Final Approach to Retirement: 3 Steps to a Smooth Landing (and Avoiding a Crash)
The transition to retirement is about more than just savings—it’s about creating a carefully crafted financial strategy to guide you into this exciting new chapter. If you’re nearing the end of your working years and preparing for this significant life change, you’re on the “final approach” to retirement. This post outlines three essential steps to help you navigate this critical phase with confidence and clarity.
Step 1 - Dial in Your Spending Plan: The Flight Manual for Retirement Success
As you prepare to transition from saving to spending, understanding your true retirement income needs is the cornerstone of a successful plan. Yet surprisingly, many retirees enter this phase without clarity on how much they actually need to spend—and that’s where plans can unravel. As my dad, who supported our family on a police officer’s salary, always said: “It’s not about how much you have; it’s about how much you spend.”
In my decades of experience as a retirement planner, I’ve observed that even the most meticulously crafted plans can go awry due to one critical factor: spending. No matter how much wealth you’ve accumulated, it’s always possible to outspend it. But before you panic, know this: creating a sustainable spending plan doesn’t mean becoming a bookkeeper or tracking every penny. The last thing our clients want to do with their time in retirement is become a meticulous bookkeeper! You’ve managed your finances successfully for years, and now it’s time to simplify, not complicate.
Here’s how we guide clients to build a spending plan that aligns with their goals:
Retirement Income Equivalent: We analyze your current income and expenses, adjusting for changes like reduced work-related costs and increased healthcare or travel. This gives you a realistic benchmark for the income you’ll need in retirement.
Establishing Spending Categories and Limits: Forget tedious tracking—this approach defines broad spending categories (housing, travel, entertainment) and sets limits for each. Some clients even set up separate accounts—a form of visual accounting—so what's in the travel account, for example, is readily available for a trip, no further calculations required.
Create a Monthly Draw Amount: Give yourself a retirement “paycheck.” By setting up a monthly transfer into your checking account, you recreate the structure of working life, making the transition feel much less disorienting. Voilà, retirement feels a lot like life when you were working. Plus, it eliminates the psychological stress of “dipping into savings.” If the money’s in the account, you’re on track.
Cash Flow Projections and Modeling: Advanced planning tools help visualize how your spending decisions affect your long-term financial health. Seeing the big picture allows you to adjust course before small missteps turn into big problems.
Plan for Big-Ticket Items: Whether it’s a second home or once-in-a-lifetime travel, large expenses can make or break your retirement plan. We help you evaluate these decisions and align them with your overall financial goals.
In my experience, the key to a successful spending plan isn’t about cutting back—it’s about freeing yourself to enjoy retirement with confidence, knowing your financial strategy is built to last.
Step 2 - Stress-Test Your Plan: Landing Safely and Setting Sail Again
Retirement isn't just about reaching a destination—it’s about preparing for the journey ahead. As you make the “final approach” to retirement, your focus shifts from growing your wealth to ensuring it lasts. Landing safely is just the first step, because once you’re on solid ground, a new adventure begins. Think of it like transitioning from a smooth landing to setting sail on a long voyage. Stress-testing your plan ensures your financial vessel is ready to handle both calm seas and unexpected storms.
Many advisors focus exclusively on investment returns, but we believe a more holistic approach is essential. A resilient retirement plan balances investment performance with your spending needs, because even the best portfolio can falter without careful planning for the realities of retirement. Stress-testing your plan is how we prepare for the inevitable uncertainties, giving you confidence that your wealth can weather any storm.
How We Stress-Test Your Plan:
Market Volatility Simulations: Before setting sail, you’d prepare for rough weather. Similarly, we use advanced modeling tools to simulate market scenarios, from mild corrections to severe downturns. This helps identify vulnerabilities in your plan and ensures it can handle turbulent markets without derailing your retirement.
Sequence of Returns Risk Analysis: Sequence of returns risk—the danger of experiencing market losses early in retirement—can dramatically shorten your plan's lifespan. This is especially critical in the first few years, when the combination of withdrawals and negative returns can be particularly damaging. To mitigate this risk, we make sure you have sufficient funds in assets not exposed to the stock market. By maintaining cash reserves or lower-volatility investments, you can ride out inevitable downturns without selling growth-oriented investments at a loss. This strategy ensures your plan has the time it needs to recover, preserving your financial foundation for the long haul.
Scenario Planning for Life’s “What Ifs”: Retirement isn’t just subject to market fluctuations. Inflation, changes in interest rates, unexpected healthcare costs, or other life events can present challenges. By exploring these “what if” scenarios, we create a financial plan that remains flexible and resilient, no matter what lies ahead.
Strategies to Prepare Your Plan for the Next Adventure:
Once we’ve identified potential risks, we implement strategies to protect your wealth and ensure it supports your goals:
Strategic Asset Allocation and Diversification: We carefully balance your portfolio’s growth potential with your risk tolerance, tailoring it to your retirement timeline and spending needs, while ensuring your investments are diversified across asset classes, industries, and geographies to minimize the impact of any single downturn.
Bucket Strategies: By dividing your portfolio into “buckets” for immediate, mid-term, and long-term needs, we create a system that provides stability for current expenses while allowing growth-oriented investments to thrive over time. This ensures that your short-term spending isn’t impacted by market volatility.
Preparing for the Voyage Ahead:
Stress-testing your plan isn’t just about protecting your wealth—it’s about ensuring it’s ready for the journey ahead. With a thoughtful, resilient plan in place, you can transition from landing in retirement to setting sail on new adventures with confidence. Retirement is more than a finish line—it’s a launch point for the life you’ve worked so hard to create.
Step 3 - Understanding Retirement Taxes: A Guide to Keeping More of What You’ve Saved
Taxes don’t retire when you do. In fact, they often become more complex in retirement, especially for high-net-worth individuals. Many people assume their tax burden will decrease once they stop working, but without careful planning, unexpected tax bills can significantly reduce your hard-earned wealth. Understanding how retirement income is taxed—and how to effectively navigate those rules—is critical to making the most of your savings.
As a CPA with an MS in Tax, I’ve spent years helping clients untangle the complexities of retirement taxation. Over time, I’ve seen how a well-thought-out tax strategy can significantly impact your long-term financial success, often saving tens or even hundreds of thousands of dollars over the course of retirement.
Think of your retirement income as a puzzle with multiple pieces: taxable accounts, tax-deferred accounts (like IRAs and 401(k)s), and tax-free accounts (like Roth IRAs). Each piece comes with unique tax rules, and the challenge lies in knowing how to put them together. But every puzzle needs a box top—that big-picture guide that shows how all the pieces fit together. In retirement planning, your financial plan is that box top. It helps you visualize the finished product and ensures all the pieces work together seamlessly.
Key Tax Considerations for Retirement
1. Strategic Withdrawal Planning
The order in which you withdraw from your various accounts can dramatically affect your tax liability. Without a clear strategy, you risk paying more in taxes than necessary. For example, withdrawing too much from tax-deferred accounts early in retirement could push you into a higher tax bracket, while waiting too long could lead to large Required Minimum Distributions (RMDs) that increase your tax burden later on.
A key concept here is tax bracket management—making withdrawals and account conversions in a way that keeps you in lower tax brackets over time. For example:
In lower-income years (such as before Social Security starts), it may make sense to convert traditional IRA assets to a Roth IRA. This potentially allows you to pay taxes now at a lower rate and enjoy tax-free withdrawals later, depending on future tax laws.
Drawing from taxable accounts first might allow tax-deferred investments to continue growing, while also taking advantage of lower tax rates on capital gains.
The optimal strategy depends on factors like:
Your current and projected future tax brackets.
The tax characteristics of your accounts (taxable, tax-deferred, tax-free).
The interaction of withdrawals with other income sources (e.g., Social Security, pensions).
Helping clients develop strategic withdrawal plans is something we do very often. Each situation is unique, but the goal is always the same: to maximize after-tax income over the course of retirement, rather than simply minimizing taxes in the short term.
2. Managing Required Minimum Distributions (RMDs)
Once you reach age 73, the IRS requires you to start withdrawing from most tax-deferred retirement accounts. These RMDs are taxed as ordinary income, and failing to take them can result in a 25% penalty on the amount you were supposed to withdraw.
To manage RMDs effectively:
Qualified Charitable Distributions (QCDs): These allow you to donate directly from your IRA to a qualified charity, satisfying your RMD requirement while avoiding taxes on the donated amount.
Use the years leading up to RMDs to strategically reduce the size of your tax-deferred accounts through Roth conversions or planned withdrawals. This reduces the impact of RMDs later on.
We frequently help clients navigate RMD strategies, whether it’s incorporating charitable giving to offset taxable income or reducing the tax-deferred account balance before RMDs begin. These decisions can be complex, but the tax savings and peace of mind they provide can be well worth the effort.
3. Tax-Efficient Charitable Giving
For retirees interested in philanthropy, understanding the tax implications of charitable giving can make your generosity go further. Two common strategies include:
Donating Appreciated Assets: By gifting stocks or other investments that have grown in value, you avoid paying capital gains taxes and can deduct the full market value of the donation.
Donor-Advised Funds (DAFs): These funds allow you to make a large donation in a high-income year for an immediate tax deduction, while distributing the funds to charities over time.
Qualified Charitable Distributions (QCDs): These allow you to donate directly from your IRA to a qualified charity, satisfying your RMD requirement while avoiding taxes on the donated amount.
4. Planning for Other Tax Scenarios
Beyond income taxes, retirement planning must account for other potential tax impacts, such as:
Medicare Premium Surcharges: Higher income can lead to increased Medicare Part B and D premiums. Careful income management can help you stay below thresholds and avoid surcharges.
Estate Taxes: For those with significant wealth, proactive estate tax planning can help preserve more of your assets for your heirs.
5. Coordinating with Professionals
Retirement tax planning is a complex puzzle, with pieces that must align with your overall financial and estate plans. Collaborating with professionals—including a financial advisor, tax expert, and estate attorney—ensures you have the expertise needed to craft a comprehensive, tax-efficient strategy.
Securing Your Financial Future
Retirement taxes are intricate, with ever-changing rules and thresholds that require ongoing attention. By understanding the complexities and proactively planning, you can protect your wealth, avoid unnecessary tax bills, and enjoy more peace of mind in retirement.
