I’ve been a CPA since 1981, and before I founded MoneyTalksNews I spent more than 10 years as an investment advisor on Wall Street. In all that time, the retirement decisions that did the most damage weren’t made at 45 or at 75. They were made in a narrow window: the five years or so on either side of the last paycheck.
Get the decisions in that window right and the next 30 years get easier. Get them wrong and you can lock in a six-figure mistake before you’ve cashed your first Social Security check.
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Same Average Return, $239,000 Apart
Here’s the risk most retirement statements never show you. Take two retirees. Each starts with $1,000,000 and withdraws $50,000 at the start of every year. Over 10 years, both earn exactly the same returns: two bad years (down 20% and down 10%), one modest year (up 5%) and seven good years (up 8% each). The only difference is the order.
- Retiree A gets the bad years first. After 10 years: about $578,000.
- Retiree B gets the bad years last. After 10 years: about $818,000.
Same returns. Same withdrawals. A gap of roughly $239,000. (This is a simplified hypothetical illustration, not a prediction or a guarantee of any return.) Planners call it sequence-of-returns risk. When you’re still working and adding money, a bad year early on hurts less. When you’re withdrawing, a bad year forces you to sell more shares at low prices, and those shares aren’t there for the recovery.
Is your plan built for a bad first year? A fiduciary advisor can stress-test your withdrawal plan against the order of returns, not just the average. Matching is free, takes about 10 minutes, and you decide whether and when to talk to anyone. Find a fiduciary advisor who works with retirees
Three Decisions That Collide Around 62
1. When to claim Social Security. For anyone with a full retirement age of 67, claiming at 62 pays 70% of your full benefit, while waiting until 70 pays 124%. That means the check at 70 is about 77% larger than the check at 62, for life, with cost-of-living adjustments on top. For a married couple, the higher earner’s claiming age also sets the survivor benefit. This decision is hard to undo once you’ve made it.
2. Which accounts to draw from first. Withdrawals from traditional IRAs and 401(k)s are taxed as ordinary income. Required minimum distributions now start at 73, or 75 for people born in 1960 or later. The years between your last paycheck and your first RMD are often a low-tax window for Roth conversions or for drawing down taxable accounts. Use that window well and you may shrink the tax bill your 401(k) is carrying. Skip it and that bill can land all at once, in your 70s.
3. How to cover health care before Medicare. Medicare starts at 65. Retire at 62 and you need three years of coverage from somewhere, and the income you report can affect what you pay for marketplace insurance.
Each of these decisions affects the other two. That’s why they’re so easy to get wrong when you make them one at a time.
These three decisions interact. Compare fiduciary advisors in your area before you lock any of them in.
What Well-Prepared Retirees Do Differently
The retirees I’ve seen come through this window in good shape tend to share a few habits:
- They keep a cash cushion. One to two years of spending in cash or short-term bonds means a down market doesn’t force them to sell stocks at a loss.
- They write down a withdrawal plan. Which account, how much and in what order, reviewed every year.
- They decide on Social Security as a household. Spouses know the plan, including what happens to income when one of them dies.
- They get a second opinion before the window closes. Not a sales pitch: a review from someone legally required to act in their interest.
How to Choose an Advisor
Look for a fiduciary, an advisor legally obligated to put your interests ahead of their own. Then ask three questions, and expect clean answers:
- How are you paid, and what will I pay you each year in dollars?
- How would you plan my withdrawals to manage sequence-of-returns risk and taxes?
- When would you recommend my spouse and I claim Social Security, and why?
If you don’t have an advisor, a matching service can save you the legwork. SmartAsset’s free service, for example, matches you with fiduciary advisors who work with people in your situation. SmartAsset provides matching, not financial advice. Here’s what to expect so there are no surprises:
- A questionnaire of roughly 37 questions that takes about 10 minutes, covering your age, retirement timeline, assets, income and goals
- A request for your phone number near the end. You control whether and when you respond to anyone.
- No cost and no obligation. Nearly all matched advisors offer a free first appointment.
- The service is designed for people with at least $100,000 in investable assets. More than 2 million people have used it.
Get a fiduciary’s second look before you retire. Answer about 10 minutes of questions and get matched with fiduciary advisors who specialize in clients like you. Free, no obligation, and you decide whether and when to respond. More than 2 million people have used the service. Get matched with a fiduciary advisor
The Bottom Line
In my hypothetical, the order of returns alone was worth about $239,000 in a decade. Add a Social Security claim that leaves a 77% larger check on the table, or a tax bill that arrives all at once in your 70s, and the cost of getting this window wrong can run well into six figures. The retirees who come through it well don’t guess. They make these decisions together, in writing, with someone obligated to act in their interest, before the window closes.
About 10 minutes. Free. No obligation. Get matched with a fiduciary advisor
This article is for general information and is not individual investment, tax or legal advice. Hypothetical examples are for illustration only.
MoneyTalksNews is an independent personal finance publisher. We may earn a referral fee from partner services at no cost to you. Our editorial recommendations are based on merit, not compensation.
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