The Five Decisions That Collide at Retirement: Are You Really Ready?

For decades, most Americans are taught a relatively straightforward formula for preparing for retirement: work, save, invest, contribute to a 401(k), take advantage of an employer match, and accumulate as much as possible.

Then retirement arrives.

One Friday afternoon, you leave work for the final time. Monday morning comes, and something that has happened regularly for 30 or 40 years suddenly doesn’t happen.

There is no paycheck coming.

That’s when retirement planning changes dramatically.

Accumulating money and successfully distributing that money throughout retirement are two very different challenges. And the transition between the two can create several important retirement decisions at almost exactly the same time.

To illustrate the challenge, let’s meet a hypothetical couple: Jack and Diane.

They’ve worked, saved, invested, and accumulated a respectable retirement portfolio. They have Social Security available and believe they’re ready.

But are they?

From the Retirement Ascent to the Descent

I like to think about a person’s working years as the Ascent.

During the Ascent, you’re climbing the financial mountain. You’re earning a paycheck, contributing to retirement accounts, accumulating assets, and generally have time to recover from financial setbacks and market volatility.

Eventually, you reach the summit: retirement.

But anyone familiar with mountain climbing understands something important. Reaching the summit is only half the journey.

You still have to get back down.

Retirement begins the Descent, and the financial rules can be very different.

Instead of contributing to retirement accounts, you may begin withdrawing from them. Your paycheck disappears. Social Security and Medicare enter the picture. Taxes may change. Market volatility can become more consequential when you’re withdrawing money rather than contributing it.

And eventually, one spouse may need to continue the journey alone.

That’s why successful retirement planning requires more than simply reaching a particular account balance.

It requires coordinating decisions.

Retirement Decision #1: Where Will Your Paycheck Come From?

Jack and Diane retire and immediately face a fundamental question:

How are we getting paid now?

Suppose they need $8,000 each month to maintain their desired retirement lifestyle.

Social Security may provide part of that amount. Perhaps a pension provides another portion.

Where does the remainder come from?

An IRA? A 401(k)? Savings? Taxable investments? Some combination?

Having $1 million in retirement accounts doesn’t automatically create a retirement income strategy. The more useful question isn’t simply, “How much money do I have?”

It’s:

“What does this money need to do for me?”

That’s why I think about retirement assets according to the jobs they need to perform.

Some money has a job NOW.

Some has a job SOON.

And some has a job LATER.

Money you’ll need next month shouldn’t necessarily be treated exactly like money you don’t anticipate needing for another 15 years.

Retirement Decision #2: Which Money Should You Use First?

Jack might reasonably conclude, “We’ll just withdraw whatever we need from the IRA.”

But that introduces another question.

What happens because you made the withdrawal?

A distribution from a traditional IRA or 401(k) can affect taxable income. That may affect other aspects of the retirement plan.

Should taxable assets be used first?

Should Roth assets be preserved?

Could Roth conversions be appropriate during certain years?

How might decisions made today affect required minimum distributions later?

There isn’t one universal withdrawal sequence that’s appropriate for everyone.

That’s why the early retirement years can represent an important Decision Zone.

The objective isn’t merely determining where money can come from. It’s understanding how today’s decision might affect tomorrow’s options.

Retirement Decision #3: When Should You Claim Social Security?

Social Security is one of the most important retirement decisions many families make, but it shouldn’t necessarily be made in isolation.

Jack may be anxious to claim because he has spent his entire working life paying into the system.

But the better question is not simply, “When can I collect?”

It’s:

“How does Social Security fit into our overall retirement income strategy?”

Claiming earlier or delaying benefits can affect lifetime income. For married couples, the decision can also have implications for the surviving spouse.

What happens to Diane if Jack dies first?

What happens to Jack if Diane dies first?

How does the Social Security decision interact with withdrawals from other retirement assets?

The objective shouldn’t necessarily be to optimize one benefit independently. It should be to understand how that benefit works within the household’s broader retirement strategy.

Retirement Decision #4: How Will Taxes and Medicare Interact?

Retirement can create an interesting period for tax planning.

Imagine Jack and Diane retire before required minimum distributions begin. Their employment income disappears, and perhaps they haven’t yet claimed Social Security.

Their taxable income may temporarily look quite different.

I refer to this period as the Retirement Tax Window.

Depending upon someone’s individual circumstances, these years may warrant examining questions involving Roth conversions, retirement-account withdrawals, capital gains, and future required distributions.

But another consideration eventually enters the conversation:

Medicare.

Higher income can potentially affect Medicare premiums through the Income-Related Monthly Adjustment Amount, commonly known as IRMAA.

That demonstrates one of the central challenges of retirement decision planning.

A decision that appears to be purely about taxes may have consequences somewhere else.

Retirement decisions don’t live in separate rooms.

Change one, and you may change another.

Retirement Decision #5: What Happens When One Spouse Is Alone?

This may be the most uncomfortable question of the five, but it is also one of the most important.

Jack and Diane may begin retirement together, but statistically one spouse is likely to eventually continue retirement alone.

What happens financially then?

One Social Security benefit may disappear. The survivor’s tax circumstances may eventually change. Some household expenses may decline, but many won’t decline proportionately.

The mortgage or property taxes don’t automatically get cut in half.

Neither do many utilities, insurance costs, maintenance expenses, or healthcare needs.

That’s why legacy planning shouldn’t focus exclusively on what children or grandchildren inherit.

It should also ask:

“Is the surviving spouse financially prepared to continue the retirement plan?”

A Better Retirement Planning Process

With all these decisions, retirement can begin to feel unnecessarily complicated.

That’s precisely why I believe in using a process.

The retirement Blueprint process I use begins with four stages:

Complete the Discovery.

Understand where you are today, what you own, what you owe, what income you’ll need, what concerns you, and what you want retirement to look like.

Analyze the Decisions.

Evaluate income, Social Security, taxes, Medicare, investments, risk, longevity, and legacy—and, importantly, how those decisions interact.

Build Your Blueprint.

Determine what needs to happen NOW, SOON, and LATER and identify the job each portion of your money needs to perform.

Decide Together.

Evaluate alternatives, understand the tradeoffs, make informed decisions, implement appropriate solutions, and continually review the Blueprint as circumstances change.

The philosophy behind the process is straightforward:

Clarity first. Decisions second. Solutions third.

Strategy Should Determine the Solution

Retirement conversations can sometimes begin with products.

Should I buy an annuity?

Should I roll over my 401(k)?

Should I purchase an investment?

Should I convert my IRA?

Those may eventually be legitimate questions.

But I believe they come later.

First ask:

What am I trying to accomplish?

Then:

What decisions need to be made?

Only then should the conversation turn to which financial solutions might appropriately accomplish those objectives.

In other words:

Strategy should determine the solution. The solution should never determine the strategy.

Five Questions to Ask Before You Retire

If you’re approaching retirement, ask yourself:

Where will my retirement paycheck come from?
Which accounts will I draw from, and in what order?
How does Social Security fit into my overall retirement income strategy?
How might my tax decisions interact with Medicare and other retirement costs?
What happens financially when there’s eventually only one of us?

If you can confidently answer all five, you’re beginning retirement with considerably more clarity.

If you can’t, that’s not a reason to panic.

It’s a reason to start the conversation.

Because retirement isn’t simply about reaching a certain age or accumulating a certain amount of money.

It’s about making better decisions with the money you’ve worked a lifetime to accumulate.

At Wisdom to Wealth, I help individuals and couples examine these interconnected retirement decisions and develop a Blueprint around what they’re actually trying to accomplish.

If you’re approaching retirement and wondering whether all the pieces of your financial life are working together, I invite you to learn more and start a conversation.