Just Retired at 63? It's the Most Dangerous Year of Your Financial Life - Here's Why

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Master your first year of retirement by navigating crucial financial decisions. Learn how to manage income and taxes to avoid costly mistakes.

The first year of retirement is a critical period that sets the foundation for your long-term security. This episode focuses on five major decisions that converge during this time, specifically designed for those approaching or currently in the transition phase. We break down the complexities of retirement financial planning to help you organize your affairs effectively.

We examine how to identify and structure your retirement income sources while managing the tax implications of withdrawals and conversions. You will learn the importance of planning for tax payments early to ensure your cash flow remains consistent. By listing all expected financial events that impact your tax returns, you can avoid surprises and keep more of your savings.

Implementing a solid retirement tax strategy now provides clarity for the years ahead. This guide offers the framework you need to coordinate these moving parts successfully.

Timestamps:
0:00 Why year one is the "takeoff"
0:46 The five decisions and the one question connecting them
1:19 The switch: your paycheck stops, your portfolio starts
1:52 The one thread running through all five
2:07 Decision 1: Social Security timing (the hardest to walk back)
3:33 Decision 2: Where your new paycheck comes from
5:04 Decision 3: Medicare premiums that follow your income
5:44 What happened to David (the IRMAA example)
7:24 How we help couples coordinate this
7:33 Decision 4: Paying your own taxes in retirement
9:03 Decision 5: The Roth conversion window
10:56 Why all five are really one decision
11:26 The year-one checklist (order of operations)
12:13 The yellow flag and the red flag
12:54 How to book a call

Resources:

Website:  https://www.demarsfinancial.com/

Phone: (509) 536-9556

Schedule an introduction call with Taylor: https://bit.ly/demarspodcast

Check out Taylor's YouTube Channel: https://www.youtube.com/@TaylorMadeRetirement

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Disclaimer: Since we don't know your specific situation, none of this information should be construed as tax, legal, financial, insurance, financial advice, or other advice and may be outdated or inaccurate. It is your responsibility to verify all information yourself. This content is prepared for entertainment purposes only. If you need advice, please contact a qualified CPA, attorney, insurance agent, financial advisor, or the appropriate professional for the subject you would like help with. Demars Financial Group, LLC or its members cannot be held liable for any use or misuse of this content. Advisory services offered through Demars Financial Group LLC, a Registered Investment Advisor. Demars Financial Group is not affiliated with LPL Financial.

Transcript

SPEAKER_01 0:00

Today's content is pulled from Taylor's YouTube channel. If you want to watch the video version or catch more great content, subscribe by clicking the link in today's show description. Welcome to Taylor Made Retirement, where we explore what it takes to build a retirement that works for your money and your life. With third generation certified financial planner Taylor Demars.

SPEAKER_00 0:28

The first year of retirement might be the most consequential one of your entire financial life. It's not because of what the market might do, because although everyone's worried about a market crash, there's another first-year risk that gets a lot less attention. And it's the one I'm going to walk you through today. Because in the first 12 months out of your paycheck, there are five big decisions that start colliding all at the same time. Several have deadlines. A few are just hard or expensive to walk back. Let's think about a flight for a second. Once you're up in the air at about 35,000 feet, most of the rest of the journey is on cruise control. And it's easy to make some small course corrections along the way. But preparing for and executing the takeoff first is different. Takeoff demands your full attention. And retirement works the same way. And year one is your takeoff. So the five decisions that collide in the first year include Social Security, your portfolio withdrawals, your Medicare premiums, estimated taxes, and Roth conversions. And they all connect through one planning question. Not how much income you show, but which pocket comes out of and in which calendar year it lands in. So if you're somewhere around 63 years old or you just retired, stay with me because I'm going to show you which of these decisions are flexible, which have a deadline, and how one perfectly reasonable choice in one spot can quietly create an expensive problem somewhere else. Now, what makes that first year different is this switch, because for decades your paycheck has done the heavy lifting. Money's shown up probably every two weeks, taxes were taken out before you ever saw it, and you spent what was left. The day you retire, that machine turns off. Used to feed the accounts, now the accounts need to feed you. And in this switch, you go from rather minimal control over your taxes to more control than you'll have at almost any other point in retirement. This is the stretch where you have the most room to steer, and most people unfortunately put themselves on autopilot. So before we get into these five topics, hold on to this one idea. Because all five points is really the same problem wearing a different hat, such as how much income you show, which account you pull it from, and which year it hits your tax return. That's the whole game. So keep that in your head, and the rest of these five will be a lot simpler. So decision number one, Social Security timing. I'm referencing it first because of all five, it's the hardest and most expensive to walk back. The math can be simple to calculate because start at as early as possible at age 62, you're locking in only 70% of your full retirement benefit. At age 67, you're gonna get that full 100%. Hold out until age 70 and it climbs up to 124% of that benefit. It's the same person, same earning history, but that gap is huge. So where does this sit on the clock? It's different from the other decisions because no hard deadline forces your hand in this year. So you can take your time, but if you do claim earlier, it locks in that lower monthly amount for good with only narrow ways to reset it. So it's not about a clock, it's about the permanence of the decision. So how do you weigh this decision? The full answer is probably best answered in one of my other videos, but a good starting point is to weigh those numbers at 62, 67, and 70. Weigh those numbers against your health, how long folks in your family have lived, what other income sources you've got turning on, and the one that people underweight underweight the most is what would your spouse need if you were to die first? I've got no dog and the fight on the timing, but the right answer depends on all those factors. And once you've settled in and to your decision and the income starts, the next question is how to fund the rest of your retirement, which leads us to decision number two, where your paycheck comes from. Because when the real paycheck stops, you got to cut yourself a new one. And the question immediately becomes which account to pull from. Because your Nesteg comprises of up to three tax buckets. It's your taxable bucket, like a brokerage account where you've already paid tax on what you've put in, and just what you get taxed going forward are the dividends, interest, and any gains you'll have along the way. Your next bucket is the tax-deferred one, where the 401k or IRA, for example, has every dollar coming out taxed as traditional income. And then third of all is your tax-free bucket, the Roth, where qualified withdrawals come out clean. The good news is this decision is adjustable. You don't you can change where your paycheck comes from each month or each quarter if you need it as the retirement takes shape. So you don't need to nail it on day one. But the order still matters a lot. So you might ask, how do you start to think about it? I would suggest looking at what your life actually costs each month, obviously. Subtract any guaranteed income sources such as Social Security, maybe a pension, and whatever the gap is, is what you need to make up. The decision becomes which of those buckets you're going to pull from because each one lands differently on your tax return. Pull from the wrong account at the wrong time, and you can be paying much more or much sooner than you needed to. What most people overlook when making this decision is that it doesn't just affect your tax bill, but other costs in your plan as well, which brings us to the one that almost no one sees coming. Decision number three are your Medicare premiums that follow your income. When you go on Medicare at 65, what you pay for it isn't the same as everybody else. It's tied to your income. So you might think you'll just switch up your income in the year that you start Medicare, but the government's already one step ahead of us. In fact, they're two steps ahead of us. Medicare is looking back at what your income was two years ago. So the income on your tax return in this year, 63 years old, sets your Medicare premiums two years later when you start Medicare at 65. The higher your income, the more IRMA, income-related monthly adjustment amount, can spike your Medicare premiums, meaning you pay more for the exact same coverage. And it hits both part B, your doctor coverage, and part D, your prescription coverage. I'll show you an example of how this works. Let's assume our friend, we'll call him David, retires at 63 a couple years back, with most of his $2.5 million sitting in his 401k. He's on Medicare now, but in the year that he retired, he did three reasonable things. He took withdrawals to fund his income needs. His deferred comp happened to pay out, and he read that a Roth conversion was smart, so he pulled the trigger on that. Each one makes sense on their own, but watch what they do when they're stacked together. He starts with $120,000 in deferred comp. He takes another $80,000 in withdrawals, and then he does around $100,000 Roth conversion. Plus, he forgets that he has around $50,000 of income counted from his dividends and interest and some consulting work he does on the side. Add that all up, he's quickly at about $350,000 of income, and it tips him past a key marker of Irma. Now watch what it does. You can see how he quickly reached to about $350,000 of income, tipping him past a key line item in the IRMA thresholds. Under the 2026 Medicare table, that tier takes his Part B Medicare premium from a little over $200 a month up to $527 a month each. And that's just Part B premium surcharges. That same tier will tack on about $60 more each per month for their Part D drug coverage. All this is for the exact same Medicare coverage. So you can tell pretty quickly how these decisions start arriving at the same intersection, your tax return, and without coordinating them, you're looking for a recipe for collisions. Creating clarity out of this tax chaos is the type of thing I sit down with and map out with couples heading into this home stretch. So there's a link in the description below if you'd like to connect and talk through yours. Now, the next deadline that quietly catches up with people is right after the paycheck stops, which is decision number four, paying your own taxes. It's subtle, but it commonly surprises people in their first year of retirement. Again, your whole working life, your employer pulled taxes out of each paycheck before you got it. You didn't have to think about it. But the day you retire, that safety net goes away, and the IRS still wants you to pay your own taxes throughout the year, not just at the end. This goes back to how your retirement income is created. Social Security will sometimes withhold those taxes for you, but make sure if they are that you're elected to withhold enough as well as from IRA withdrawals. People commonly withhold too little or worse, unknowingly send the IRS too much as a tip. Withdrawals from a brokerage account can be the most complicated to figure out for your taxes of all, because the gains from that account will have payments due for taxes in April, June, September, and the following January. You miss them and you may be subject to a penalty on top of those taxes. So how can you actually figure out how much you need to pay along the way? At a high-level surface, the goal is to cover at least 90% of this year's tax, and with those for an AGI over $150,000, 110% of your prior year tax bill. Now, this isn't financial advice. Be sure to consult a financial professional to be sure for your situation. It may feel like a headache that you just want to ignore all this tax payment nonsense, but unfortunately, the IRS has a pretty good memory and will catch up with you if you don't figure it out sooner than later. Now, decision number five, the Roth conversion window. And this is the one that many retirees get most excited about. But a quick reframe because a lot of people get it backwards. Many assume that they'll be in a lower tax bracket for their whole retirement. And for many of you, the opposite might be true. Because if most of your money sits in a tax-deferred bucket like the 401k or IRA, you're probably sitting on a ticking tax time bomb. Because at 75, the government's going to force you to start pulling it out whether you need it or not, and stacked on top of things like your Social Security, it can push you right back up into a high bracket in your 70s and 80s, with nothing you can do about it. So the opportunity hiding in this early window is this. Before your Social Security starts and those forced withdrawals begin, you often have unused room in those lower tax brackets. That makes it one of the best windows you'll get to move money from the tax-deferred expensive bucket into the tax-free Roth bucket. Pay the tax now at today's rate instead of the higher one. It's kind of like paying tax on the seed instead of on the orchard that you want to then harvest. But, and this matters, it's not just a bet on tax rates. A higher rate later makes the case even stronger. But even at a similar rate, a conversion can still pay off because shrinking those forced withdrawals down the road and by keeping the spouse who's left from getting pushed into a higher tax bracket when they're filing single. That's exactly why it's a decision you model, not just assume you'll figure out as you go. Now, as you might imagine, you can't just convert as much as you want in Roth. If you do too much, you're going to trip up into higher and more expensive tax brackets, as well as spiking those Irma surcharge premiums on your Medicare. And once Social Security is turned on, too much of it makes even more and more of your Social Security benefits taxable. If it's starting to feel a bit dizzying, you're not alone. I like to compare all these decisions like different facets of a Rubik's Cube. You turn one side to fix a problem, you're going to find that three other sides move. And this is the thread that I named at the start. Every one of these five decisions are really the same handful of questions, such as how much income should you show, which pocket does it come from, and which gear should you have it land in? If you get these right on purpose, these five decisions will all fall in line. If you leave the decisions on autopilot or wait to figure it out until the last minute, they're going to land all up on top of each other. So what does this actually look like when you sit down to coordinate the strategy? I find it simple to think of it like a checklist. You don't have to run it perfectly. It's just good to approach it in this order. So first, I'd suggest listing everything that's scheduled to hit your tax return in that first year of retirement. Your final pay, many severance, maybe some pension income, deferred comp. That's your fixed income floor, and you need to build up around it. Second, figure out the spending gap your portfolio needs to cover. And then third, test whether Social Security should start, survivor protection included. Fourth, decide which of your accounts you're going to pull that spending gap from and see how those withdrawals move your tax bracket and your Medicare income. Fifth, test how much Roth conversions, if any, actually improves the picture. And finally, make sure that you have the appropriate withholding or estimated taxes to cover your bill. Now, if you've watched this far, it's clear that you want to get all these things right. So let me hand you a simple way to gauge whether you actually stand. If you've hired an advisor and he or she have not walked you through these five facets on their own before you ever had to ask, that's maybe just a yellow flag. But when you do bring them up and you might get just a blank stare or a cookie cutter answer, that's a red flag. Because coordinating these decisions is exactly the thing that should be on their radar. And none of that's not a knock on you. It just means the most important year of your financial life is where you want to be sure that somebody's actually mining all at once. And I'll be honest, I'm not a fit for everyone to help coordinate that. If you're just looking for someone to help pick your investment funds, that's not what we do for clients. But if you'd rather sit down and map out all the moving pieces of your plan in a coordinated sense, that's the work we do. You can click the link in the description or book a call with a QR code on screen to get started. The first call is really just to figure out whether the retirement readiness roadmap we build for clients is right for your situation or not.