What Should You Do Financially the Year You Retire?
Congratulations. Now What?
You've spent 30 or 40 years working toward retirement. Then somebody hands you a cake, you turn in the laptop, the paycheck stops-and suddenly you're supposed to know what to do with everything.
For a lot of people, the first year of retirement is one of the biggest financial transitions of their lives. You're deciding what to do with a 401(k), figuring out where the paycheck is going to come from, making decisions about Social Security and Medicare, and adjusting to a completely different tax and investment environment.
And for the first time in decades, you're looking at the money you've spent your entire career accumulating and thinking: Am I really allowed to spend this?
Yes. But I'd like a plan first.
First, Figure Out What Retirement Actually Costs
Before I start moving accounts around or changing investments, I want to know what you spend. Not what some retirement calculator says you should spend. What do you spend?
What does the house cost? Cars? Travel? Golf? Restaurants? Healthcare? Helping kids or grandkids? Boats? Second homes? Whatever your retirement actually looks like.
And don't tell me you're going to spend dramatically less just because you're retired unless there's a real reason. You finally have seven Saturdays a week. You may spend more.
The first few years of retirement can be some of the most active years of your life. You're traveling, going places, doing projects around the house and maybe buying the boat you've talked about for 15 years.
That's okay. Retirement planning should fund a life, not simply produce the lowest possible spending number.
Then Replace the Paycheck
This is the psychological transition people underestimate. Friday afternoon used to arrive and money appeared in your checking account. Now it doesn't.
Where does next month's money come from?
Maybe you have Social Security. Maybe there's a pension. Maybe you have rental income. Everything else has to come from your investments.
I want to calculate the gap. If you spend $120,000 and Social Security and pensions eventually provide $70,000, the portfolio has to provide roughly $50,000. Now we have something we can actually plan around.
And I generally want that money arriving automatically. You shouldn't have to call your advisor every month and ask for grocery money.
Build the retirement paycheck.
Decide What to Do With the 401(k)
For many retirees, the 401(k) is one of the largest assets they own. So naturally, one of the first questions is whether to leave it there or roll it into an IRA.
I'm generally positive on rollovers because I think consolidation can make retirement considerably easier. If you and your spouse have several old 401(k)s, IRAs and other retirement accounts scattered around, managing investments and distributions can become unnecessarily complicated.
Consolidating appropriate accounts can simplify the portfolio, simplify distributions and give us a much clearer picture of the retirement plan. It can also make investment management and ongoing planning easier because everything isn't scattered across three or four institutions.
That doesn't mean every 401(k) should automatically be rolled over. You should understand the costs, investments and services available in both places before moving anything.
But retirement is a great time to clean up the financial junk drawer.
Don't Accidentally Become a Day Trader
This happens more than you might think. People retire and suddenly checking their investment accounts becomes their new hobby.
They spent 40 years working and barely looked at the 401(k). Now they have coffee at 7:30, CNBC on by 8:00, the market opens at 9:30, and by lunchtime they're considering changing the entire portfolio because somebody on television thinks a recession might happen.
That's dangerous.
I recently met with a newly retired couple who were sitting in almost all cash while the stock market had risen substantially. They weren't stupid. They were nervous.
The paycheck had stopped, the money suddenly felt more important, and being in cash felt safe. But avoiding short-term volatility can create an entirely different long-term risk.
You're 65, not 95. A large part of your money may need to last another 25 or 30 years. Retirement doesn't mean your money stops needing to grow.
Build a Runway Before the Storm
This is why I like having roughly five years of anticipated portfolio withdrawals outside of equities for many retirees. Not five years of total spending-five years of what we expect to need from the portfolio.
If Social Security and a pension cover most of your expenses and you only need $50,000 a year from investments, we're talking about roughly $250,000. The rest can be positioned for longer-term growth based on your circumstances and risk tolerance.
Why? Because eventually the market is going to have a terrible year. I don't know when, and neither does anybody else.
But when it happens, I don't want to sell stocks that are down 25% to fund your checking account. I'd rather already know where the next several years of distributions can come from.
That's the runway.
Don't Automatically Wait to Touch the IRA
This is one of the biggest mistakes I see retirees make. They've been trained their entire lives not to touch retirement accounts, so they retire at 65 and say, "I'm leaving the IRA alone until the government makes me take it."
I don't necessarily like that plan.
If the IRA is large and continues growing, future required minimum distributions may eventually create much more taxable income than you actually need. We've seen how quickly this can happen after strong markets. A big IRA becomes a much bigger IRA, and eventually the IRS starts telling you how much has to come out every year.
I would rather look at your tax situation over your entire retirement. There may be years early in retirement when intentionally taking money from the IRA makes sense.
Paying tax isn't always a mistake. Sometimes waiting to pay the tax is the mistake.
Look Forward on Taxes, Not Just Backward
Your tax return tells us what happened last year. Retirement planning should also ask what's going to happen over the next 10, 20 or 30 years.
What does income look like now? What happens when Social Security begins? What happens when RMDs begin? What could Medicare premiums look like? What happens if one spouse dies and the survivor eventually has to report much of the same income using single tax brackets?
I don't want to minimize your taxes for one year. I want to look at the entire retirement and try to determine how we can reasonably reduce the amount of tax you pay over your lifetime.
That's a very different exercise.
Make a Social Security Decision-Don't Just Pick a Birthday
"I turned 62, so I took Social Security."
That's not a strategy. Neither is automatically waiting until 70.
Social Security decisions should be coordinated with the rest of the retirement plan. What's your health like? What's your spouse's benefit? Who earned more? What happens to the survivor benefit? How much money do you need now? What assets are available while you wait?
For married couples in particular, I care a lot about the surviving spouse. Eventually one Social Security check goes away, which makes the larger benefit extremely important.
This is also one of those decisions where I can show people the math and they may still tell me they're taking Social Security early.
That's okay. My job is to make sure you understand the decision. Then it's your money.
Get Medicare Right
If you're retiring around 65, healthcare and Medicare need to be part of the transition. Don't wait until your employer coverage disappears to start figuring this out.
Understand when you need to enroll, what supplemental coverage you want and what your healthcare costs may look like. And remember that Medicare premiums can be affected by income.
That means investment and tax decisions can have consequences outside the tax return. A large taxable event can potentially show up later in the form of higher Medicare premiums.
This is why I don't like making retirement decisions in separate boxes. They're connected.
Update the Boring Stuff
The first year of retirement is also a great time to clean up everything you've ignored. Review beneficiaries. Make sure accounts are titled correctly. Look at your will, powers of attorney and healthcare documents. Make sure somebody besides you knows where important information is located.
Review insurance. Consolidate unnecessary accounts. Get rid of old accounts you've been dragging around since an employer you left in 1998.
None of this is exciting. Neither is discovering your beneficiary form still names somebody you haven't spoken to in 25 years.
Do the boring stuff.
Spend Some Money
Yes, I said it.
One of the strangest things about retirement is watching somebody spend 40 years saving money and then become terrified to use it. I've seen people with plenty of resources agonize over a vacation that has virtually no impact on their long-term financial security.
What exactly was all the saving for?
I want to know how much you can reasonably spend. Then I want you to spend it.
Travel while you're healthy enough to travel. Take the family somewhere. Play golf. Buy the boat if the plan supports the boat.
You're probably not going to spend exactly the same amount at 85 that you spend at 65. The early years of retirement matter.
Use them.
Don't Try to Perfect Everything in the First 30 Days
You don't have to make every retirement decision the day after your retirement party. In fact, I'd rather you didn't.
Retirement is a major adjustment. Build the plan. Understand the accounts. Understand the taxes. Decide where income will come from. Then make changes intentionally.
There is very little prize money for reorganizing your entire financial life by Friday.
Some decisions can wait. Bad decisions made quickly can be much harder to undo.
The First Year Sets the Tone
The year you retire isn't just the end of your career. It's the beginning of a completely different financial system.
The paycheck stops. Your investments have a new job. Taxes change. Healthcare changes. Social Security enters the picture. Eventually RMDs do too. And your relationship with money changes.
That's why I think the first year deserves more planning than simply rolling over the 401(k) and picking a withdrawal rate.
Figure out what you want retirement to look like. Build the paycheck. Build the investment runway. Look years ahead on taxes. Make deliberate Social Security and Medicare decisions. Clean up the accounts and estate documents.
And then do something retirees sometimes have an incredibly hard time doing: Enjoy the money.
You spent decades building it.
Retirement is when the plan finally gets to start working for you.
