feels like a nice time to retire, enjoy the tail end of fall, and then you get the holidays with no work and that sounds really good.
Tyler Emrick:
You got it. You got it. So what are the things we need to be aware of and what’s on this list of seven? So the first thing that I wrote down was thinking about, well, hey, what are you leaving behind from a comp standpoint? So this isn’t nothing to do with benefits. This is just truly like, hey, are you going to get a bonus? How long do you got to be employed to get that bonus? Many individuals and many companies when they work, maybe their fiscal year ends in December and their bonuses pay out in February. Well, do you have to work through December to get that bonus? Do you have to be employed by February? Understanding some of those ins and outs where you can pick up some free money is very important.
I kind of think of it in the form of PTO too. How does PTO time pay out? Does all of it get paid out? Just a percentage of it or none of it?. So understanding your bonus and comp structure, and then of course that PTO payout I think is a good place to start as you’re kind of thinking through like, all right, what is that date going to be? And a lot of that’ll drive too, well, hey, do you want to give a two-week notice, a month notice, two month notice? Starting to think about those things, but your pay and bonus and PTO time I think is the first thing to wrap your arms around as you’re thinking through this decision.
Walter Storholt:
We could probably do a whole episode just on that bullet point, Tyler, because I’ve known family members who have just used PTO to retire early, but the PTO kept them an active employee through that period of time, which qualified them for bonuses and various additional payouts and investing and just all the other things.
Tyler Emrick:
You’ve got it.
Walter Storholt:
So you could get really strategic with a lot of that. And I’m just thinking back to when my wife left her very first employer and we had no idea that all that PTO would pay out and it was like Christmas.
Tyler Emrick:
A big check. Show me the money. Show me the money. [inaudible 00:04:25].
Walter Storholt:
It was like, “What?” We didn’t know that was a thing. This is amazing.
Tyler Emrick:
Well, you’re not alone. A lot of the families I talk with, they’re like, “I don’t know if my PTO gets paid out or not.” Well, do you earn it through the year? Do you not? Does it roll over? And when you start asking HR some of these questions, a lot of times you figure, wow, I didn’t realize that. I didn’t know that.
Walter Storholt:
But you can also be scared to reach out to HR on questions like that because it also tips your hand into what you’re… And if you’re not wanting everyone to know, then that can be a complicated factor, I guess.
Tyler Emrick:
A delicate situation it can be for sure. Well, along the same lines, my number two is kind of around that same concept of instead of your pay and comp focus, I wrote down like, well, are you getting everything you can and really not everything you can, but did you maximize everything that you can? So we just did an episode last week on contributions to your retirement plan, 401(k), 403(b) and the like. Well, hey, have you maxed out your retirement plan? Do you want to max out? Do you need to adjust your contribution to maximize when you plan on leaving? Hey, I’m going to leave midyear in June. Well, do you want to front load your retirement plan contributions to put in pre-tax savings because you’re not going to be able to do it once you’re officially retired? Hey, I contribute to an HSA plan. What’s my HSA contribution limit? Am I going to max that out? Am I going to be able to do that?
So taking a look at some of your benefits that are afforded to you and some of the things that you can do through payroll and once that payroll shuts off, all right, hey, it’s done. Is there any adjustments that you want to do in preparation for it? Because a lot of times we’ll tweak that retirement plan contribution, especially depending on when you’re leaving throughout the year to take advantage of, well, where do we want your income to land and that good stuff. HSA, you got a little more flexibility, right? You can do a contribution outside of payroll for that, but that 401k or 403 it’s got to be done through payroll. So once you’re officially done, it’s there.
Walter Storholt:
And you talked a little bit about the match situation in that prior episode, and that kind of applies to this line of thinking too, where if you can contribute a whole lot in January, February, even if you’re retiring, you can get a whole year’s match in some cases-
Tyler Emrick:
In some cases, yes.
Walter Storholt:
… by putting that contribution in early in the year. So that’s pretty cool.
Tyler Emrick:
No, absolutely. And that’s why I put as number three too, because on not only what you just mentioned, I think that’s very important, but also too, a lot of companies now have gone to not match on every single pay, meaning that they normally do a lump sum matching contribution for the prior year all at once. And normally that happens in Q1, Q2 the following year, they’ll look back and go. But a lot of times the way those matching programs through your employer works says, “Hey, you got to be employed on December 31st of the prior year to get that match.” But what if you’re like, “Hey, I just want to be off for Christmas, so I’m going to make my final day December 20th.” Okay, great, I just gave up a whole year’s worth of company match for retiring six days earlier or whatever.
So those would be those kind of traps to where, hey, if that’s fine, if you’re good with that, that’s great. But if you’re not, or you didn’t know, I could only imagine losing out on a whole year company match just because, hey, you wanted to leave work a week earlier or two weeks earlier. And it’s happened. Walt, we can see it. So understanding that free money, the matching program inside your 401k is that number three that I had put on there for sure.
Walter Storholt:
All these kinds of surprises can pop up and grab you, so they’re big. Yeah.
Tyler Emrick:
It can. Yeah, and hopefully it’s like, “Hey, that doesn’t apply to me, or that doesn’t apply to me.” And that’s great, right? That means, hey, this is going to be a much easier situation. But the next one applies to everyone, and that’s healthcare and health insurance, right?
Walter Storholt:
A big one, yeah.
Tyler Emrick:
It’s a big one, right? Well, one, how old are you when you leave and what options are going to be afforded to you? Generally, you’ve got about 60 days or so to elect COBRA coverage after you leave. Are you going to be electing COBRA coverage? Are you not?
Walter Storholt:
Have you ever looked at how expensive COBRA is?
Tyler Emrick:
Yes. Hey, you’re going to be going on Medicare when you leave and you’re contributing to an HSA. Maybe there’s some adjustments you need to do there to the HSA contributions to account for that. So understanding when your health insurance ends, all right, hey, if I leave on the first of the month, do I have health insurance through the entirety of that month or does it shut off? So then you can start to wrap your arms around, “Well, what am I going to do for health insurance? Medicare, individual healthcare through Obamacare or COBRA,” like Walt mentioned, or whatever. But you first got to understand when is your coverage going to end and how does that impact what your next coverage is going to be? And are there any timelines that you need to be aware of? I mean, normally, again, 60 days to apply for COBRA. You miss that window, well, you’re not getting COBRA. So being mindful of those and understanding the health insurance I think is a big key piece for sure.
Walter Storholt:
I would imagine the close cousin of healthcare is then taxes and the tax impact of this retirement date, right?
Tyler Emrick:
You got it. Well, and healthcare affects it, right? So that’s my number five. I mean, we’re moving through the list here pretty good, but number five is yes, what does your retirement date do to your taxes? And specifically, I’m thinking about two things kind of come in mind, and they’re actually both healthcare related. So the first of which would be, hey, if you end up working into the first three months of the year and earning wages, but yet you want to go on an Obamacare plan where your income affects how much you pay in healthcare and what tax subsidies that you get towards it, that absolutely can impact your healthcare decision and maybe you would go towards a more expensive COBRA plan as opposed to getting on ACA because you’ve already made too much money to get free healthcare credits towards your ACA premiums. So that wages that you’re going to earn in the year you retire will absolutely impact the healthcare decision that you need to make there and thus affect how much taxes you’re going to be paying in the form of those subsidies.
The second one that I wrote down with the taxes, Walt, was the good old IRMAA. This would be the Medicare surcharges, right? So if you make too much money, the good old IRS is going to say, “Hey, you made too much money. Now we’re going to charge you more for your Medicare Part B premium.” Well, normally you would have or you would have what’s called a qualifying event when you retire. That means you can appeal those IRMAA charges, but the year that you retire affects that appeal, right? Do you work a few months into the following year? Do you retire this year? Those decisions will determine, well, when you can actually use that appeal and that qualifying event and then what your income would have to be the following year. So if you’re a high income earner or you have some payouts coming to you from deferred comp plans or something like that, that absolutely is going to affect that IRMAA appeal and how high we want to have your income go.
So taxes very closely related to healthcare, Walt, at least in this situation for sure. Obviously the taxes too like, well, hey, if you’re contributing and want to max out your 401k earlier and knock down your income and all that stuff in relation to some of the stuff we brought up earlier, but taxes and that retirement date I think obviously go hand in hand for sure.
Speaker 3:
What would your life look like if you designed it around your true wealth? It’s a powerful question and one that True Wealth Design helps individuals, families and business owners answer every day. With a fully integrated approach to financial planning, tax strategy, investments and business advisory, their team can bring clarity and confidence to every part of your financial life. Take the first step toward a stronger financial future with a no cost, no obligation discovery meeting. Just click the link in today’s show description to get started.
Walter Storholt:
Yeah. You can tell we’ve gone from very nuanced, small little things that change now to getting into some bigger picture planning type of items now that we’ve done healthcare, taxes, and one thing we haven’t hit yet is Social Security. So I see that’s number, is that six on the list here?
Tyler Emrick:
Number six. Yeah, six on the list. Yep. And I lump Social Security and pension in together, right? But Social Security, if you’re trying to start that before your full retirement age, which is 67 for most individuals, well, hey, you can’t earn money and start Social Security. So that retirement date could potentially impact there depending on when you want to start Social Security. Obviously having a plan around Social Security and when you’re going to start it. Not every family starts Social Security right when they retire, some delay, some start now. So obviously you want to be thoughtful into there. But for those individuals that still have access to a pension, specifically a cash balance pension, your retirement date can substantially impact those payouts. I’ve had families where, let’s say those pension plans, a lot of times you have a choice, Walt. You can take a lump sum payment or you can take a monthly payment for the rest of your life. And that’s a choice there.
But for those families that maybe are leaning towards the lump sum payout where they take that money and just roll it into another retirement account and kind of use it as they see fit, well, the month that you retire can have extreme consequences on the amount of that lump sum payout because that’s all based off of interest rates. We call them segment rates. I’ve seen individuals where they have gotten $150,000 more in a lump sum payout by retiring on December 31st as opposed to January 1. So you start talking about real dollars here, especially if you’re an individual that has substantial pension plan out there. First is understanding, well, what options are you going to choose and what are you maybe leaning to? How is the plan using interest rates to calculate that monthly pension? And that will absolutely kind of trickle down into when you want to retire. So make sure, especially for those that have pension plans, this timing, especially as we’re coming towards the end of a year or the beginning of the next can be very, very big. So Social Security and pension, always on there, Walt.
Walter Storholt:
Yeah, got to be right. And now it’s obvious, we’ve kind of zoomed out to the whole picture, right? So I see your last bullet point here. Number seven, what does the financial plan actually say, right?
Tyler Emrick:
You got it. Yeah, yeah, absolutely. As you probably started to gather through all these things, they all kind of work together, right? That’s why [inaudible 00:14:57]-
Walter Storholt:
Or a few may work against each other and you’ve got to decide the lesser of the two evils, right? And like-
Tyler Emrick:
Competing objectives, competing objectives. You’re exactly right.
Walter Storholt:
Yes, that’s a much better way to say it, competing objectives, I like that.
Tyler Emrick:
That’s right. Well, I mean, it’s true, right? A lot of times when you start thinking about the assets and the wealth that you’ve accumulated over the years, some of it’s here, there, can be all over the place. All those types of plans have different things and objectives and things we want to be aware of. So the more cohesive that strategy can be and the more thought process and the more thought about those levers that go into it will just help you make some of these better decisions so you can just check them off the list as you go through it. But yeah, as you can imagine, Walt, there’s a few things that go into the old, all right, I’m going to put in my two weeks or I’m going to put in my month notice, I’m going to retire.
So now’s the time to start thinking about those things, especially for our listeners that are like, “All right, this is the year,” coming up towards the end. It’s going to be at the end of this year, beginning and next. Wait, you might be able to pick up a few bucks by deciding and thinking through some of this stuff.
Walter Storholt:
Hey, you may have somebody, “Hey, my emotional need and desire is to be done for the holidays,” like we kind of started off talking about. That’s great. Let’s take a look at it, but let’s just see what the difference would be if you retired a little earlier or even a little later into the new year, let’s say, and what are the levers that change? What are the variables? And if it all ends up equaling out because you traded this and you gained this, then hey, go with your emotional and desired date. But if there’s a, I’m just picking a number out of thin air, $20,000 difference over the next year because of the tax savings and then the bonus that you would get and this and that by just working till January 1st, let’s do that.
Tyler Emrick:
It’s worth it. Yeah. [inaudible 00:16:39]. Correct.
Walter Storholt:
It might be worth it to somebody. So these are the things you’re trying to just make sure people are aware of before they make this choice.
Tyler Emrick:
Oh, you got it. I mean, that’s what I think a good financial advisor is there to do, right? Yeah. I mean, a lot of families aren’t thinking about these seven. Yeah, hey, you’ve listened to the podcast. Maybe you’ve got these on your mind, but chances are when your time comes in to put it in, are you going to remember all these? And hey, there might be another handful that applies to your specific situation that I didn’t even necessarily bring up here, right? But it’s our job, I think, to kind of understand these, understand how they work in conjunction together and present them in a way to where you can make whatever decision’s going to be best for you as you kind of think about that next chapter of your life because it is a big decision. Hopefully you only retire once unless you want to go back.
Walter Storholt:
Yeah. Feel free to get a date in your mind, but don’t lock it in until you’ve taken a full look at the picture. I think that’s the key here for sure.
Tyler Emrick:
Absolutely.
Walter Storholt:
All right, very good. If you would like to talk about this with Tyler and the team, all you have to do is click the link in the description of today’s show, you’ll find it easily down there and you’ll be able to schedule a time to meet one-on-one with an experienced wealth advisor on the team for your initial discovery call. See if you’re a good fit to work with True Wealth Design or go your separate ways. You’ll find out kind of how well positioned you are right now for the future, where some of the early gaps that are visible might be inside of your plan, and you can start talking a little bit about how you’ll solve for those issues. That’s what the discovery process is all about. And it’s a 20, 30 minute conversation with an experienced member of the team to walk you through that. You can schedule that at your convenience. Again, just click the link in the description of today’s show, or you can go to truewealthdesign.com and look for the let’s talk button and have a conversation that way as well.
Tyler, thanks for the guidance here. Fun to talk about that date. I know that’s probably an exciting part of this process for folks, but it needs to be one made with the wisdom of the financial planning behind it as well. So good stuff.
Tyler Emrick:
Yeah, you got it. It was fun. Always a good topic to talk about for sure.
Walter Storholt:
We’ll see you next time right back here on Retire Smarter.
Speaker 4:
Information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.
