Despite how we might envision it, retirement is less of a single moment, and more of a multi-year transition. It’s also certainly more than simply an age or dollar amount of savings.
As you approach the final stretch of your career, several important financial decisions begin to converge, including when to claim Social Security, how to take employer benefits, and how to draw from your retirement savings in a tax-efficient way. Thoughtful planning during these years can have a meaningful impact on the sustainability of your retirement income.
When Should You Take Social Security?
One important decision retirees face is when to claim benefits through the Social Security Administration. While benefits can begin as early as age 62, claiming early permanently reduces your monthly benefit amount – even spousal benefits, if applicable.
Additionally, another factor to consider in timing of benefit is whether or not you will be working, at least part-time. In a situation where a person is earning more than $25,000/year after beginning to receive social security, there is a temporary earnings reduction until age 67.
On the flip side, waiting until full retirement age (typically age 67) provides your full benefit, and delaying beyond that can increase benefits by roughly 8% per year until age 70. There is no benefit to waiting past age 70 to collect benefits.
What is your “best” claiming age? That depends on a number of factors, including life expectancy, marital status, other income sources, the reliance on this federal benefit to meet expense needs, and tax considerations.
Evaluating Employer Retirement Benefits
As retirement approaches, it’s important to review how employer benefits will be distributed.
For individuals with a pension, the decision often comes down to choosing between a lifetime monthly payment (that may offer different survivor benefits to a spouse) or potentially a lump-sum distribution. Monthly payments provide predictable income, while a lump sum offers flexibility, but requires careful investment management.
Those participating in deferred compensation plans should review distribution elections carefully. These plans are typically taxed as ordinary income when paid out, so the timing of payments can significantly affect tax brackets during the early retirement years. Some governmental deferred compensation plans will allow funds to be rolled to an IRA to delay taxation.
For employees with other plans such as stock options or restricted stock units (RSUs), retirement planning may also involve deciding when to exercise options or sell shares. Because these awards often create taxable income at vesting or exercise, coordinating the timing with other income sources can help manage taxes and avoid unintended spikes in income.
Creating a Tax-Efficient Withdrawal Strategy
Retirees often have savings spread across multiple types of accounts, including traditional IRAs or 401(k)s, Roth accounts, annuities, and taxable investment accounts. The order in which these funds are used can influence both taxes and the longevity of a portfolio.
A common approach is to draw first from taxable accounts, then from tax-deferred accounts such as IRAs, while allowing Roth accounts to grow longer since qualified withdrawals are tax-free. However, every situation is different. In some cases, taking strategic withdrawals from a pre-tax account or completing partial Roth conversions early in retirement may reduce future taxes—especially before required minimum distributions begin.
A Coordinated Plan Can Make a Meaningful Difference
Retirement income planning involves more than simply accumulating savings. Decisions about Social Security, pensions, stock compensation, and withdrawal strategies all interact with one another—and with the tax system.
If you are within five to ten years of retirement, now is an ideal time to review your plan. Many individuals are surprised to learn that choices around Social Security timing, pension/benefit elections, or withdrawal strategies can materially affect their lifetime income.
We obviously regularly work with our clients as they approach retirement, helping to coordinate these decisions and build a clear income strategy for the years ahead. If you are nearing the age at which you’d like to retire or have friends who are in this stage of life, schedule a conversation with our team. A thoughtful review today can help ensure the transition into retirement is both confident and well-planned.