How Do I Handle My Money as I Get Close to Retirement?

Here is a truth about the retirement transition that most people do not expect.

The financial complexity of retirement does not go away when you stop working. In many ways, it intensifies. The decisions you make in the three to five years before retirement and the first few years after it have disproportionate impact on how far your money goes for the rest of your life.

Let me walk you through the three decisions that matter most in this window.

The first is Social Security timing. You can begin collecting Social Security as early as age 62 or as late as age 70. Every year you delay beyond your full retirement age (which is 67 for people born after 1960), your benefit increases by approximately 8%. That is a guaranteed 8% return for each year of delay, which is one of the best guaranteed returns available in any financial context. If you start at 62, you receive permanently reduced payments, roughly 30% less per month than if you had waited to full retirement age. If you delay to 70, you receive payments that are 24% higher than at full retirement age.

The calculation that determines the right timing for you is your break-even age, meaning how long you need to live for the delayed start to pay off more than the earlier start. For most people, the break-even between claiming at 62 versus 67 is approximately age 78 to 80. If you expect to live beyond that, delaying is the better financial choice. If you have significant health concerns, earlier claiming may make sense.

The second decision is Required Minimum Distributions (RMDs). Starting at age 73, the IRS requires you to withdraw a minimum amount from your traditional IRA, 401k, and other pre-tax retirement accounts each year. These withdrawals are taxed as ordinary income. The amount is calculated using IRS life expectancy tables and your account balance as of December 31 of the prior year. Missing an RMD carries a 25% penalty on the amount you were supposed to take, which can be reduced to 10% if corrected within two years.

What most retirees do not understand until it is too late is that large RMDs in their 70s can push them into a higher tax bracket, trigger IRMAA surcharges (which increase Medicare Part B and Part D premiums), and cause a larger portion of their Social Security benefits to be taxable. Strategic Roth conversions in the years before RMDs begin (the window between retirement and age 73) can reduce the size of your future RMDs and their tax impact.

The third decision is Medicare. You become eligible at 65 regardless of when you claim Social Security. But the cost of Medicare is income-dependent through IRMAA. If your Modified Adjusted Gross Income in two years prior exceeds certain thresholds, your Part B and Part D premiums increase significantly. A large Roth conversion, a business sale, or a large RMD can all trigger IRMAA surcharges you did not anticipate.

Here is the question that pulls all three of these together. Have you modeled what your taxable income will look like at age 73 when RMDs kick in, factoring in Social Security income, any pension or rental income, and investment withdrawals? If the answer is no, that modeling needs to happen before you retire, not after.

The Retirement Readiness Calculator and the Compound Interest Calculator at Unleash Your Ideas are the tools for this kind of forward-looking picture.

Create your free account at Unleash Your Ideas. Retirement is not the finish line. It is a new financial landscape. Come map it.