Every year, millions of Americans consider winding down their working years. For many people, retirement ushers in an enjoyable new phase of prioritizing leisure and personal fulfillment. At the same time, retirement can evoke feelings of uncertainty, especially if it follows a long and rewarding career. Retirement entails a big shift from work to new pursuits and from years of saving to spending your nest egg. If you are looking to retire in the next one to three years, careful planning can give you peace of mind and help you make the most of this transition.
Before Retirement
The years leading up to retirement are often your highest earning years, which opens up unique planning opportunities. While there are many potential strategies, below we highlight a few key considerations for this stage of the journey.
Maximize Savings: Working with a financial planner is a good place to start. Once you know how much you need to support your lifestyle in retirement, you can compare it with the nest egg you have accumulated. Starting in 2025, people between the ages of 60 and 63 can save an additional $11,250 into a 401(k) on top of the standard employee contribution limit of $23,500.[1] Depending on your organization, you may have access to additional savings options such as a deferred compensation account or a 457(b) that require additional planning.
Understand Your Income: Soon-to-be retirees benefit from being aware of the different income sources in retirement. If you have a pension, careful planning is required to decide when to claim benefits and how those benefits continue for a spouse after you pass away. Social Security is another source of retirement income. For many retirees with savings, delaying collecting benefits until age 70 can maximize the total income you receive over your lifetime. Beyond pensions and Social Security, you can also draw from retirement accounts, such as a 401(k) or IRA, to fund your day-to-day living. Each of these account types has its own tax characteristics and should be reviewed together.
Charitable Planning: Donating to charity in your highest income years may lower your tax bill when it’s most valuable. Donating highly appreciated stocks to a charity also gives you multiple tax benefits. You avoid the capital gains tax and the organization ends up with more funds for their work. One strategy involves creating a donor-advised fund (DAF), allowing you to pre-fund a number of years’ worth of charitable giving and enjoy the tax deduction in a single year when your income is highest.
After Retirement
The years that follow retirement, particularly before Social Security benefits or Required Minimum Distributions (RMDs) begin, are typically your lowest income years. This brings a new set of considerations as the shift from saving to spending begins.
Track Expenses: Transitioning from paid work to retirement may mean a change in day-to-day living expenses. We recommend tracking your cash flow closely in the first few years of retirement to understand if your new living situation is sustainable. Planning for large expenses, such as home improvements or travel plans, allows you to minimize taxes.
Optimize Your Taxes: Income may decline in retirement, opening up tax planning opportunities. For example, converting pre-tax retirement accounts into post-tax or Roth accounts at lower tax rates, also known as Roth Conversion, can be an excellent idea. Retirees with capital gains or concentrated stock in their non-retirement account may take advantage of lower taxes to diversify or fund a large expense.
Update Your Estate Plan: Now that you are retired, you have more time and energy to review your plan for what happens when you pass away. We recommend making sure that the beneficiaries and successor trustees are up to date. If you don’t have an estate plan, now is a good time to create one with the help of an estate attorney.
Personal Finance is Personal
Transitioning from paid work to retirement can be simultaneously exciting and daunting. Although it may be helpful to discuss the transition with friends or colleagues, retirement differs from person to person, and no two financial plans are identical. At North Berkeley, we meet our clients where they are on their retirement journey and take into account their unique situation. With good planning, the transition to retirement can be navigated with confidence and a sense of calm.
Resources:
[1] https://www.fidelity.com/learning-center/personal-finance/secure-act-2
