Should You Retire in December or January?

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As with any nine-to-five employee, you’ve likely been planning for retirement since your mid-20s. Everything should be smooth sailing from here on out, and you might even know what year you want to retire, but have you considered the month? Retiring earlier or later in the year can significantly affect your post-retirement benefits. 

You should retire in January if you want to reduce taxes, increase annual leave payouts, and take advantage of Health Care FSA reimbursements. Retirees will also have enough time to collect the prior year’s benefits. Meanwhile, retiring in December is ideal for those who want to maximize their COLAs.

Don’t worry if this isn’t sufficient information to help you decide on whether to retire toward the end of this year or if you should push your plans back one more month. I’ll explain to you all the pros and cons as well as what factors retirees should consider.

Pros of Retiring in December This Year


Should You Retire in December or January?


Below are the pros of retiring in December.

The Social Security Tax May Be Reduced by 6.2%

The Federal Insurance Contributions Act states that only $137,000 of one’s annual earned income is subject to SS taxes. Since annual leave payouts count toward earned income, you may be able to exceed that amount. Once you do, your SS tax may drop by around 6.2%.

Just make sure that you’ll receive your payout on or before the last day of the year. Otherwise, the annual leave payout will already count for the subsequent year’s earned income computation. Play it safe by submitting a retirement letter by mid-November.

You Can Get a Headstart on Your Cost of Living Adjustments (COLAs)

Perhaps one of the most significant benefits of retiring toward the end of the year is you’ll get a headstart on your COLAs

Monthly pension benefits increase annually based on the current year’s inflation rates. This adjustment ensures retirees retain their purchasing power despite rising inflation rates, increased cost of living, or possible dollar weakening. One can expect to receive their first adjusted pension check one year following his or her retirement date. 

The loophole here is that “one year” does not necessarily require 12 months to pass. If you retire in December, the following month will already count as one year. Hence, you’ll receive your first adjusted pension check.

To take advantage of this benefit, you should forecast your separation date on or before November 30. Otherwise, your pension check will only be adjusted on the next, next year—13 months from the retirement date.

Cons of Retiring in December This Year

Also consider the cons if you’re thinking of retiring in December. 

You’ll Need a Six-Figure Income To Reduce Social Security Taxes

For a retiree to enjoy a reduced SS tax rate, they’ll need to have a six-figure income. Sadly, the average household income in the U.S. based on a 2019 census survey was a little bit under $70,000. The only solution here is to ensure you have a full year’s worth of annual leave payout. 

However, if you’re confident that your earned income won’t hit $137,000 this year, you might want to reconsider your decision to retire in December. A headstart on COLAs won’t be enough to compensate for the SS taxes you pay.

Moving Your Retirement Date To Receive an Adjustment Pension Check May Not Be Worth It

Your pension check will only be adjusted by 1/12 or 0.083% of the COLA on your retirement year. This increase might not be worth the hassle for some retirees. The only upside here is that COLAs for the succeeding years increase slightly as the rates compound on your first pension—which has already increased by 0.083%.

Although, you may be able to earn more if you had worked for the entirety of December and opted to push your separation date to January. Apart from the extra month’s worth of pay, your high-3 salary would increase by 0.083%, thus, increasing your pension as well.

Pros of Retiring in January Next Year

These are the pros of retiring in January.

Chances of Dropping to a Lower Tax Bracket

As I said, annual leave payouts count toward the taxable earned income. That means even if you reduce SS taxes by retiring in December and increasing your earned income, you’ll also run the risk of moving to a higher tax bracket.

If such is the case, I suggest retiring at the start of the subsequent month instead. That way, you’ll receive your annual leave payout on a year with significantly less income. At best, you might even be able to drop to a lower tax bracket. 

This strategy is ideal for those who are either making below six-digits annually or will end up moving to a higher bracket if they opted to spike the current year’s earned income.

Possibly Higher Annual Leave Payout

Your annual leave payout depends on two factors: the number of unclaimed paid leaves you have in a year and your hourly wage. 

If you decide to retire in January, opt to do so after the annual appraisal. The idea is to claim your salary increase before retiring to adjust your annual leave payout accordingly. On top of that, extending your stay by one or two months will also increase the number of unclaimed leaves you have.

Cons of Retiring in January This Year

There is one particular disadvantage to retiring in January.

  • The reduced bracket will only take effect the following tax year. Your company has withheld taxes during the prior year. That means this year’s earned income tax has already been decided, and you’ll only realize the reduced tax benefits in the following year.

Factors To Consider When Deciding What Time of the Year To Retire

Before making your big decision, consider these factors that can help you choose what time of the year to retire.

Company Policies on Employment Benefits

One of the most crucial factors to consider when determining the ideal month to retire is your unclaimed employment benefits. Take a second look at your company policies.

This factor especially applies to shareholders. Consult with your HR department to know when the company’s profit-sharing program distributes funds. I suggest scheduling your retirement after claiming shares.

Existing 401K Contributions

I strongly recommend maxing out your 401K contributions before considering retirement. Trust me; even a few extra grand will lead to exponential benefits considering the interest your plan accrues over time—especially if your 401K pays dividends.

Check out this video by The Dave Ramsey Show where they discuss how to gauge whether you have enough funds to retire:

Healthcare Coverage Gaps

A common mistake retirees commit is creating gaps in their healthcare coverage. Gaps often happen when the retiree is taken off the company healthcare plan before they have finished signing up for a new private/public healthcare plan or their spouse’s Consolidated Omnibus Budget Reconciliation Act (COBRA)

A good approach here is to sign up for Medicare a few months before retirement. Don’t mind the excess premiums because the law requires seniors over 65 to sign up for a Medicare plan. So either way, you’ll end up needing one later on.

Post-Retirement Freelance Plans

It’s very common for retirees to continue working on a project basis. The only issue here is that those below the full retirement age—often 66 or 67—will have reduced Social Security benefits if they earn more than $1,470 monthly. Guidelines state that benefits will drop by $1 for every $2 that the retiree earns over $1,470.

Sadly, there’s no other way to resolve this other than wait to reach the full retirement age. If you don’t want to push back retirement any longer, you can opt to stay below the $1,470 mark in the meantime.

Final Thoughts

There is no one-size-fits-all retirement solution. Whether you choose to retire in December this year or January in the subsequent year depends on your financial goals, your existing retirement funds, and the company’s retirement benefits policies. Just don’t blindly base your decision on when your buddies plan to leave as well.

I also suggest consulting with a certified financial advisor. Preferably someone who specializes in taxes and estate planning. Retirement involves a lot of documents. And I would assume that scouring dozens of paperwork is not how you would want to spend your remaining employment days.



Hey there, my name is Ruth, I'm in my late fifties. My life was turned upside down a few years ago as I experienced a burn-out. But I saw it as a sign that something had to change in my life. I'm happy I used this tough experience as a stepping stone. I now feel happier than ever and hope to inspire you to do the same, no matter how old you are.

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