You have decided to retire. Now it is life after your last paycheck. There will be no more direct deposit, at least not from your former employer. We wrote earlier about Why Getting Old is the New Normal.
Here are practical steps for retirement.
Identify What It Costs You a Year to Live
Before anything else, you need to know one number, what it costs you a year to live. Do not forget to include expenses that you may not pay monthly. This could include real estate taxes, property taxes and car, homeowners, and umbrella insurance. If you need help with getting your costs down, read our post Goodbye to the Joneses. 3 Practical Steps to Arrive Financially.
Then, reverse engineer how you will cover this number. A portion of these funds will come from Social Security, employer retirement accounts like a 401(k) plan and pension plan and personal savings.
Additionally, perhaps you are going to work part-time. Or you have decided to start a side-hustle or gig. These funds can also be used to cover what it costs you a year to live.
While I am not a fan of general rules of thumb, you should target having 75% of what you were making before you retired. You should not need 100% of what you made when you were working as you are no longer saving. Also, if you are fully retired, you will not be paying any Social Security or Medicare tax under the current tax code. Additionally, hopefully your mortgage has been paid off by then.
Understanding Sequence Risk
After your last paycheck, you are shifting from the accumulation mode to the distribution mode. You spent a lifetime saving and planning for retirement, this is the accumulation mode. Now you are (likely) no longer saving money. You are distributing assets from your portfolio to live on; this is the distribution mode. At this point, this means that the most important thing you need to learn is what sequence risk is.
This is the risk that there will be poor market returns while withdrawing funds from the portfolio.
Sequence risk is the highest during the five years before and the five years after your retirement.
The best way to mitigate sequence risk is to have a “war chest.” This would include a cash reserve fund of at least 18 months of living expenses. Additionally, depending on your risk tolerance and your station in life, having 30% or more of your portfolio in fixed income. Having both should allow your portfolio time to recover from the next inevitable market decline.
While there were lots of lessons learned from The Great Recession of 2007-2009, sequence risk was clearly the biggest lesson learned by investors. The Standard & Poor’s 500 Index declined by 57% from October 2007 to March 2009. This means that a $1 million portfolio would have declined to $430,000 before taking any money out and before the market recovered. While this decline was brutal, it was not as bad as the Great Depression, which had two distinct legs of decline. 1)
Inflation Risk
Sequence risk is not the only risk retirees face. Inflation risk is also very real risk for retirees. The Federal Reserve Board (The Fed) targets 2% inflation annually. Actual inflation can be less or more than their target.
However, if you project a 2% inflation rate over a 30-year retirement, this will reduce your purchasing power by about half. Said differently, if your spending was $60,000 a year when you retired, and inflation averaged 2% for 30 years, you would be spending $109,000 in year 30 just to maintain the same lifestyle. Again, this is with assuming only a 2% inflation rate.
This risk is managed best by continuing to own stocks and not having too much fixed income and cash. You will need to focus on the real returns. These are the returns you receive after inflation and taxes.
What Replaces Your Paycheck First?
There is no one answer here that would apply to all. Everyone is on their own journey and each situation is unique.
For example, while we clearly do not recommend it, you could claim your Social Security benefit early. Depending on when you were born, the full retirement age for most folks now is age 67. You could claim benefits at any time prior to this starting at age 62. However, if you start then, your benefit is discounted from what you would have received at age 67 by 30%. That is a big discount.
And, as importantly, it is for the rest of your life.
On the other hand, you could delay claiming Social Security all the way up to age 70. Currently, you will get an increase of 8% annually in your benefit until age 70. There is no additional increase in benefits after age 70, so that is the latest you would consider waiting to file for benefits. When you are filing for your Social Security benefit it is typically the second biggest decision after deciding when to retire.
Secondarily, you can access your Traditional IRA at age 59 ½ without the 10% premature withdrawal penalty. However, at the other end of the spectrum, you must begin to take your Required Minimum Distribution (RMD) by April 15th of the year following the year you turn age 73. However, we do not recommend waiting until April 15th of the following year. If you do, you will need to take two distributions that year, which may put you in a higher income tax bracket.
Predictable Income Versus Variable Income
For many retirees, the only source of predictable income they have is their Social Security benefit. However, there is a potential funding issue brewing in the Social Security funding. If changes are not made, the system will be insolvent by 2032-2033. Insolvent here means that benefits for current and future beneficiaries will be reduced by 23%. We wrote about this here in 3 Practical Reasons for Your Coming Social Security Haircut.
Other more fortunate retirees may be receiving another form of predictable income, a pension. Almost all large companies terminated their pension plan years ago. Now pension plans are generally limited to federal, state, and municipal employees. If you are getting a pension, you are in the minority. Be grateful. We wrote about this here in 7 Reasons Not to Wait Until Thanksgiving to be Grateful.
Variable income will come from your personal savings. This is typically from a brokerage account, 401(k) plan, Traditional IRA or Roth IRA. Variable means, well, it is not predictable. These accounts will be invested in cash and the stock and bond markets.
Why the Order Matters as Much as Your Income Tax Rate
The order of what you distribute annually to yourself matters as much as your income tax rate. The reason the order matters is due to the income tax effects. Long term capital gains are taxed at only 15%. For higher income earners, they are taxed at 20%. Distributions from your 401(k) plan and traditional IRA are taxed as ordinary income. Qualifying distributions from your Roth IRA are income tax free.
Minimize the Unintentional Tax Bracket Increase
The federal income tax is a progressive system. The more money you make, the higher the income tax brackets are. In 2026, the maximum federal income tax rate is 37% and the maximum state of Connecticut income tax rate is 6.99%.
Having said that, the first thing you need to know is your tax bracket. Whether you engaged a CPA to prepare your return or you did it yourself, most tax preparation software will have an additional report that will disclose your tax bracket. Income taxes can be one of investors’ largest expenses. We addressed this here in 3 Practical Ways to Minimize Your Lifetime Tax Bill.
Income Tax Planning
First, review your 2025 income tax return to find out what income tax bracket you were in.
Second, run an income tax projection for this year. For example, it is projected that in 2026 for a married couple filing jointly will be in the 22% federal income tax bracket if their taxable income is $100,801 – $211,400. Their tax bracket goes to 24% when their taxable income is $211,401 – $403,550.
Third, there are a few items that can significantly impact your income. One is when you realize capital gains. Depending on the size of the gain, it may put you in a higher income tax bracket. Another one is making partial, annual Roth IRA Conversions.
While the income taxes are very visible when you file your income tax return, for higher income earners, there may be another surprise. When your income exceeds certain thresholds, and you are enrolled in Medicare, you may be subject to an increase in your Medicare premiums. Medicare has what is known as Income-Related Monthly Adjustment Amount (IRMAA). This is one area where many retirees get surprised. This is because the adjustment is made from your income two years ago.
In 2026, a married couple filing a joint income tax return will be subject to this when their modified adjusted gross income exceeds $218,000. The higher your income, the more your Medicare premium is increased.
Remember, you do not want tax tail to wag the dog. However, the key takeaway is that you need to be cognizant of the moves you make and how it will impact your income tax bracket.
Conclusion
If you would like help thinking through life after your last paycheck, or pressure-testing your retirement income plan to see how it holds up in a downturn, feel free to reach out. You can contact Thomas Scanlon at (860) 645-1515 or email Thomas.scanlon@raymondjames.com.
This is original content written by Manchester, Connecticut Financial Advisor Thomas F. Scanlon, CFP®, CPA.
1)federalreservehistory.org – The Great Recession
The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Thomas F. Scanlon, CPA, CFP® and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and subject to change.
Changes in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James Financial Advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and investors may incur a profit or a loss.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, maybe subject to a 10% federal tax penalty.
Like traditional IRA’s, contribution limits may apply to Roth IRA. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Roth IRA owners must be 59 1/2 or older and have held the IRA for five years before tax-free withdrawals are permitted.