Navigating the Transition to Retirement  

Retirement is not the finish line, but a significant life transition that marks the beginning of a new journey, demanding both financial and psychological preparation. After years of building wealth, the jump from saving as much money as possible, to one where you are now actively spending those hard-earned savings, is not an easy change. Starting this new phase of life also brings different risks, priorities, and opportunities. With that being said, let’s explore the important decisions to consider, the tools and resources you might have available at your disposal, and how to prepare for this new chapter as much as possible.

Clearly Visualize Your Retirement & Timeline

Before you crunch numbers or come up with an arbitrary figure of how much you need to save, take the time to reflect on how you envision your life in retirement. Some questions to ask yourself are:

• What age do I want to retire?
• Do I see myself volunteering or working part-time?
• Where would I like to live? Is it the same town, or a new location?
• How will I spend my time? Will I continue my current hobbies or take up new ones?
• Do I have any destinations or experiences I’d like to cross off my bucket list?
• Will I prefer to cook at home, try new restaurants, or eat out more often?
• Will I be making any significant purchases, such as a new car, boat, or perhaps a vacation home?
• Will I host events or visit family and friends more often?
• Does my partner intend to retire at the same time as me?
• What kind of day-to-day lifestyle do I want to maintain? Will it be simple and relaxed, or active and luxurious?

These lifestyle choices will heavily affect your future spending needs, how much you’ll need for retirement, when you can retire, and of course, your portfolio’s allocation. The clearer you are in visualizing and defining your ideal lifestyle, the more effectively you can plan for the retirement you desire.

Review Your Spending & Budget

Entering retirement often brings shifts in your spending habits. Creating a detailed yet adaptable retirement budget will help you smoothly navigate these changes. Your budget should include:

• Non-discretionary expenses: These are expenses you must pay no matter what to live your life. Examples of these costs include housing, utilities, food, healthcare, insurance, and more.
• Discretionary expenses: These are expenses you can skip or reduce if needed, as they are not essential. Some examples include travel, dining out, entertainment, hobbies, and gifts.
• Unexpected expenses: These are typically one-time or non-recurring costs. Expenses that would fit this category are home repairs, medical emergencies, and family support.

For most people, spending is highest at the beginning of retirement as they start to check off their bucket list items and explore new hobbies or skills that they previously had no time or energy for during their working years. Over time, spending naturally decreases as major goals and dreams are accomplished, and activity levels shift with age.

Evaluate Your Investment Strategy & Update as Needed

During the accumulation phase, where you’re actively working and saving, portfolios typically focus on growth-oriented investments. However, as retirement approaches, reassessing your portfolio to manage risk becomes increasingly important, especially given the shift away from a steady income. You may want to allocate a portion of your assets to more conservative, less volatile investments, to safeguard your financial foundation and ensure your savings remain accessible when needed. Consider these key questions when evaluating your portfolio allocation:

• How much do I expect to withdraw from the portfolio each year?
• Can I delay taking money from my investments?
• What other income sources do I have available?
• How much of my spending relies on investment returns?
• How much risk am I comfortable with?
• How long do I need these investments to last, accounting for both longevity and inflation?
• Do I expect to support any family members in the future?
• Am I more concerned with continued growth of the portfolio or preserving what I have?

Reflecting on these questions, reviewing your portfolio, and rebalancing as needed will help make sure your portfolio is still aligned with your goals, risk tolerance, and timeline.

Develop a Withdrawal Strategy

A thoughtful withdrawal strategy is essential to avoid depleting your assets too soon. Some considerations include:

• Dynamic spending: Adjust withdrawals based on investment returns. If markets are having a down year, it may be a good idea to take a smaller vacation or find other ways to limit spending if needed.
• Tax diversification: Having a mix of accounts that are taxed differently can give you flexibility when needing to withdraw from investments.
• Asset location: Strategically placing tax-inefficient assets in pre-tax accounts and tax-efficient assets in taxable accounts.
• Roth conversions: Converting some pre-tax assets into a Roth IRA can give you flexibility to grow and withdraw those converted assets tax-free (provided that the 5-year rule is met when assets are taken out of the Roth IRA).
• Harvesting capital gains: If you’re in the 0% capital gains bracket, it might make sense to realize any securities with substantial gains before Required Minimum Distributions (RMDs) or Social Security income potentially bumps you up a tax bracket.
• Social Security: Consider delaying Social Security benefits until age 70 to receive increased monthly payments. Each year you delay taking Social Security after your full retirement age, your benefits increase by 8%, a considerable increase.

Strategically coordinating your withdrawal sources can significantly enhance tax efficiency during the active phase of drawing from your investments.

Plan for Required Minimum Distributions

At age 73 (age 75 for those born after 1960), you will have to take RMDs from your pre-tax, also called tax-deferred, retirement accounts such as Traditional IRAs and 401(k)s. The amount typically increases each year as the number is determined by the year-end value of the account divided by an age factor from the IRS’s Uniform Lifetime Expectancy table. Here are several strategies to help you effectively manage taxes resulting from this mandatory income realization:

• Roth conversion: In years when your income is lower, particularly during retirement but before RMDs start, consider converting a portion of your pre-tax retirement savings to a Roth IRA. This strategy can help prevent you from moving into higher tax brackets once RMDs begin.
• Qualified Charitable Distributions (QCDs): Starting at age 70½, you can distribute up to $108,000 (for 2025, adjusted annually for inflation) from your Traditional IRA tax-free to 501(c)(3) organizations which includes many public charities, religious organizations, educational institutions, nonprofits, and more.
• Withdrawing more than the RMD: This approach can help reduce the size of future RMDs, potentially preventing you from being pushed into higher tax brackets down the line. High RMDs can trigger unintended consequences, including pushing you into a higher tax bracket, increasing Medicare premiums (IRMAA), and making more of your Social Security benefits taxable. Proactive planning can significantly reduce your tax burden and help you retain more of your hard-earned savings.

Use Charitable Giving Tools to Manage Taxes

Giving to causes you care about is meaningful, and it can also offer valuable tax benefits. Consider these charitable strategies to support your values while reducing your tax liability:

• Qualified Charitable Distributions (QCDs): As mentioned earlier, you can gift to qualified public organizations from your Traditional IRA.
• Donor-Advised Funds (DAFs): In a high-income year, it might make sense to bunch charitable donations of cash, securities, or other assets to a sponsoring organization. Not only can you receive a tax deduction, but you also receive flexibility to spread donations over time.
• Gifting appreciated securities: Donating highly appreciated securities can be hugely beneficial for you and your charitable organization. It helps you avoid capital gains tax, you can receive a tax deduction, and it allows the charity to use the full value of the gift with no tax consequences.

Revisit Estate Planning Documents

As you move through different stages, revisiting your estate plan is essential. Your current plan might no longer align with your intentions, especially after you’ve clarified your retirement vision. Key elements to  reassess include:

• Beneficiaries: Review the named beneficiaries on investment accounts, bank accounts, and insurance policies.
• Wills: Check this document to make sure it still aligns with your wishes and names the appropriate heirs, guardians, and executors.
• Power-of-attorney: Confirm if your agents are still appropriate for both your financial and healthcare decisions.
• Trusts: Confirm if this vehicle will still serve its intended purpose, such as avoiding probate, managing complex family needs, or controlling how and when assets are distributed.

Ensuring your estate documents are current helps prevent confusion, safeguards your loved ones, and keeps your assets aligned with your wishes. If any major life events occur during retirement, make sure to review your estate documents again.

Final Thoughts

The adjustment from accumulation to decumulation with money is one of the most complex and emotionally charged stages of your life. It requires a serious shift in mindset. From growing your assets, to distributing them sustainably, it takes some time getting used to. Having the right strategies in place can effectively aid retirees in having peace of mind knowing that their assets are aligned with their lifestyle, values, and legacy goals.

As financial planners, we can help tailor these strategies and ensure your plan adapts to changes along the way. Retirement may be a transition, but it doesn’t have to be daunting or done alone.