The article “What time of year should you retire?” was originally published in MoneySense on September 6, 2022. Photo by Kampus Production from Pexels.
When’s the best time to retire? The timing is not always up to you, but if you can choose, there may be an ideal date.
“Is there a better time of the year to retire based on tax implications: December 31 versus June 30 versus January 30?” Laf
The best date to retire for tax purposes
For most Canadians planning their retirement, tax isn’t the primary factor, Laf. However, there are instances when tax can come into play for choosing a retirement date, as well as other timing and calendar-based considerations.
Tax rate for retiring in Canada
Canadian tax is levied on a graduated basis, with higher income moving into higher tax brackets. Federal tax brackets increase at about $50,000, $100,000, $156,000, and $222,000 for 2022. Provincial and territorial tax brackets vary, and this results in most taxpayers falling within many tax brackets. Only income that exceeds the tax bracket thresholds is taxed at the higher tax rate—not your entire income.
So, I suppose it is possible for someone to decide that being in a certain tax bracket on their next dollar of income is a deterrent from continuing to work in the year they retire. Practically speaking, this is probably not going to apply for most people, Laf.
If someone has large, deferred employment compensation, for example, they might retire closer to the end of the year to push that income into the following year. Specific types of bonuses for senior executives like deferred share units (DSUs) might become payable within a certain number of days of retirement. Employee stock options might also need to be exercised within a certain time limit after retiring, like 90 or 180 days, though some stock option plans allow normal 10-year expiry dates, for example, to apply under certain retirement criteria.
Will you get a bonus before retirement?
For most employees, retirement timing related to bonuses has more to do with waiting until a bonus is earned or paid before retiring. Many companies pay bonuses in February or March for the previous year, for example, so this is a common time of the year for employees to wait to retire.
Making the most out of employer matching and benefits
Other considerations might include waiting to receive the maximum matching contributions on group retirement or savings plans mid-way through a year. Or, waiting to retire early in the following year might allow time to use health and dental plan benefits if they are not prorated.
Some companies offer retiree benefits to employees based on their years of service, so that may be another factor to consider.
Workers with defined benefit (DB) pension plans might be more mindful of their retirement date based on pension plan formulas. Some plans have formulas whereby a certain combination of years of service and age mean there is no early retirement discount or there is some other pension enhancement that may apply.
Best time to retire for CPP and OAS
Some retirees might consider income planning opportunities related to government benefits.
Both pensions can be deferred and often result in more lifetime income by starting them later than the earliest ages they can be taken, but for some retirees, their retirement date might be impacted by their 60th or 65th birthday.
Planning retirement for when it’s convenient for you
An important non-financial consideration for a retirement date relates to travel and holidays. If someone really likes a particular season of the year, they may want to retire before it begins. A cottage owner might want to retire by the spring. Certain holidays might also impact when someone retires so they can enjoy a particular holiday season as a retiree.
In summary, Laf, your question is a good one because there are reasons to retire at certain times of the year. Tax may be a factor for some people, but there are plenty of other considerations for those who can control their retirement date.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.