As retirement approaches, your focus should shift from accumulation to distribution. The idea is to think of your retirement savings not as a lump sum, but instead as a series of income streams that will become your retirement paycheck. This can include Social Security, pensions, annuities, and investment account withdrawals. The goal is to create reliability and tax efficiency.
The first step is to understand your mandatory and discretionary expenses. Some things (like food and utilities) will fluctuate each month, but those are still mandatory. In an ideal world, you have reduced your mandatory expenses by paying off all debts heading into retirement.
In your final working years, it is wise to “test drive” your future net income. You can do this by increasing your retirement contributions or diverting some of your paycheck into a savings account to simulate your post-retirement income. Doing this for several months or longer can reveal gaps, spending habits, and your comfort level with the new income.
Tax planning for retirement is critical. Curating your income stream is just as important as creating it. Strategically withdrawing from taxable, tax-deferred, and tax-free accounts while staying aware of fixed income sources can minimize taxes paid over your lifetime and will lead to a better outcome overall.
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