The 6 Financial Stages of Retirement
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Retirement is classically divided into three stages based on the activity level of the retiree:
- The go-go years
- The slow-go years
- The no-go years
Financially speaking, people tend to spend more during the go-go years (often on travel) and the no-go years (often on medical and long-term care expenses) than on the slow-go years—thus, the classic “retirement smile.” However, you will probably do a better job with your financial planning—and particularly your tax planning during retirement—if you divide retirement planning into six stages. In this post, we’ll define and describe those six periods and list strategies to consider during each stage.
#1 Early Retirement
Many people never experience this stage at all. It typically requires you to retire by your early to mid 50s at the latest. The start of this stage is when you quit working, or at least dramatically cut back on how much work you do. I’m not going to be the Internet Retirement Police and tell you that you can’t work in retirement, but the onset of this stage is classically when you stop working. The stage ends when you can access your 401(k)s (at age 55 and separated from the employer) and/or IRAs (at age 59 1/2) without penalty.
During these years, retirees tend to have a relatively low tax bill. They no longer have all that earned income and don’t have to pay any payroll taxes at all. They typically live off dividends (often taxed at qualified dividend rates), a few capital gains taxes (typically long-term gains on relatively high-basis shares), or rents mostly or completely covered by depreciation losses. However, deferred compensation plans, particularly non-governmental (tax-exempt) 457(b) plans, often play an important part in creating spendable income. 457(b) money is not subject to age 55/59 1/2 rules and, in the case of a non-governmental 457(b), isn’t technically your money yet. It should be spent first. It’s great early retirement money.
The primary financial strategies in early retirement are doing Roth conversions for yourself or heirs to spend later and keeping taxable income low enough to maximize the Affordable Care Act (ACA) subsidies for health insurance purchased on the government exchange. Sequence of Returns Risk (SORR) management is also paramount.
#2 Retirement Account Eligibility
The next phase of retirement begins typically at age 59 1/2, although it may occur as early as age 55 if you leave money in a 401(k) instead of rolling it into an IRA. You can now access your retirement account money without paying any penalties. (Note: some five-year rules might have an effect on this.) In this phase, you can spend Roth money tax- and penalty-free, and you can spend tax-deferred money penalty-free. Typically, these are also go-go years, so maximizing how much you can spend may be pretty important to you.
While Roth conversions and ACA subsidy maximization still matter, your tax bill is often a little higher than during early retirement. Your entire tax-deferred withdrawal is now taxable. Taxable assets you sell now have lower basis, and less of your investment property rents may be covered by depreciation. Spending down your nest egg, perhaps even at a rate greater than 4%, is often reasonable to further delay claiming Social Security.
More information here:
#3 Medicare Eligibility
At age 65, you can apply for Medicare. It’s important to realize Medicare is not free, although the cost of health insurance is typically lower on Medicare than most other insurance plans. You don’t have to worry about that ACA subsidy, but replacing that anxiety will be worries about the Income Related Monthly Adjustment Amount (IRMAA), essentially an extra tax on high earners to access Medicare. Strategies to minimize that are essentially the same as those to maximize the ACA subsidy, keeping taxable income low. In this stage, most wise retirees are still not taking Social Security, so Roth conversions may still be an attractive option.
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#4 Social Security
The Social Security stage begins no later than age 70. Delaying Social Security beyond age 70 has no benefit, although it often makes sense to delay until 70, at least for the higher earner in a couple. This maximizes your guaranteed, inflation-adjusted income floor. Theoretically, this stage could begin at 67 or even prior to the Medicare eligibility stage if you claim Social Security at 62. This stage often means the end of the obvious Roth conversion years. Eighty-five percent of Social Security income is likely to be taxable for WCIers, and that will fill up significant portions of the lower tax brackets, making Roth conversions much less attractive. However, you may also decrease the withdrawal rate from your nest egg. Not only does Social Security replace that, but moving into your 70s may also mean the onset of the slow-go years when less income is needed.
If you are charitably inclined, this stage does include the onset of Qualified Charitable Distribution (QCD) eligibility at age 70 1/2. If you are eligible, this is the best way to give to charity. You can give to charity with pre-tax dollars, reduce current and future RMDs (see next stage), and still claim the standard deduction. This stage is also often a time when people consider Single Premium Immediate Annuities (SPIAs) to raise their floor of guaranteed income.
#5 Required Minimum Distributions
Required Minimum Distributions (RMDs) begin at age 73-75 (75 for those born in 1960 or later). While some people have ridiculous fears about RMDs, those in the know recognize that a high RMD, like a high income during your earning years, is a great problem to have. An RMD is just an acknowledgement that you have maxed out the tax and asset protection benefits the government offered you on your tax-deferred accounts decades ago. You now have to give the government its portion of your tax-deferred accounts that you have been investing on its behalf for decades and reinvest your portion of the account in your taxable account. Better yet, spend your portion.
If your investments have done well or you have spent very conservatively, your tax bill is likely quite a bit higher during this stage of retirement. In a few cases, you might even have a higher marginal tax rate in this stage than you had during your earning years. That might mean larger IRMAA payments, too. Too late now for the real solution to that problem (Roth contributions and conversions), but you can minimize your taxes (and IRMAA) by carefully balancing withdrawals from your tax-deferred accounts beyond the RMDs with Roth withdrawals.
Long-term care dilemmas often show up in this stage for married couples where one spouse with extensive costs can leave the other impoverished. Either purchase some sort of insurance coverage, or make sure you are wealthy enough to self-insure this risk.
More information here:
- Helping Natural Savers to Spend During Retirement
- Fear of the Decumulation Stage in Retirement
- Here’s How Much the Man Who Invented the 4% Rule Actually Spends in Retirement (Spoiler: It’s More Than 4%)
#6 Widowhood
If you thought things got bad tax-wise during the RMD phase, you haven’t seen anything yet.
In most couples, both partners don’t die at the same time. Since women live longer and are often younger than their husbands at marriage, widowhood is much more common than widowerhood, although this can obviously go both ways. This usually occurs during no-go or at least slow-go years, but the tax bill often goes up dramatically once it does. You are no longer using the Married Filing Jointly tax brackets. You have to use the single brackets.
At $200,000 of taxable income in 2026, that means a 32% instead of a 22% marginal tax rate. At $90,000, it’s 22% instead of 12%. That’s a big difference ($9,000-$20,000 per year). Taxable income will likely fall with the loss of Social Security, pension, and SPIA income, but the drop in after-tax income may be even more severe. Expenses do fall, but sometimes not by very much. Divorce gives you half as much income and assets to maintain your household, and it is obviously much more severe financially than widowhood. But widowhood can still be pretty bad.
The primary financial concern in this stage is the remaining spouse running out of money before running out of life, but financial competency and estate planning issues are also paramount.
What do you think about the six stages of retirement? What other considerations belong in each stage? If you’re retired, what stage are you in now?
The post The 6 Financial Stages of Retirement appeared first on The White Coat Investor – Investing & Personal Finance for Doctors.
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