The First 5 Years of Retirement: The Decisions That Matter Most
Key Takeaways
- Build a clear plan for where your retirement paycheck will come from.
- Coordinate withdrawals with Social Security and taxes rather than making each decision separately.
- Keep enough accessible cash for near-term spending without abandoning your long-term investment plan.
- Pay close attention to taxes and Medicare as your income sources change.
- Revisit your plan every year instead of assuming the decisions you made at retirement should remain unchanged.
The first few years of retirement can shape much of what comes afterward.
Your paycheck stops. You begin relying more heavily on savings and investments. Social Security and Medicare decisions may enter the picture. Your tax situation can change, and market declines can feel very different when you are withdrawing money instead of contributing it.
That is why the first five years of retirement deserve their own plan.
Year 1: Build Your New Paycheck
For decades, your paycheck determined how money entered your household.
Retirement reverses that process.
Now you need to decide how much you will spend and which accounts will provide that money.
Your income could come from several places: cash, taxable investments, Traditional retirement accounts, Roth accounts, pensions, and Social Security.
The important part is coordinating them.
Taking money from the easiest account without considering taxes or future income can create problems later.
Your first year should establish a repeatable system for funding spending while keeping enough flexibility to adjust.
Educational overview only. This does not recommend which account should be used first.
Year 2: Compare Your Plan With Reality
A retirement budget created before retirement is still an estimate.
After a full year, you finally have actual information.
How much did you really spend? Was travel higher than expected? Did healthcare cost more? Did some work-related expenses disappear?
Compare what you expected with what actually happened.
This is also a good time to decide whether the amount you are withdrawing from your portfolio still makes sense.
The objective is not to restrict spending unnecessarily. It is to make sure your plan reflects the retirement you are actually living.
Year 3: Revisit Taxes
Your tax return may look very different once employment income disappears.
That can create planning opportunities, particularly if you have substantial money in pre-tax retirement accounts.
For example, lower-income years may provide an opportunity to evaluate Roth conversions. But additional taxable income can also affect other parts of your plan, including Medicare premiums through IRMAA.
Do not look at your tax bracket in isolation.
Look at your expected income over several years and determine whether recognizing income today could improve your longer-term tax picture.
“Do not look at your tax bracket in isolation.”
Lower-income years may provide an opportunity to evaluate Roth conversions. But additional taxable income can also affect other parts of your plan, including Medicare premiums through IRMAA.
Year 4: Stress-Test the Portfolio
Market declines matter differently once you are retired.
When you were working, a downturn could provide an opportunity to continue buying investments at lower prices.
When you are retired, you may be selling investments to support your lifestyle at the same time.
That makes your withdrawal strategy, cash reserves, and investment allocation especially important.
Ask what would happen if markets declined significantly. Where would the next year of spending come from? Would you need to sell investments you would rather leave alone?
A retirement plan should work through difficult markets, not only good ones.
Year 5: Update the Next Chapter
By year five, your retirement may already look different from what you imagined on your last day of work.
Your spending may have changed. Your portfolio has moved. Social Security may have started or be approaching. Medicare may now be part of your plan. Future Required Minimum Distributions may be getting closer.
This is a good point to rebuild your projections rather than simply extending the original plan.
Frequently asked questions
At least annually, and whenever there is a major change in your income, spending, investments, health, family situation, or goals.
Not necessarily. Retirement and Social Security claiming are separate decisions. Your claiming strategy should be considered alongside your spending needs, other income, taxes, portfolio, and household circumstances.
They are when you move from accumulating money to relying on it. Spending, withdrawals, taxes, Social Security, healthcare, and investment decisions begin interacting in new ways.
The bottom line
The first five years of retirement are not about making one perfect decision on the day you stop working.
They are about adjusting.
Build your retirement paycheck. Compare your projections with reality. Look for tax-planning opportunities. Prepare for difficult markets. Then update the plan as your retirement evolves.
Approaching retirement or recently retired? We can help you build a coordinated plan for the years ahead.
Educational information only. This article is not individualized financial, tax, or legal advice.
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About the Author
Stuart A. Schiffman, CFP®, RICP®, TPCP®
Founder, Senior Wealth Advisor, Compound Wealth Advisors — San Diego
I run a boutique, fee-only fiduciary practice for individuals and couples age 50 and older, helping them navigate the critical years before and during retirement with clarity and confidence. I hold the CFP®, RICP®, and TPCP® designations and an MBA, and have been quoted in Forbes, Investopedia, U.S. News, and Nasdaq.
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