Thoughts on final 6 months of paid employment

[ArmchairMillionaire]

If all goes as planned, I hope to retire at the end of June, 2025. Normally, this is the time of year I start to make my spreadsheets for the next year. Once I learn what the 401(k) and IRA contribution limits are for the next year, I do some math and figure out how much to have taken out of each paycheck in order to hit the maximum allowed contributions for the year. For example, in 2024, the 401(k) contribution limit was $23,000 + $7500 catch-up for a total of $30,500. $30,500 ÷ 52 weeks = 586.5384615384615 or $563 the first week of the year and $587 the other 51 weeks. That way I don't have to worry about over-contributing.

The IRAs are a bit easier, as they're both with Vanguard, and they have an option to automatically withdraw the correct amount from our savings into the IRAs in order to contribute the maximum for the year. All I do is figure out how much of my paycheck to have diverted into savings to cover those withdrawals plus our insurance and taxes for the year. This only leaves me with a little over $100 each week after taxes into our checking account, so we pretty much live off DWs income from teaching.

But 2025 is going to be different since we both plan on retiring at the end of June. We're planning on getting ACA Marketplace insurance starting in July, basing it on a tentative income of $60K for the year. Of course, once we get our final paychecks, we'll figure out what we made for the year, and plan on taking a distribution from my 401(k) to get us to that magical annual $60K number.

So after all that background information, here's my question... Should I put as much as I can into the 401(k) for the first 6 months of the year? Or should we continue contributing approximately $900 per week into the retirement accounts? We could stop contributing to the 401(k) and just build up our savings so we could live off that for the rest of the year, but then that would give us a lot more taxable income for the year.

What have others done when they w*rked for half the year that they retired? Any ideas would be greatly appreciated. Thank you.

 

[RetiredHappy]

When I was working, I used to complete all contributions by the 3rd month. I like that the money grew immediately instead of spreading out over 12 months. If you can afford it, I would do the same, contribute 100% as quickly as you can.

 

[ArmchairMillionaire]

When I was working, I used to complete all contributions by the 3rd month. I like that the money grew immediately instead of spreading out over 12 months. If you can afford it, I would do the same, contribute 100% as quickly as you can.

The limits are too high for that nowadays. I could put 100% of my pay into the 401(k) for the entire 6 months and still not reach the 100% level, since they still take out some taxes even if you try to put it all into tax-deferred accounts. That doesn't even include the IRA contributions. At $30/hr., I just don't make enough to contribute that much in so little time.

 

[RetiredHappy]

The limits are too high for that nowadays. I could put 100% of my pay into the 401(k) for the entire 6 months and still not reach the 100% level, since they still take out some taxes even if you try to put it all into tax-deferred accounts.

... ah... I did use to make alot of money.

 

[Tetto]

I think I’d try to get as much cash together as I could, to give yourself flexibility and stay within the $60k for subsidies

 

[Al18]

I’m not sure what tax bracket you’re in now or your after tax savings or brokerage account, but I would cut your 401K savings rate in half for the last 8 months of working and put the remainder in a money market account or high yield (4%+) savings account. Plan on making no 401K withdrawals next year and live off savings, dividends, stock sales. Hopefully you’ll have a last big check for unused vacation time, which you can use to make your last Roth IRA contribution and/or savings.

 

[Koolau]

If all goes as planned, I hope to retire at the end of June, 2025. Normally, this is the time of year I start to make my spreadsheets for the next year. Once I learn what the 401(k) and IRA contribution limits are for the next year, I do some math and figure out how much to have taken out of each paycheck in order to hit the maximum allowed contributions for the year. For example, in 2024, the 401(k) contribution limit was $23,000 + $7500 catch-up for a total of $30,500. $30,500 ÷ 52 weeks = 586.5384615384615 or $563 the first week of the year and $587 the other 51 weeks. That way I don't have to worry about over-contributing.

The IRAs are a bit easier, as they're both with Vanguard, and they have an option to automatically withdraw the correct amount from our savings into the IRAs in order to contribute the maximum for the year. All I do is figure out how much of my paycheck to have diverted into savings to cover those withdrawals plus our insurance and taxes for the year. This only leaves me with a little over $100 each week after taxes into our checking account, so we pretty much live off DWs income from teaching.

But 2025 is going to be different since we both plan on retiring at the end of June. We're planning on getting ACA Marketplace insurance starting in July, basing it on a tentative income of $60K for the year. Of course, once we get our final paychecks, we'll figure out what we made for the year, and plan on taking a distribution from my 401(k) to get us to that magical annual $60K number.

So after all that background information, here's my question... Should I put as much as I can into the 401(k) for the first 6 months of the year? Or should we continue contributing approximately $900 per week into the retirement accounts? We could stop contributing to the 401(k) and just build up our savings so we could live off that for the rest of the year, but then that would give us a lot more taxable income for the year.

What have others done when they w*rked for half the year that they retired? Any ideas would be greatly appreciated. Thank you.

I structured my accounts to end up with what I thought was a lot of cash in savings as I was leaving Megacorp. Turns out, because of the mix of expenses I had in the first few years of FIRE, it was NOT enough. I had to take from my 401(k) the minute I was eligible (and pay the taxes but no penalty for early withdrawal.) IOW I had NOT set aside enough cash for expenses in those first few years.

I can't advise anyone else, but my experience is that I had NOT calculated my needs well and ended up "cash poor." for a while. YMMV

 

[ArmchairMillionaire]

I structured my accounts to end up with what I thought was a lot of cash in savings as I was leaving Megacorp. Turns out, because of the mix of expenses I had in the first few years of FIRE, it was NOT enough. I had to take from my 401(k) the minute I was eligible (and pay the taxes but no penalty for early withdrawal.) IOW I had NOT set aside enough cash for expenses in those first few years.

I can't advise anyone else, but my experience is that I had NOT calculated my needs well and ended up "cash poor." for a while. YMMV

Thank you for responding.

I have been planning on taking a "rule of 55" distribution from my current 401(k) sometime in the 2nd half of 2025 (if we need it) since we've decided on retiring halfway through the year.

Our current situation is that we should have around $500K in the current 401(K) to get us through until I reach the age of 59-1/2.

I should also have around $225 - $250K in a Roth IRA along with around $100K in an after-tax account for cash if needed.

Once I reach 59-1/2, I should have somewhere between $900K and $1M in a separate Vanguard traditional 401(k) to get us down the stretch. DW has a traditional IRA with about $150K plus whatever she has through her school. I think she might qualify for a pension once she's 60 but that's quite a ways down the line.

The house is paid off and we already bought our retirement road-trip vehicle. We paid cash for it so we don't have to worry about any car payments. Property taxes, home insurance, and car insurance should only be around $3K per year. Health insurance for the 2nd half of the year should be around $1500 to $2K.

I also know I have to consider Roth conversions once I am no longer earning a salary. Unfortunately, I will need to find a new accountant as our previous one retired unexpectedly back in 2021. He set us up for the years up to retirement well enough, but I've been filing our own taxes these past couple of years. This year's taxes shouldn't be that difficult, but once we actually retire things are going to be more complicated next year.

So that's how MMMV.

 

[Diogenes]

If all goes as planned, I hope to retire at the end of June, 2025. .... We're planning on getting ACA Marketplace insurance starting in July, basing it on a tentative income of $60K for the year. ..... Should I put as much as I can into the 401(k) for the first 6 months of the year? ....

Depending on your age, it might make sense to delay retiring until December 31st of 2025. Instead of OMY, it would be "SMM" (six more months). That would slightly goose your eventual SS eligibility, and solve the quandaries of what to do regarding 401K, Roth-IRA and so on.

But if you're set on retiring in June, there's merit to maximizing the allowable amounts for tax-deferred or tax-exempt savings vehicles.

Regarding ACA, are you sure that you can keep your modified-AGA low enough, to qualify for a subsidy?

 

[ArmchairMillionaire]

Depending on your age, it might make sense to delay retiring until December 31st of 2025. Instead of OMY, it would be "SMM" (six more months). That would slightly goose your eventual SS eligibility, and solve the quandaries of what to do regarding 401K, Roth-IRA and so on.

But if you're set on retiring in June, there's merit to maximizing the allowable amounts for tax-deferred or tax-exempt savings vehicles.

Regarding ACA, are you sure that you can keep your modified-AGA low enough, to qualify for a subsidy?

DW teaches, and she wants to be done at the end of the school year. So if we w*rked longer, it would just be OMY until June, 2026.

Our combined AGI was less than $55K last year. We don't have a lot of "M" for the M.A.G.I. We're planning on $60K or less total next year. In the first 6 months, if I make $25K and DW makes $11K for a total of $36K, we were planning on taking an additional $24K if needed to make it through 2025.

Actually, we want to keep it under $60K just to qualify for better subsidies. We lead a pretty simple lifestyle in a LCOA area.

 

[Aerides]

Assuming all else is good, and you have the right amount of cash and AA, I'd plan to pack your 401k as fast as you can - June is the plan but what if it comes earlier - either by your choice or a boss who decides, eh, how about you go now?

You also want to be very aware of how your company match works. Mine was done quarterly, and required you to be employed on the last day of the quarter. Going into my final year, I didn't know what my last day would be, but I figured it would be after March 30 but unlikely to go past June. So I jacked up my contributions to complete by the end of March that year.

But as others have said, don't underestimate having a good amount of cash going into retirement. Don't sell yourself short there to save a bit on taxes. Far better to pay a bit more tax than have to sell some investment when you really don't want to.

 

[ArmchairMillionaire]

Assuming all else is good, and you have the right amount of cash and AA, I'd plan to pack your 401k as fast as you can - June is the plan but what if it comes earlier - either by your choice or a boss who decides, eh, how about you go now?

You also want to be very aware of how your company match works. Mine was done quarterly, and required you to be employed on the last day of the quarter. Going into my final year, I didn't know what my last day would be, but I figured it would be after March 30 but unlikely to go past June. So I jacked up my contributions to complete by the end of March that year.

But as others have said, don't underestimate having a good amount of cash going into retirement. Don't sell yourself short there to save a bit on taxes. Far better to pay a bit more tax than have to sell some investment when you really don't want to.

I appreciate your input. I have to wait until at least January 1st, as I'm only 53 now. I'll turn 54 before the end of the year, so I can use the rule of 55 next year.

The company match is only 4% and I get it with every paycheck. I'll be leaving after only 3 years, so I will not be 100% vested in the company match, so I'll have to give back a little when I leave, but I'm not worried about it.

I will not be able to max out my 401(k) in only 6 months, as I do not make enough. The federal and state governments take out some taxes, along with FICA, so I can't put 100% into the 401(k). I'll probably put in $600/week for the 26 weeks for a total of $15,600 with a match of $1,248. I'll also set aside $400/week to contribute $4K each to my Roth IRA and DWs traditional IRA, with $$ left over towards insurance & taxes. That'll leave me with maybe $50/week plus DWs teaching for a total of a little under $500/week for those first 6 months. If we can live off that, then $60K per year, minus 20% in taxes, comes out to $48K, which would give us over $900/week. We should be able to live pretty decently as we're pretty simple folks.

We'll have around $20K in the bank, plus around $25K in our HSA accounts for emergencies. We'll see where we're at after the first year. I might transfer some of our funds into something like a Money Market account. Maybe from the Roth IRA...

 

[Lee94joyce]

Probably a good opportunity to take advantage of a Roth IRA!

 

[Dream Weaver]

Until now I did not know you could start ACA midyear. That's a relief knowing I'm probably going to be in that situation next year.

 

[timeismine]

My recommendation is put the money into an after-tax account or investment. With ACA, if you go over the income threshold, you will have to pay back part or all of the difference between the unsubsidized premium and the subsidized premium. I wrote another post detailing my experience with this.

Why this kicks in is the Fed considers IRA/401K withdrawals as income. There are lots of things that can propel you over your planned withdrawals: trips, emergency medical events that drive you up to the "out of pocket" maximums, stuff not covered by insurance, relatives that need help......

If you have a good base of taxed savings, this does not count as income and can keep you under the ACA subsidy limits. Depending on how many years you have before Medicare, you could run through the taxed cash before you get there. I did.

 

[MarieIG]

I had planned to work 1/2 of the year my last year and in preparation for retirement front loaded my 401k and IRA to the first two months of employment, and thereafter put cash in a taxable account.

 

[ArmchairMillionaire]

Probably a good opportunity to take advantage of a Roth IRA!

My recommendation is put the money into an after-tax account or investment. With ACA, if you go over the income threshold, you will have to pay back part or all of the difference between the unsubsidized premium and the subsidized premium. I wrote another post detailing my experience with this.

Why this kicks in is the Fed considers IRA/401K withdrawals as income. There are lots of things that can propel you over your planned withdrawals: trips, emergency medical events that drive you up to the "out of pocket" maximums, stuff not covered by insurance, relatives that need help......

If you have a good base of taxed savings, this does not count as income and can keep you under the ACA subsidy limits. Depending on how many years you have before Medicare, you could run through the taxed cash before you get there. I did.

I had planned to work 1/2 of the year my last year and in preparation for retirement front loaded my 401k and IRA to the first two months of employment, and thereafter put cash in a taxable account.

Thanks for all the advice, everybody.

While it would be nice to front load my 401(k), Roth IRA, and DW's traditional IRA, we just don't make enough to do that. I should be able to hit the 50% mark on all of them, if I continue like I have been doing since I turned 50. (after contributions, we end up with around $550/wk.)

We will have around $150K or so between taxable accounts, HSA accounts, and savings. As to contributing to after-tax accounts, it's kind of a Catch-22, as if I put everything into taxable accounts, that, in turn, counts as more taxable income, which then would make it so we would have to live off what we just put into the taxable accounts for the rest of the year in order to keep our income levels low.

Of course, with DW's Federal Head-Start teacher position and the ACA situation now becoming a little murky for next July, DW might end up retiring at 47 and I might not end up retiring in 2025 after all. I guess only time will tell. That's all I'm going to mention about that. **Please do not comment about this paragraph, as we all know the rules. Moderators - I only vaguely mentioned it before somebody else did. If you feel this post needs to be closed, I will understand.

 

[Dean56]

I think I’d try to get as much cash together as I could, to give yourself flexibility and stay within the $60k for subsidies

That's very good advice. I did the same thing myself. It is nice to have cushion.

 

[thod]

For someone about to retire and then start a SEPP to retrieve money from an IRA, I do not see alot of benefit of putting cash into a tax deferred investment vehicle, that you are going to start withdrawing from in less than a year.

From my experience, once retired you start spending your savings, so since money if fungible, why deposit into one account to just withdraw or spend from another. Especially if the account be deposited into has very specific withdrawal rules/scenarios.

Just keep the money as cash (earning interest, I assume) and let the year play out. Eventually you get a feel of how finances and taxes will work in retirement.

 

[PointBreeze]

I structured my accounts to end up with what I thought was a lot of cash in savings as I was leaving Megacorp. Turns out, because of the mix of expenses I had in the first few years of FIRE, it was NOT enough. I had to take from my 401(k) the minute I was eligible (and pay the taxes but no penalty for early withdrawal.) IOW I had NOT set aside enough cash for expenses in those first few years.

I can't advise anyone else, but my experience is that I had NOT calculated my needs well and ended up "cash poor." for a while. YMMV

I, too, wish I had retired with a lot more non-tax-deferred savings (I retired several years earlier than I had planned). I recommend to anyone younger than me to build up those brokerage and Roth accounts in preparation for retirement. It gives one so much more flexibility.

 

[Sunset]

I don't see any advantage of putting $$$ into a 401K in 2025 , when OP is going to retire in June 2025.
As OP will need to take some $$ out to get to 60K spending anyways.

OP - Better double check you can withdraw from 401K under the rule of 55 , as I'm not sure all 401K's allow it without penalty. Even then, is the withdrawal allowed multiple years or times, or just 1 withdrawal ?

 

[ArmchairMillionaire]

I don't see any advantage of putting $$$ into a 401K in 2025 , when OP is going to retire in June 2025.
As OP will need to take some $$ out to get to 60K spending anyways.

OP - Better double check you can withdraw from 401K under the rule of 55 , as I'm not sure all 401K's allow it without penalty. Even then, is the withdrawal allowed multiple years or times, or just 1 withdrawal ?

I did double check about rule of 55 distributions from my current JH 401(k). It is allowed. JH automatically withholds 20% for taxes. Monthly distributions are allowed, but there is a transaction fee, so my plan was to see where our income levels were once we retired and received our final paychecks. Then, depending on our level of savings and projected spending, I was going to take a single distribution from the JH 401(k) into a local credit union money market account, trying to keep our annual income below $60k. We would then tap from that money market account as needed for the second half of the year.

Then I was going to see what happened when we filed our 2025 taxes, and adjust accordingly. The initial plan for 2026 was to take two distributions, one in January and one in July. I also plan on meeting with a new tax accountant towards the end of this year. Our previous tax guy unexpectedly retired after Covid, and I've been doing our taxes myself online since, so we're going to have to find a new expert once we're taking distributions, at least to start us off on the correct foot tax-wise.

 

[Al18]

You have no after-tax money in your savings, CD, brokerage account you can access? There are no taxes due on withdrawals from any of these sources if your taxable income is less than $94K per year.

 

[ArmchairMillionaire]

You have no after-tax money in your savings, CD, brokerage account you can access? There are no taxes due on withdrawals from any of these sources if your taxable income is less than $94K per year.

We should have around $20K in savings/checking accounts, $100K in an after-tax brokerage account, plus around $225K in a Roth-IRA with about $125K of after-tax contributions available to us when we retire. Are you suggesting we spend from those accounts before we pull approximately $30K ($24K after the 20% withholding) from the 401(k)?

Since JH automatically withholds 20%, but we plan on being in the 12% tax bracket, we were thinking we would be doing okay tax-wise this next year. All the 401(k) money is pre-tax, so we understand that we have to pay our taxes on it eventually. The first (1/2) year of retirement, we plan on still being within the 12% tax bracket, and maybe even doing some Roth conversions towards the end of the year. Of course, we'll have to see what the tax brackets and/or ACA earnings limits end up being depending on any policy changes next year.

 

[Al18]

I retired 6 years ago, married in the 12% tax bracket and pulled mostly from after tax accounts during the first year. I pulled $15K or $20K from 401k the first year, with 20% federal withholding. During years 2-6 I did mostly the same, but also did RothIRA conversions of $30K-$40K with 10% federal withholding. My wife is also a retired teacher and collects a small pension with federal and state withholding. I am happy paying 1/2 the federal and state taxes compared to when I was working.

Since you will have income during your first year of retirement, you and your wife can make a RothIRA contribution, paying no taxes.