Retirement changes a lot more than where your paycheck comes from.
For years, you have been saving money, contributing to retirement accounts and getting used to a paycheck showing up every couple of weeks. Then retirement arrives, the paycheck stops, and suddenly you have to start using the money you spent decades building.
That transition can feel strange even when you are financially prepared.
In this video, I walk through four things I think are especially important as you get close to retirement: knowing what you actually spend, understanding how your investments and Social Security fit together, having a plan for taxes, and thinking about what you will actually do with your time.
Know what you actually spend before you retire
You do not necessarily need a detailed retirement budget with every streaming service, restaurant meal and utility bill listed separately.
But you should know what you are actually spending.
One simple way to get there is to look at the checking account where your paycheck is deposited and most of your bills are paid.
Look at the starting balance, add everything that was deposited during the period, and subtract what was left at the end. Then adjust for money that was simply transferred into savings and for large expenses that only happen once or twice a year.
Ideally, look back over a full year so you capture irregular expenses such as property taxes, insurance, vacations and other larger purchases. If that feels like too much, even three to six months can give you a useful starting point.
There are also expenses that may change when you retire.
Health insurance is a big one. Before age 65, that could mean coverage through the health insurance marketplace or COBRA. At 65 and beyond, Medicare becomes part of the picture.
You may also want to intentionally plan for more travel or other spending during the first several years of retirement.
The goal is not simply to cut spending. It is to know what your retirement actually costs so you can see whether your plan supports the life you want to live.
Coordinate Social Security with your investment portfolio
Once you know what you want to spend, the next question is where that money is going to come from.
Social Security, pensions and investment withdrawals all work together.
The age you start Social Security can have a significant effect on how much you need to withdraw from your portfolio during the first few years of retirement.
For example, suppose a couple has $1.5 million invested and wants to spend $12,000 per month.
If Social Security provides $6,000 per month, the portfolio needs to provide the other $6,000. That works out to about $72,000 per year, or roughly 4.8% of a $1.5 million portfolio.
But if they delay Social Security for three years, the portfolio may need to provide the entire $12,000 per month during that period.
That is $144,000 per year, almost a 10% withdrawal rate.
That does not automatically mean delaying Social Security is a bad decision. It simply means the investment plan needs to account for the additional withdrawals during those bridge years.
One approach may be to keep some of the money you know you will need during those first few years in cash, short-term Treasuries or other relatively stable investments. That way, a market decline does not necessarily force you to sell stocks at a bad time just to pay your monthly expenses.
Have a plan for taxes after the paycheck stops
Retirement also means you become your own payroll department.
While you were working, your employer generally handled tax withholding automatically. In retirement, your income may come from several different places, and withholding may work differently for each one.
Social Security does not automatically withhold federal income tax unless you request it. With IRA withdrawals and pension payments, you generally choose how much you want withheld.
The important question is fairly simple:
How much tax are you likely to owe this year, and are you paying roughly that amount along the way?
One reason I like using withholding is that it can function much like the withholding from a paycheck.
There is another useful feature as well. Federal tax withholding is generally treated as though it were paid evenly throughout the year, even if the withholding occurs later in the year. That can sometimes make withholding from an IRA distribution useful when adjusting taxes closer to year-end.
This is why I like running tax projections during retirement rather than simply waiting until the tax return is prepared the following spring.
Think about what your Mondays will look like
This last one has nothing to do with investment returns or tax brackets.
What are you actually going to do when you retire?
Some people retire and tell me they are so busy they cannot imagine how they ever had time to work.
Others find the transition harder than they expected.
For decades, work may have provided structure, routine, social interaction and a reason to get up at a particular time each morning. Retirement can change all of that overnight.
So think about your first Monday morning when the alarm does not go off.
Then think about the Monday after that.
Travel may be part of retirement, but most of retirement is not vacation. It is everyday life.
What will give your days structure? What will you enjoy doing? Who will you spend time with? What gives you a sense of purpose?
Retirement is a financial transition, but it is also a lifestyle transition.
Start putting the pieces together before you retire
Ideally, these decisions start coming together several years before retirement.
Know what you spend. Understand where your income will come from. Coordinate Social Security with your investment withdrawals. Have a plan for taxes. And give some thought to what life will actually look like once work is no longer filling most of your week.
If retirement is getting close and you have not worked through all of this yet, now is a good time to start.
And if you do just one thing, pull up your bank account and figure out what you are actually spending.
Not for your financial planner.
For you.
Knowing that number is one of the first steps toward understanding what your retirement will really cost and whether you can spend your money with confidence.