The closer we get to leaving our cushy salaried jobs, the more we wonder about the ideal timing of when to leave, how to leave and what not to do on our way out.
It’s tempting to want to go out in a blaze of glory, but that’s just not the kind of people we are. We are planners. We want to make sure we optimize our income, benefits, and tax situation on our way out. Plus, we like ‘most’ of the people we work with. We’ve worked with them for literally a decade or two (in Mr.Need2Save’s case) and we have a professional moral compass that we don’t plan to abandon. It’s not that we feel like we need a good reference for the next job because we hope to never need another job after leaving, but it’s the right thing to do.
Let’s Talk About Money
Although neither of us has those ‘golden handcuffs’ to keep us working for many more years, we do have the timing of anticipated income to consider. Specifically, we each are eligible for annual bonuses. These typically come in February and March. In both cases, we have to still be working to get the bonus payout. So this makes staying through the end of March or April as an incentive to receive both of these bonuses.
Then, due to some recent changes in policy, I get a second bonus payment in July of each year. It’s the kind of bonus that is based on rolling company performance for a 3 year period. So, during the 2 years prior to the payout year, I have a pretty good idea of whether we met our company performance or not (or only partially). I can consider whether it will be a large, average, or poor payout year based on the prior year payments. Lately, the payouts have not been at 100% of the target. So if this keeps up, it’s less likely to be an incentive for me to try to stick it out until July.
Considerations Regarding Your 401(k) Or Other Workplace Retirement Savings
In the year we leave, we will likely be age 50 or 51. This means that we will be eligible to make Catch-up Contributions to our 401(k). Under current limits (updated for 2018), this would allow us to stash away another $6,000 each in our 401(k) on a pre-tax basis. So for both us, instead of saving $37,000 – we can save $49,000 instead! Hopefully the limits will even be a little higher by then. We definitely want to fill up these buckets in our last year of work. We don’t know if there will be any future earned income which may allow us to contribute to an IRA and we are planning to live on this money once we turn age 60 for another 25 – 35 years.
Also consider the timing of when your company provides your employer match. Unfortunately, although we will time our personal contributions to max these out in that final year unless I stay until July, I won’t get any company match for my contributions in the first half of the year. This is because I have to be ‘actively employed’ on June 30 in order to get the employer match for the first half of the year. This wouldn’t keep me until July because it’s not that much money – but it’s just something to be aware of. Mr.Need2Save’s plan contributes the employer match biweekly so there is less of an incentive for him to keep working. He does typically earn a profit-sharing component though (not guaranteed) and that is typically processed in late March or early April of each year.
Although not a factor for us, are you leaving 401(k) employer match unvested? Does your company have 100% immediate vesting on the employer match? If not, find out the vesting schedule so you know if your employer match will be going with you when you leave or how close you are to becoming vested. It could be as long as six years at some companies to be fully vested if you have a schedule where you only vest (or ‘own’) a certain percent each year.
Our taxable income should drop significantly in the year we quit. Since we are in a high tax bracket now, we will welcome falling into a lower tax bracket in our final year of work.
We want to take all the tax breaks we can in our highest earning years which probably won’t include the last partial year of work. We will reduce our taxable income by:
- only working part of the year
- maximizing our 401(k) contributions
- filling up our Health Savings Account as much as possible*
- contributing to our Donor Advised Fund (DAF)
We are really looking forward to paying less in taxes in our final year of working and dramatically less the next year!
*Be careful with final year HSA contributions. The IRS requires that you prorate your annual contributions unless you are in a qualifying High-Deductible Plan for the entire year. If you planning to go without health insurance for part of the year, or switch to a plan that is not a qualifying High-Deductible Plan, you have to be sure that you don’t overcontribute to the HSA. Otherwise you have to report the excess contributions when you file your taxes and pay taxes and penalty on the overage.
It would be pretty amazing if you were considering early retirement before you had worked ten full years, but I suppose it is possible. You have to work for 40 quarters to qualify for Social Security benefits. This is typically done by working a minimum of ten years (4 quarters a year), but they don’t have to be consecutive years.
What about leaving those goose eggs on your earning history? Due to earnings in high school and college when we were mere pups, we may just eek out 34 or 35 years of earnings. We aren’t worried about it in the slightest, but it may be more of a consideration for you the younger you are.
Retiree health insurance is very rare. Neither of us will be eligible for any special health insurance arrangement once we quit and it will be quite some time before we become eligible for Medicare (around 15 years actually). We will be offered COBRA to continue our current health coverage. That gives us the opportunity, should we want it, to continue group health coverage for a maximum of 18 months once our jobs end. It’s expensive though. On COBRA, you pay the full monthly premium that your employer once paid for your coverage, plus 2% for admin fees. If we retired this year and went onto COBRA we’d pay over $900/month to continue coverage for the two of us. I know this is on the low end because I work in benefits and our plan options are based in the Mid-Atlantic region where access to quality care keeps health inflation tepid.
We will certainly look into other options. We would be willing to go with a significantly higher deductible as a catastrophic fall back position and pay for most things like doctor’s appointments and prescriptions fully out of pocket. We say this now because we are both relatively healthy. With the U.S. healthcare situation in a precarious situation right now, we are hopeful that affordable private health insurance will be available. At least we will have that 18 months of COBRA as an initial cushion to figure our options out.
But wait…before you go! Don’t forget that whatever your plan is post-employment, it’s a really good idea to get as many checkups, tests, etc. while you still have full coverage under your employer. You may have more time once you stop working, but wouldn’t you want to know if there is something previously undetected before you give up your employer’s health plan? And you’ll likely pay less out of pocket for any testings or office visits under your current coverage than post-employment.
Consider your company’s paid-leave policies. Will you get paid out for unused vacation or PTO, for example? If not, can you use it up before your last official day? Should you try to use up more of it in the year leading up to the big day? Should you bank it for an extra financial cushion on your payout? Does your company give a lump sum of all your annual leave at the beginning of each year or spread it out?
What if you plan to leave around paid holidays? For example, my office closes around the Christmas and New Year’s holidays in the U.S. You have to be considered an ‘active employee’ to be paid for those holidays. I couldn’t retire on December 15th and expect to get pay through the end of the month.
Work Cycles/Project Commitments
Is your work cyclical? I couldn’t imagine leaving in the middle of a major annual project. The best time from a planning/project perspective for me would be in the late winter/early spring when planning for the next year hasn’t started in earnest. This would give the next person time to get ramped up before any major strategic decisions would need to be made and allow me to wrap up the implementation and execution of decisions made last year.
If you are a teacher, would leaving at the end of the school year make the most sense for your students? If you work in accounting or finance, would wrapping up annual reporting and filings/taxes be the best time? There may simply be no good time so you just have to pick a date that works for you.
Closing the Door For Good on Work Stress
When we come across recent early retirees, I’m always curious about how long it takes them to stop thinking about work. How long until you stop waking up in the middle of the night and realize you were mindlessly obsessing about long-term projects or deadlines or overdue performance reviews? We hope this is a swift transition for us. However, in order to feel like we left things in good working order for the next person, I know we will do our best to wrap up loose ends and leave a workable transition plan for the next person. After all, we are planning to travel a lot after we retire. We won’t exactly be a quick phone call or email away if someone has a quick question.
Frankly, although we don’t mind helping out a colleague on occasion with professional references, we don’t plan to be ‘available’ for consulting after we are off the payroll. We want a clean break and I mean final!
So how long will that smooth and finite transition take to prepare and execute?
The Novelty Factor
Mr.Need2Save is a runner. Specifically, he would like to run a marathon in each of our glorious states at some point in his life. Recently, he realized that the timing of our early retirement plans may come about at an ironical milestone. That is working for his current employer for 26.2 years! He would get a small satisfaction out of literally hanging in there until he finished his marathon gig.
What happens if we meet our financial goals earlier than anticipated and I’m ready to leave at 25 years instead? Sorry honey. You can stick it out for the extra 1.2 years – and find me on the road. I’ll leave bread crumbs behind me so you can find me.
It looks like for the above reasons, that late April may be our target sweet spot. Yes, we will forego a July bonus and some of our company match in our 401(k), but everything else will line up pretty nice. Will Mr.Need2Save really want to work a couple more months until June to get to that magic 26.2? I think the closer we get, the less likely he’s going to want to stay on for an extra 2 or 3 months.
Could we wait it out until June? Sure, but then why not wait until July for the last bonus and 401(k) match? It’s a slippery slope. If you are sure, you are sure…you just gotta punch your timecard in for the last time and exit gracefully to stage left.
Have you crafted your exit plan?
Have we missed anything that you’ve considered? If you are already retired, what advice do you have for aspiring retirees?