How Much Do You Need to Retire?

By Michael Ruger, CFP®
Partner and Chief Investment Officer at Greenbush Financial Group

“How much do I need to retire?”

As Certified Financial Planners, this is probably one of the most common questions we hear from individuals who are approaching retirement. It is also one of the most difficult retirement questions to answer with a simple number.

You have probably heard some of the popular rules of thumb. You need $1 million to retire. Or maybe $2 million. Perhaps you have heard that you need to save 10 times your salary or accumulate enough investments to replace a certain percentage of your pre-retirement income.

While these retirement savings benchmarks can provide a starting point, they can also be misleading. From our experience building financial plans for individuals and families, there simply is not one retirement savings number that works for everyone.

One person may be able to retire comfortably with $400,000. Another household may need $1 million. Someone else may need $5 million or more to maintain the lifestyle they want.

Why is there such a big difference?

When determining how much money you need to retire, two variables tend to have an enormous impact:

• How much you expect to spend each year in retirement

• How much recurring income you expect to receive from Social Security, pensions, employment, and other sources

Once you understand those two numbers, you can begin estimating how much your investment portfolio may need to provide throughout retirement.

How Much Will You Spend in Retirement?

Before asking, “How much money do I need to retire?” we believe there is another question that needs to be answered first:

How much will you actually spend each year after you retire?

When we prepare financial plans for clients, we often go through retirement expenses line by line. That means looking beyond the big expenses and accounting for everything from property taxes and groceries to vacations, utilities, car insurance, home repairs, medical insurance, gifts, and entertainment.

Why get that detailed?

Because it is surprisingly easy to overlook smaller expenses. Forget one $500 monthly expense and it may not seem significant. Forget five or six of them, however, and suddenly your retirement spending estimate could be thousands of dollars per year below what you will actually need.

Retirement planning becomes much more useful when it is built around how you actually expect to live rather than a generic percentage of your current salary.

Your Expenses May Change After You Retire

Another important consideration is that your spending at age 65 may look very different from your spending at age 55.

Some expenses may decrease. If your children have moved out of the house, your grocery bill may be lower. Your mortgage may be paid off. You will no longer be contributing to a 401(k), and expenses associated with commuting to work may disappear.

Other expenses could increase.

Many new retirees spend more on travel, hobbies, entertainment, and dining because they finally have the time to enjoy them. Healthcare costs can also become a larger part of the household budget as retirement progresses. If you plan to relocate, downsize, purchase a second home, or make major improvements to your existing home, your housing expenses could change significantly as well.

This is why we generally want to know a household's expected after-tax annual spending when evaluating whether they have enough money to retire.

The relationship is fairly straightforward: the more you plan to spend, the more income your retirement plan needs to produce and, all else being equal, the more assets you will generally need.

Don't Forget About Inflation in Retirement

One of the biggest mistakes you can make when estimating how much you need for retirement is assuming today's expenses will remain unchanged.

They won't.

The price of groceries, utilities, insurance, healthcare, travel, and most other goods and services tends to rise over time. For planning purposes, assume that a household currently needs $80,000 per year after taxes and we model those expenses increasing by 3% annually.

After 10 years, that household would need approximately $107,500 per year to purchase what $80,000 buys today.

After 20 years, the number would be approximately $144,500 per year.

Nothing about the family's lifestyle necessarily changed. They may be buying essentially the same goods and services. Inflation simply increased the number of dollars required to maintain that lifestyle.  This becomes especially important because retirement can last 20, 30, or even 40 years. A retirement plan that works at age 65 based on today's expenses may not necessarily work at age 85 unless inflation has been incorporated into the projections.

It is also important to recognize that inflation does not occur at exactly 3% every year. Some years will be higher and some will be lower. A 3% assumption is simply an example of how inflation can be modeled in a long-term financial plan.

Pensions Can Dramatically Change How Much You Need to Retire

Once you have estimated your expenses, the second major part of the equation is determining your retirement income.  This is where two households with identical lifestyles can require dramatically different amounts of retirement savings.

Some retirees are fortunate enough to have a pension through a former employer. This is still relatively common among certain teachers, state and local government employees, and workers who spent their careers with employers that maintained traditional pension plans.

For example, assume someone expects to receive a $50,000 annual pension for life. That $50,000 of recurring income can substantially reduce the amount that needs to be generated from 401(k)s, IRAs, brokerage accounts, and other investments.

Compare that with someone who has the exact same annual expenses but no pension. That person's investment portfolio may have to produce substantially more income every year.

This is one reason why asking whether $1 million is “enough” to retire does not provide enough information to answer the question.  For one household, $1 million combined with a significant pension may provide more than enough resources to support its desired lifestyle. For another household without a pension and with higher spending needs, $1 million may be insufficient.

Social Security Is Another Important Retirement Income Source

For many retirees, Social Security represents another important source of recurring retirement income.  Depending on when you retire and when you claim Social Security, those two dates may not be the same. Someone could retire from work at age 62 but decide to wait several years before beginning Social Security. That creates a temporary period in which investments or other income sources may need to cover more of the household's expenses.

Social Security also has an important inflation-related feature. Benefits generally receive annual cost-of-living adjustments, or COLAs, when the applicable inflation measure increases. Those adjustments are intended to help protect the purchasing power of Social Security benefits over time. That can make Social Security different from a pension that does not include a cost-of-living adjustment. A fixed $40,000 pension may feel substantial at the beginning of retirement, but its purchasing power can gradually decline as prices increase.

For this reason, it is important to know not only how much pension income you will receive, but also whether the pension includes an inflation adjustment.

An Example: Susan Retires With a Pension

Let's look at a hypothetical example. 

Assume Susan is preparing to retire and expects to spend $70,000 per year after taxes. 

Susan was a teacher and expects to receive a pension of approximately $40,000 per year. She also expects to receive approximately $25,000 per year from Social Security once she begins collecting benefits.

At first glance, you might add the two numbers together:

$40,000 pension + $25,000 Social Security = $65,000 of annual income.

Since Susan spends $70,000, you might conclude that she only needs to withdraw another $5,000 from her investments.

But there is an important issue missing from that calculation:

Taxes.

Retirement Income and Retirement Spending Are Not the Same Number

When we talk about retirement expenses, we are generally interested in the dollars available to actually pay those expenses.

If Susan needs $70,000 deposited into her checking account during the year to support her lifestyle, she may need more than $70,000 of gross income to produce that amount after federal and potentially state income taxes.

Pension payments can be fully or partially taxable depending on the pension and the participant's basis in the plan. Social Security benefits may also be partially taxable depending on the retiree's overall income. Distributions from traditional IRAs, 401(k)s, and similar pre-tax retirement accounts are generally subject to ordinary income tax, while qualified Roth distributions can receive different tax treatment.

For that reason, simply adding your pension, Social Security, and retirement account withdrawals together without accounting for taxes can significantly distort your retirement projection.

Suppose Susan needs approximately $80,000 of gross income to produce her desired $70,000 of spendable income. The exact amount would depend on her tax situation, deductions, account types, state of residence, and other factors, but the example illustrates why taxes need to be incorporated into the retirement plan.

Now Compare Susan With Scott

Let's compare Susan with another hypothetical retiree named Scott.

Scott also wants $70,000 per year after taxes to support his retirement lifestyle.

Like Susan, Scott expects approximately $25,000 per year from Social Security. However, unlike Susan, Scott does not have a pension.

That difference is significant.

Susan has $40,000 of additional recurring pension income helping to support her lifestyle every year. Scott has to replace that missing income from somewhere else, which will most likely mean taking larger withdrawals from his 401(k), IRA, brokerage account, or other investments.

Even though Susan and Scott want exactly the same lifestyle and have the same annual expenses, Scott may need substantially more retirement assets than Susan. This illustrates why there is no universal answer to the question, “How much money do I need to retire?”  Your required retirement savings are determined by the gap between what you plan to spend and the reliable income sources available to help pay those expenses.

Think About Your Retirement Income Gap

One useful way to begin thinking about retirement is to calculate your retirement income gap.

For example, imagine a household needs $100,000 per year of gross income to support its lifestyle and taxes.  If Social Security and pensions provide $70,000 per year, the household has approximately a $30,000 annual income gap that needs to be filled by investments or other sources.

Now consider another household with the exact same $100,000 income requirement but only $30,000 of Social Security and no pension. That household has approximately a $70,000 annual income gap.  Those two households may need very different amounts saved for retirement even though they maintain exactly the same standard of living.

Importantly, you cannot simply multiply the income gap by the number of years you expect to live. A comprehensive retirement projection should consider investment returns, inflation, taxes, the timing of withdrawals, the types of accounts being used, and how long the assets may need to last.

Part-Time Work Can Reduce the Amount You Need From Investments

Part-time income is also becoming an increasingly important part of retirement planning.

Not everyone wants to stop working completely on the day they retire from their primary career. Someone might leave a full-time position at age 60 and continue consulting, teaching, working seasonally, or pursuing another part-time job for the next five or ten years.  That income can have a meaningful impact on a retirement plan.

Assume someone retires at age 60 and earns $30,000 per year from part-time work until age 67. Those earnings could reduce the amount that needs to be withdrawn from investments during the first seven years of retirement.  That can be particularly valuable because the early years of retirement can be a sensitive period for an investment portfolio. Reducing withdrawals may allow more of the portfolio to remain invested and potentially continue growing.

Part-time income can also serve as a bridge between the date you retire and the date you begin Social Security, a pension, or other retirement benefits.

What About an Inheritance?

Expected inheritances may also factor into a long-term financial plan, but they should generally be approached cautiously.  For example, an individual may have parents with substantial assets who are spending considerably less than their retirement accounts and other investments are generating. It may appear likely that some of those assets will eventually pass to their children.

However, there are significant uncertainties associated with an inheritance. The timing is unknown. The amount can change. Parents may encounter substantial healthcare or long-term-care expenses, investment values may fluctuate, estate plans can change, and other unexpected events can occur.  For that reason, an inheritance can be incorporated into financial planning scenarios when appropriate, but it may make sense to also evaluate whether the retirement plan works without relying heavily on that future inheritance.

If the plan succeeds without the inheritance, the eventual inheritance may simply create additional financial flexibility later.

So, How Much Do You Actually Need to Retire?

This brings us back to the original question.

Is $500,000 enough to retire?

Is $1 million enough?

Do you need $2 million?

The answer depends on your individual financial picture.  Someone spending $60,000 per year who receives a substantial pension and Social Security may require far fewer investment assets than someone spending $150,000 per year who has no pension.  Instead of beginning with an arbitrary retirement savings target, we generally believe the more useful approach is to work through the retirement equation in the opposite direction.

First, estimate how much you expect to spend after taxes each year. Then account for inflation and changes in expenses throughout retirement. Next, identify your expected income from Social Security, pensions, part-time work, rental properties, and other recurring sources. Determine how much of the remaining need must be supported by your investment portfolio.

From there, a retirement projection can evaluate whether your 401(k)s, 403(b)s, 457 plans, IRAs, Roth IRAs, brokerage accounts, cash, and other assets appear capable of supporting those withdrawals over your expected retirement.

That analysis should also account for taxes, investment returns, inflation, healthcare expenses, changes in income sources, and the possibility of living longer than expected.

Retirement Planning Is About More Than Reaching a Number

The question “How much do I need to retire?” sounds as though it should have a simple numerical answer.  But retirement planning is not really about reaching one magic account balance.  It is about determining whether the resources you have accumulated can reliably support the lifestyle you want for the rest of your life.

Two people can retire on the same day with the same amount in their 401(k)s and have completely different financial outcomes because their expenses, pensions, Social Security benefits, taxes, investment allocations, and retirement goals are different.

That is why detailed retirement planning can be so valuable. Instead of relying on a generic benchmark, a financial plan allows you to test your actual numbers and answer more useful questions: What happens if you retire two years earlier? What if inflation is higher? What if you delay Social Security? What happens if you spend more on travel during your first ten years of retirement? What if the market declines shortly after you retire?

Ultimately, the amount you need to retire is the amount required to support your retirement—not someone else's.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions About How Much You Need to Retire

1. How much money do I need to retire comfortably?
   There is no single amount that everyone needs to retire comfortably. The answer depends heavily on your annual spending, Social Security benefits, pension income, taxes, retirement age, investment portfolio, and how long your retirement assets may need to last. Someone with modest expenses and a large pension could potentially retire with substantially fewer investments than someone with high expenses and no pension. A retirement projection based on your expected cash flows provides a more useful answer than a generic savings target.
2. Is $1 million enough to retire?
   For some retirees, $1 million may be more than enough, while for others it may not be enough. If you have $1 million saved, low annual expenses, Social Security, and a substantial pension, your retirement income gap may be relatively small. If you have the same $1 million but spend significantly more each year and have no pension, your portfolio may need to support much larger withdrawals. Whether $1 million is enough to retire depends on the income that your investments need to replace.
3. Is $500,000 enough to retire?
   It can be, depending on your circumstances. A retiree with $500,000 who receives a pension and Social Security and has relatively low expenses may have a very different retirement outlook from someone with $500,000 who needs their portfolio to provide most of their income. Retirement age is also important because retiring earlier generally means your assets need to support a longer retirement.
4. How do I calculate how much I need to retire?
   Start by estimating your annual retirement expenses after taxes. Next, identify expected recurring income sources such as Social Security, pensions, rental income, and part-time employment. The difference between your spending needs and recurring income represents the amount that generally must be supported by your savings and investments. A comprehensive calculation should then incorporate inflation, taxes, expected investment returns, account types, retirement age, and longevity rather than simply multiplying the annual shortfall by a fixed number of years.
5. How much should I budget for expenses in retirement?
   A retirement budget should reflect the lifestyle you actually expect to maintain rather than relying exclusively on a percentage of your current salary. Review housing, property taxes, food, utilities, insurance, transportation, healthcare, travel, entertainment, gifts, home maintenance, and other recurring expenses. Also account for expenses that may disappear after retirement and expenses that could increase. Building a detailed retirement budget is one of the most important steps in determining how much you need to save.
6. How does inflation affect how much money I need for retirement?
   Inflation increases the cost of maintaining your lifestyle over time. At a hypothetical 3% annual inflation rate, $80,000 of annual expenses today would grow to approximately $107,500 after 10 years and about $144,500 after 20 years. Because retirement can last several decades, even moderate inflation can substantially increase your future income needs. This is why retirement planning should generally model expenses increasing over time rather than remaining flat.
7. Do I need less money to retire if I have a pension?
   Generally, a pension can reduce the amount of income that needs to come from your investments. If two retirees have identical expenses but one receives a $50,000 annual pension and the other does not, the retiree without the pension may need to withdraw substantially more from retirement accounts each year. However, pension taxation, survivor benefits, and whether the pension has a cost-of-living adjustment should also be considered.
8. How does Social Security affect how much I need to save for retirement?
   Social Security can reduce the amount of annual income your investment portfolio needs to generate. The timing of your Social Security claim is also important because retiring before beginning benefits can create an income gap that needs to be funded from savings or other income. Social Security benefits can receive cost-of-living adjustments, which can help offset some of the impact of inflation over a long retirement.
9. Should taxes be included when calculating how much I need to retire?
   Yes. Taxes can have a significant impact on retirement cash flow. Withdrawals from traditional IRAs and many employer retirement plans are generally taxable, pension income may be fully or partially taxable, and a portion of Social Security benefits may be taxable depending on your income. Roth accounts and taxable brokerage accounts can have different tax treatment. Retirement planning should therefore focus on how much spendable, after-tax income you need rather than looking only at gross distributions.
10. What is the best way to determine if I have enough money to retire?
    A detailed retirement income projection can help determine whether your assets and expected income sources are sufficient to support your desired lifestyle. The analysis should incorporate your annual expenses, inflation, Social Security, pensions, investment accounts, taxes, expected returns, healthcare costs, retirement age, and longevity. It can also be helpful to test different scenarios, such as retiring earlier, delaying Social Security, experiencing lower investment returns, or increasing retirement spending. This provides a much more individualized answer than relying on a rule of thumb such as needing $1 million or $2 million to retire.

Can You Afford to Retire at Age 60?

By Michael Ruger, CFP®
Partner and Chief Investment Officer at Greenbush Financial Group

Retiring at age 60 sounds pretty good.

You have reached a point where you may have accumulated significant savings in your 401(k), IRA, brokerage accounts, and other investments. Your mortgage may be paid down or close to being paid off. The kids may be out of the house. After working for several decades, you may finally be ready to spend more time traveling, pursuing hobbies, visiting family, or simply enjoying a schedule that isn't dictated by work.

But can you actually afford to retire at age 60?

The answer is going to be different for every household. Retiring at 60 can absolutely be achievable, but retiring before age 65 typically requires some additional planning. One of the biggest reasons is healthcare. Most people do not become eligible for Medicare based solely on age until 65, which potentially leaves a five-year period during which you need another source of health insurance.

At the same time, Social Security retirement benefits cannot generally begin until age 62, and claiming at 62 permanently reduces your monthly benefit compared with waiting until your full retirement age. For people born in 1960 or later, full retirement age is 67.

This creates what we might call the age-60 retirement bridge.

If you retire at 60, you need a plan for getting from age 60 to Medicare at 65, a strategy for when to begin Social Security, and enough income and investments to support your lifestyle potentially for several decades.

When evaluating whether you can afford to retire at 60, some of the most important questions include:

• How will you obtain health insurance between age 60 and Medicare eligibility?

• What will your annual after-tax expenses be?

• How will inflation impact those expenses over a potentially long retirement?

• When should you claim Social Security?

• What pensions, part-time income, or other income sources will you have?

• How much will you need to withdraw from your retirement accounts?

• How will taxes impact the amount you actually have available to spend?

Let's walk through each of these areas.

Healthcare May Be the Biggest Challenge When Retiring at 60

For many people who want to retire at age 60, healthcare is one of the first issues we address in the financial plan.

Medicare generally becomes available at age 65 for people who qualify based on age. That means someone retiring at 60 could potentially have approximately five years in which they need another source of health insurance.

Those five years matter.

If health insurance costs $1,000 or more per month, that expense can significantly change the amount you need to withdraw from your retirement accounts. It can also affect your tax planning because the income you recognize during those years may influence the financial assistance available for certain Marketplace plans.  Fortunately, there are several potential health insurance options for early retirees.

Option #1: Health Insurance Through Your Spouse's Employer

One of the simplest situations occurs when one spouse retires at 60 while the other spouse continues working.  The retiring spouse may be able to obtain health insurance through the working spouse's employer-sponsored plan. Losing other health coverage can provide a special enrollment opportunity for an employer's group health plan, subject to applicable enrollment rules and deadlines.

However, don't assume the cost will be the same as what the working spouse is currently paying.

An employer might heavily subsidize coverage for its employees but provide a smaller subsidy for spouses or other dependents. Adding a spouse could therefore increase the monthly premium substantially.  Before submitting your retirement paperwork, ask the working spouse's employer for the actual cost of family or employee-plus-spouse coverage. Also review deductibles, copays, provider networks, prescription coverage, and out-of-pocket maximums.

If adding the retiring spouse costs an additional $800 per month, for example, that represents $9,600 of additional annual expenses that should be included in the retirement plan.

Option #2: Retiree Health Insurance Through Your Former Employer

For someone retiring before 65, employer-sponsored retiree health coverage can be extremely valuable.

Although not every employer offers it, some organizations provide healthcare benefits to eligible retirees after they leave employment. Depending on the plan, coverage might continue until the retiree becomes eligible for Medicare, or benefits could continue in some form beyond age 65.

The important point is that retiree health plans vary significantly.  One employer may subsidize most of the premium. Another may require retirees to pay a significant portion of the cost. Plans can also differ in deductibles, networks, prescription coverage, dependent coverage, and what happens once the retiree becomes eligible for Medicare.

If retiree health insurance is available to you, request the plan documents before you select a retirement date.  You want to know exactly what you will pay, how premiums can change, whether your spouse is covered, and what happens at age 65. Those numbers should then be incorporated directly into your retirement projections.

Option #3: COBRA Coverage

COBRA can provide another potential bridge for someone leaving an employer before becoming eligible for Medicare.  Under federal COBRA rules, eligible employees who retire or otherwise leave employment can generally continue their employer-sponsored health insurance for up to 18 months following the qualifying event. Certain circumstances can result in longer continuation periods.

The advantage is continuity. You can generally keep the same coverage you had immediately before leaving the employer.  The disadvantage can be the cost.

While you were working, your employer may have been paying a significant portion of your health insurance premium without you really thinking about it. With COBRA, you generally become responsible for the full premium—the employee portion and the portion previously paid by your employer—plus a potential 2% administrative fee.  That can make COBRA surprisingly expensive.

However, COBRA may still be a useful planning tool for someone retiring closer to age 65.

For example, someone retiring at age 63½ may be able to use COBRA to help bridge much or all of the period until Medicare eligibility. Someone retiring at exactly 60, on the other hand, generally cannot rely on the standard 18-month COBRA period to cover the entire five-year gap.  That individual will likely need another healthcare solution after COBRA ends.

Option #4: Health Insurance Through the Marketplace

If you retire at 60 and don't have access to a spouse's employer plan or retiree health insurance—and COBRA isn't appropriate for the entire period—you may need to purchase individual health insurance through the Health Insurance Marketplace or an applicable state marketplace.

This is where retirement planning and tax planning can become closely connected.  Marketplace premium tax credits can reduce the cost of coverage for qualifying households, and eligibility and the amount of the credit depend in part on household information and estimated income.

That means your retirement income strategy could potentially influence your health insurance costs.

For example, imagine you retire at 60 with substantial balances in a traditional IRA and a taxable brokerage account. The amount and type of income you recognize during the year could affect your eligibility for Marketplace financial assistance.  This is one reason we don't look at healthcare planning, tax planning, and investment withdrawal strategies as three completely separate decisions. For an early retiree, they can interact with one another.

Depending on your location, age, household, income, and plan selection, unsubsidized Marketplace premiums can also be substantial. Instead of estimating the cost, research the plans available to you and incorporate realistic premiums, deductibles, and potential out-of-pocket costs into your financial plan.

Don't Just Budget for the Health Insurance Premium

Another mistake is looking only at the monthly premium.  Your actual healthcare budget may include premiums, deductibles, copays, prescription expenses, dental care, vision care, and other out-of-pocket medical costs.  Suppose you estimate that your health insurance premium will cost $12,000 per year. If you build your retirement projection using only that number, you may be understating your actual healthcare spending.

This is particularly important for someone retiring at age 60 because healthcare expenses don't disappear once Medicare begins at 65. The structure of the costs changes, but Medicare itself does not necessarily mean healthcare becomes free.

A good retirement projection should therefore model healthcare expenses both before and after age 65.

How Much Will You Spend If You Retire at 60?

Once healthcare is addressed, the next step is building a detailed retirement budget.  We generally want to go line by line.  That means looking at property taxes, mortgage payments, homeowners insurance, utilities, groceries, car payments, auto insurance, home maintenance, travel, entertainment, gifts, subscriptions, healthcare, and other recurring expenses.

This can be particularly important for someone retiring at 60 because some expenses that might disappear later in retirement may still exist.  You might still have a mortgage. You could still be financially helping children. You may be replacing vehicles. Perhaps you plan to travel extensively during the first decade of retirement because you finally have the time to do it.

Rather than assuming you will spend 70% or 80% of your pre-retirement income, build the budget around the life you actually expect to live. 

Inflation Has an Even Bigger Impact When You Retire Early

If you retire at 60, your retirement could potentially last 30 years or longer. That makes inflation an important variable.

For illustration, assume your household needs $80,000 per year after taxes at age 60 and we use a 3% annual inflation assumption.

Ten years later, you would need approximately $107,500 per year to maintain the purchasing power of that original $80,000.

Twenty years later, at age 80, you would need approximately $144,500 per year.  That doesn't necessarily mean your lifestyle became more expensive. It means that, using our hypothetical 3% assumption, the same goods and services gradually cost more.  Of course, inflation doesn't increase by exactly 3% every year. Some years it will be higher and some years lower. We are simply using 3% as a long-term financial planning assumption to illustrate how purchasing power can change.

The earlier you retire, the more years inflation potentially has to impact your expenses.

Social Security Creates Another Gap at Age 60

Another important consideration is that Social Security retirement benefits generally cannot begin at age 60.  The earliest age most individuals can begin Social Security retirement benefits is 62. However, filing at 62 means accepting a permanently reduced monthly benefit compared with waiting until full retirement age. For individuals born in 1960 or later, claiming at 62 can reduce the monthly retirement benefit by as much as 30% compared with the benefit available at full retirement age of 67.

This creates another planning decision.  If you retire at 60, should you begin Social Security immediately at 62?  Or should you use your retirement assets to fund your lifestyle for a few additional years and allow your Social Security benefit to grow?

There isn't one answer that works for everyone.

Your health, life expectancy, marital status, other income sources, investment assets, taxes, and overall retirement strategy can all factor into the decision.  The important point is that your retirement date and your Social Security filing date do not have to be the same.  You can retire at 60 and potentially wait until 62, 67, or later to begin Social Security. Your financial plan should model those different scenarios so you can understand the tradeoffs.

Retiring at 60 Could Also Affect Your Social Security Benefit

There is another Social Security consideration that can be easy to overlook.

Social Security retirement benefits are calculated using your highest 35 years of earnings. If you stop working at 60 and have fewer than 35 years of earnings, years with no earnings can reduce your benefit calculation. Even if you already have 35 years of earnings, continuing to work could potentially replace lower-earning years with higher-earning years.

For many people with long careers, this may not dramatically change the retirement decision. But it is worth checking your individual Social Security earnings record and projected benefit before selecting a retirement date.

Identify All of Your Income Sources

Once we know what you expect to spend, we can begin identifying the income available to pay those expenses. 

• If you have a pension, when does it begin?

• Can it begin at 60, or is there a reduction for starting it early?

• Does the pension have a cost-of-living adjustment?

• When will Social Security begin?

• Do you expect rental income or income from another source?

• Do you plan to work part-time?

Part-time work can be particularly helpful for someone retiring at 60. You may be finished with your primary career but still enjoy consulting, teaching, seasonal employment, or another flexible job. If you earn $20,000 or $30,000 per year for the first five years of retirement, that is money you potentially don't have to withdraw from your investments.

That can reduce pressure on the portfolio during the early years of retirement.

Your Investments Have to Cover Whatever Your Other Income Doesn't

Once your annual expenses and recurring income sources have been identified, we can determine how much needs to come from your assets.

Those assets could include:

• 401(k) and 403(b) accounts

• 457 plans

• Traditional IRAs

• Roth IRAs

• Taxable brokerage accounts

• Cash and savings

• Other investment assets

Imagine that you need $100,000 of gross annual income to support your spending and taxes. 

Perhaps a pension provides $30,000 and part-time work provides another $20,000.

That leaves approximately $50,000 that needs to come from your investment portfolio.

When the part-time work eventually ends, the amount required from the portfolio may increase. When Social Security eventually begins, the amount required from the portfolio may decrease again.  This illustrates why early-retirement planning isn't as simple as dividing your investment balance by your annual expenses.

Your income needs can change significantly from year to year.  A detailed financial plan can map those changes across the different phases of retirement.

Don't Forget About Taxes When Retiring at 60

Taxes are another major consideration.

Let's say you expect to spend $70,000 per year in retirement.

That is generally $70,000 after taxes because your mortgage company, grocery store, utility company, and airline don't care what your gross income was. They care whether you have enough cash available to pay the bill.  If much of your retirement money is held in traditional 401(k)s and IRAs, withdrawals generally create taxable income.  Pension income can also be taxable, and depending on your overall income, a portion of your Social Security benefits may eventually be subject to federal income tax.

As a result, you might need $80,000, $85,000, or some other amount of gross income to produce $70,000 of after-tax cash flow. The actual number depends on your individual tax situation.  State taxes matter as well.

Different states have different rules regarding pension income, Social Security, and distributions from retirement accounts. If you are planning to move after retirement, the tax rules in your future state of residence may also need to be considered.

The Years Between 60 and 65 Can Create Tax-Planning Opportunities

There can also be opportunities associated with retiring early.  For some retirees, the years immediately following retirement represent a period in which taxable income is lower than it was during their working years.

You might have stopped receiving a salary but have not yet begun Social Security. Required distributions from certain retirement accounts may also be years away.  Depending on your circumstances, that period could create opportunities to evaluate strategies such as Roth conversions or realizing income at potentially lower tax rates.

However, those decisions should not be made in isolation.

For example, increasing taxable income through a Roth conversion could potentially affect Marketplace health insurance subsidies. A strategy that looks attractive strictly from an income-tax perspective could have a different result once healthcare costs are considered.  This is another reason comprehensive planning can be particularly valuable between ages 60 and 65.

Can Your Portfolio Survive a Long Retirement?

Someone retiring at 60 also needs to consider longevity.  If you retire at 60 and live to age 90, your investments need to support a 30-year retirement.

Live to 95, and you're looking at 35 years.

That doesn't mean you shouldn't retire early. It means the plan should be stress-tested over a sufficiently long period. It is also important to consider what happens if investment markets decline shortly after you retire. Taking large withdrawals while the portfolio is temporarily down can create additional challenges because you may have to sell more investments to generate the same amount of cash.  A retirement plan should therefore evaluate not only whether the numbers work under an average set of assumptions, but also what happens when conditions aren't ideal.

A Hypothetical Age-60 Retirement Example

Consider a married couple, John and Lisa, who are both age 60. 

They estimate that they need $80,000 per year after taxes to support their desired lifestyle. Lisa plans to continue working until age 65, while John would like to retire now.

John can join Lisa's employer health insurance plan, but doing so will increase their premiums by $9,000 per year. 

John has a pension available immediately, and Lisa will eventually receive Social Security. They also have 401(k)s, IRAs, Roth IRAs, and a brokerage account.

Instead of simply asking whether their investment balance is “enough,” we would want to map out their cash flow year by year.

From 60 to 62, their income sources may look one way.

At 62, Social Security becomes available, although they may decide not to claim it yet.

At 65, Medicare changes the healthcare equation.

At 67, they reach full retirement age for Social Security if they were born in 1960 or later.

Later in retirement, additional tax and retirement-account considerations may arise.

The financial picture changes repeatedly.  That is why a detailed retirement projection can provide far more useful information than a generic rule saying you need $1 million, $2 million, or some other arbitrary amount to retire at 60.

So, Can You Afford to Retire at Age 60?

You may be able to.  Retiring at 60 can be a great option for individuals who have accumulated sufficient assets and have a clear plan for the additional variables that come with early retirement.  The biggest hurdle is often healthcare coverage between retirement and Medicare eligibility at 65. But that is only one part of the analysis.

You also need to understand your annual expenses, account for inflation, determine your Social Security filing strategy, identify pensions and other income sources, estimate how much needs to be withdrawn from your investments, and account for federal and state taxes.

Retiring five or seven years earlier than the traditional retirement age gives you more years to enjoy retirement—but it also means your assets may need to support you for more years.  The goal of financial planning isn't necessarily to determine whether you can retire at 60 based on one investment balance.

The better question is whether your combination of income, investments, healthcare coverage, taxes, and Social Security strategy can sustainably support the lifestyle you want throughout retirement.  If the answer is yes, retiring at age 60 may be a very viable option.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions About Retiring at Age 60

1. Can I afford to retire at age 60?
   Whether you can afford to retire at 60 depends on your annual expenses, retirement savings, healthcare costs, pensions, Social Security strategy, taxes, and other income sources. Because Medicare generally does not begin based on age until 65 and Social Security retirement benefits generally cannot begin until 62, someone retiring at 60 needs a plan to bridge those gaps. A detailed retirement projection can help determine whether your assets are sufficient to support your desired lifestyle over a potentially 30-year or longer retirement.
2. How much money do I need to retire at 60?
   There is no single amount you need to retire at 60. Someone with a pension, low expenses, and retiree health insurance may need substantially less than someone with no pension, high expenses, and expensive private health insurance. Instead of targeting an arbitrary amount such as $1 million or $2 million, calculate the difference between your expected after-tax spending and the recurring income available to support it.
3. How can I get health insurance if I retire at 60?
   Potential health insurance options for someone retiring at 60 include coverage through a working spouse's employer, retiree health insurance from a former employer, COBRA continuation coverage, and individual coverage through the Health Insurance Marketplace or an applicable state marketplace. Costs and coverage vary substantially, so healthcare should be researched before selecting your retirement date.
4. Can I use COBRA until Medicare starts at 65?
   It depends on your age when you retire and your eligibility. Following termination or retirement, federal COBRA continuation coverage is generally available for up to 18 months, although certain circumstances can extend coverage. Someone retiring at 63 1/2 might potentially use an 18-month COBRA period to bridge much of the gap to Medicare, while someone retiring at 60 would generally need another solution before reaching 65.
5. Can I collect Social Security if I retire at age 60?
   Retiring from your job and claiming Social Security are two separate decisions. Social Security retirement benefits generally cannot begin until age 62. You can retire at 60 and use pensions, savings, investments, or other income for several years before beginning Social Security. Waiting beyond age 62 can result in a larger monthly benefit than claiming at the earliest possible age.
6. Should I take Social Security at 62 if I retire at 60?
   Not necessarily. Claiming at 62 provides income sooner, but your monthly benefit is permanently reduced compared with waiting until full retirement age. For people born in 1960 or later, claiming at 62 can result in a benefit up to 30% lower than the full-retirement-age amount. Your life expectancy, marital situation, investments, tax situation, and other income sources should be considered when evaluating your Social Security filing strategy.
7. How much does health insurance cost if I retire before 65?
   The cost can vary significantly based on the type of coverage, location, age, household size, income, plan selection, and whether an employer subsidizes any portion of the premium. Early retirees should consider not only premiums but also deductibles, copays, prescriptions, and maximum out-of-pocket costs. If using Marketplace insurance, household income can also affect eligibility for premium tax credits.
8. What expenses should I include when planning to retire at 60?
   Your retirement budget should include housing, property taxes, mortgage payments, utilities, food, transportation, insurance, healthcare, travel, entertainment, home repairs, vehicle replacement, gifts, and other recurring or periodic expenses. Because someone retiring at 60 may still have a mortgage or other costs that disappear later, it is helpful to build a year-by-year projection rather than assuming expenses remain unchanged throughout retirement.
9. What are the biggest risks of retiring at 60?
   Important financial risks include unexpectedly high healthcare costs, inflation, a longer-than-expected lifespan, poor investment returns early in retirement, higher spending, and withdrawing too much from investments during the first several years. Retiring at 60 also means your portfolio may need to support you longer than if you retired at 65 or 67. Modeling different scenarios can help determine how resilient your retirement plan may be.
10. What should I do before retiring at age 60?
    Before retiring at 60, build a detailed after-tax retirement budget, determine your health insurance strategy through age 65, review your Social Security options, identify pensions and other income sources, estimate taxes, and determine how much you will need to withdraw from your investments each year. It can also be helpful to test the plan under different assumptions for inflation, investment returns, healthcare costs, and longevity. The objective is to determine whether your entire financial picture-not simply your current retirement account balance-can support the lifestyle you want for the rest of retirement.

Retirement Income Planning: How to Pay Yourself Without a Job

The hardest part of retirement is not saving money. It is turning your savings into a paycheck that can last for decades. A strong retirement income strategy combines Social Security, investments, and cash reserves in a way that helps retirees manage taxes, market downturns, and long-term spending needs. At Greenbush Financial Group, we often find that retirees feel more confident once they move from random withdrawals to a structured retirement paycheck plan.

The Hardest Part of Retirement Is Not Saving. It’s Replacing Your Paycheck.

For most of your working life, income was automatic.

You worked, your paycheck arrived, taxes were withheld, and bills were paid.

Retirement changes that system overnight.

Now your income may need to come from:

• Social Security

• Investment accounts

• IRAs

• Roth IRAs

• Cash savings

• Brokerage accounts

• Maybe a pension

That transition can feel uncomfortable even for financially responsible retirees.

Many people spend decades learning how to save for retirement but very little time learning how to withdraw from retirement.

That is why one of the biggest retirement questions becomes:

“How do I actually turn my savings into reliable monthly income?”

The answer is usually not:

• Living only on dividends

• Using the 4% rule blindly

• Pulling money randomly from accounts

• Staying fully invested with no cash reserves

A retirement paycheck works best when it is intentional, flexible, tax-aware, and designed to handle both good markets and bad ones.

What a Retirement Paycheck Actually Looks Like

A retirement paycheck is usually built from three primary sources:

1. Guaranteed income

2. Investment withdrawals

3. Cash reserves

Each source plays a different role.

The goal is not maximizing investment returns.

The goal is creating sustainable monthly income while reducing unnecessary financial stress.

The 3 Buckets of Retirement Income

Bucket #1: Guaranteed Income

This includes predictable income sources such as:

• Social Security

• Pensions

• Certain annuities

For many retirees, this income helps cover core living expenses like:

• Housing

• Utilities

• Groceries

• Insurance

• Basic healthcare costs

Guaranteed income creates stability.

The more predictable income a retiree has, the less pressure there may be on investment withdrawals during difficult markets.

Bucket #2: Investment Withdrawals

This is where retirees often generate additional income beyond Social Security.

Withdrawals may come from:

• Traditional IRAs

• 401(k)s

• Taxable brokerage accounts

• Roth IRAs

This is also where many costly mistakes happen.

Without a strategy, retirees may:

• Withdraw too much

• Trigger unnecessary taxes

• Increase Medicare premiums

• Sell investments during downturns

• Deplete the wrong accounts too early

The order of withdrawals matters.

Bucket #3: Cash Reserves

Cash reserves are one of the most overlooked parts of retirement income planning.

Cash reserves may include:

• Savings accounts

• Money market funds

• CDs

• Treasury bills

• Short-term bond holdings

The purpose of cash is not maximizing returns.

Its purpose is flexibility.

Cash reserves help retirees avoid selling investments during bad markets when emotions are elevated and portfolio values are temporarily down.

How Retirement Income Is Structured Month to Month

Retirement income planning usually starts with one simple question:

“How much do you actually need each month?”

Step 1: Identify Monthly Spending Needs

Example:

John and Linda retire at age 66.

They estimate they need:

• $8,000/month after taxes

That includes:

• Property taxes

• Insurance

• Healthcare

• Travel

• Utilities

• Food

• Entertainment

• Home maintenance

Step 2: Subtract Guaranteed Income

They receive:

• $4,500/month combined from Social Security

That leaves:

• $3,500/month that must come from investments and savings

This is called the income gap.

Step 3: Build a Withdrawal Strategy

Their assets include:

• $950,000 in IRAs

• $300,000 in brokerage accounts

• $150,000 in cash reserves

• $200,000 in Roth IRAs

Instead of taking income randomly, they decide to:

• Use brokerage assets first for flexibility

• Maintain 18 months of cash reserves

• Delay larger IRA withdrawals strategically

• Refill cash reserves during stronger market periods

• Keep Roth assets growing longer for future flexibility

Now their retirement income becomes organized and repeatable rather than reactive.

Why Random Withdrawals Can Create Long-Term Problems

Many retirees withdraw from whichever account feels easiest at the time.

That can create ripple effects.

Example

Suppose a retiree withdraws $80,000 entirely from an IRA for spending and home renovations.

That withdrawal may:

• Push income into higher tax brackets

• Increase taxation of Social Security

• Trigger Medicare IRMAA surcharges

• Reduce future Roth conversion opportunities

A different withdrawal strategy may have created a better long-term outcome.

Retirement income planning is not just about generating cash.

It is about generating cash efficiently.

Why Cash Reserves Matter So Much in Retirement

Many retirees underestimate how emotionally different investing feels after paychecks stop.

During working years, market declines may feel temporary because new paychecks continue arriving.

Retirement changes that dynamic.

Now withdrawals may be happening while investments are falling.

That creates what planners call sequence-of-returns risk.

What Is Sequence Risk?

Sequence risk occurs when poor market returns happen early in retirement while withdrawals are occurring simultaneously.

This combination can permanently reduce long-term portfolio sustainability.

Example

Two retirees start with identical portfolios and identical spending.

One is forced to sell investments during a major downturn to fund living expenses.

The other uses cash reserves temporarily while allowing investments time to recover.

The long-term outcomes can look dramatically different.

How Much Cash Should Retirees Keep?

There is no perfect answer.

But many retirees feel more comfortable keeping:

• 12–24 months of planned withdrawals in cash or short-term reserves

The appropriate amount depends on:

• Risk tolerance

• Market exposure

• Spending flexibility

• Healthcare concerns

• Pension income

• Comfort during volatility

Important Note

Too little cash may force investment sales during downturns.

Too much cash may reduce long-term purchasing power because inflation slowly erodes cash value.

The goal is balance.

Should Retirees Live Off Dividends Only?

Many retirees like the idea of “never touching principal” and living entirely off dividends.

While dividend income can help, retirement income planning is usually more nuanced than that.

Dividend-only strategies can create problems such as:

• Concentrated portfolios

• Reduced diversification

• Lower flexibility

• Chasing yield

• Tax inefficiencies

What matters most is not whether income comes from dividends or withdrawals.

What matters is:

• Total return

• Sustainability

• Tax efficiency

• Risk management

• Flexibility during market declines

A well-designed retirement paycheck should focus on the overall income strategy, not just one type of investment income.

How Social Security Fits Into a Retirement Paycheck

Social Security is often the foundation of retirement income.

The timing decision affects:

• Monthly income

• Portfolio withdrawals

• Survivor income

• Longevity protection

• Taxes

Claiming at 62

Taking benefits early provides income sooner but permanently reduces monthly payments.

This may reduce portfolio withdrawals initially.

But it also lowers guaranteed lifetime income.

Claiming at Full Retirement Age

Waiting until full retirement age increases monthly benefits and avoids early claiming reductions.

For many retirees, this creates a balance between income needs and future benefit growth.

Delaying Until Age 70

Benefits increase each year benefits are delayed beyond full retirement age.

For healthy retirees, delayed Social Security can act as additional protection against longevity risk later in retirement.

Especially for married couples, this can significantly affect survivor income.

How Retirees Avoid Selling Investments During Market Declines

A strong retirement paycheck strategy is designed before market volatility happens.

That strategy often includes:

• Cash reserves

• Diversification

• Flexible withdrawals

• Annual tax reviews

• Periodic rebalancing

• Spending flexibility

Example Strategy

A retiree may:

• Hold 18 months of withdrawals in cash

• Use Social Security for core expenses

• Withdraw from brokerage accounts during stable markets

• Reduce discretionary spending during downturns

• Refill cash reserves after stronger market periods

This creates options during stressful periods instead of forcing emotional decisions.

How Often Should Retirement Income Plans Be Reviewed?

Retirement income planning is not a one-time event.

Most retirees should review their strategy annually.

Areas worth reviewing include:

• Withdrawal rates

• Tax brackets

• Roth conversion opportunities

• Medicare IRMAA exposure

• Cash reserve levels

• Investment allocation

• Spending changes

• Inflation adjustments

The goal is not constantly changing the plan.

The goal is making thoughtful adjustments as retirement evolves.

A Real-World Retirement Paycheck Example

Susan and Mark retire at ages 65 and 63.

They need:

• $9,000/month after taxes

Their income plan looks like this:

Their Strategy

They maintain:

• 18 months of cash reserves

• Moderate stock exposure for long-term growth

• Diversification across account types

• Annual withdrawal reviews

• Flexible discretionary spending

During strong markets, they replenish cash reserves.

During weaker markets, they temporarily rely more heavily on cash rather than aggressively selling investments.

This approach helps reduce emotional pressure during volatility.

Common Retirement Paycheck Mistakes

1. Withdrawing Randomly From Accounts

Random withdrawals often create tax inefficiencies and unnecessary portfolio stress.

2. Keeping Too Little Cash

Without adequate reserves, retirees may be forced to sell investments during downturns.

3. Keeping Too Much Cash

Excessive cash can reduce long-term purchasing power because of inflation.

4. Ignoring Taxes

Taxes affect:

• IRA withdrawals

• Social Security taxation

• Medicare premiums

• Roth conversion opportunities

Retirement income should be coordinated at the household level.

5. Assuming the Same Strategy Works Forever

Retirement income plans should evolve over time as:

• Spending changes

• Healthcare costs rise

• Markets fluctuate

• RMDs begin

• Tax laws change

Flexibility matters.

What Retirees Often Discover

Many retirees initially focus almost entirely on investment performance.

But over time, confidence often comes more from:

• Organized cash flow

• Predictable income

• Tax coordination

• Flexibility during downturns

• Understanding where each dollar comes from

A retirement paycheck is not about finding a perfect strategy.

It is about building a system that feels sustainable and manageable over time.

Final Thoughts

The hardest part of retirement is usually not building wealth.

It is learning how to turn decades of savings into reliable monthly income.

A thoughtful retirement paycheck strategy can help retirees:

• Reduce financial stress

• Improve tax efficiency

• Navigate market downturns

• Protect long-term portfolio sustainability

• Feel more confident about spending decisions

At Greenbush Financial Group, we often find that retirees gain confidence when they stop thinking about retirement income as random withdrawals and start viewing it as a coordinated household paycheck strategy.

The goal is not predicting every market movement perfectly.

The goal is creating a flexible income system that can support retirement through both strong markets and difficult ones.

Rob Mangold

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.

FAQ

1. How do retirees create a monthly paycheck from investments?
   Most retirees combine Social Security, investment withdrawals, and cash reserves to create consistent monthly income. Withdrawals are typically coordinated across different account types to improve tax efficiency and manage market risk.
2. How much cash should retirees keep?
   Many retirees benefit from holding 12-24 months of planned withdrawals in cash or short-term reserves, especially during the early retirement years.
3. What accounts should retirees withdraw from first?
   The answer depends on taxes, age, income needs, and long-term planning goals. Many retirees use a combination of taxable accounts, IRAs, and Roth accounts strategically rather than withdrawing from only one source.
4. What is sequence-of-returns risk?
   Sequence risk occurs when poor market returns happen early in retirement while withdrawals are being taken. This can permanently reduce long-term portfolio sustainability.
5. Should retirees rely only on dividends for income?
   Not necessarily. While dividends can help, most retirement income plans work better when they focus on total return, diversification, flexibility, and tax efficiency rather than dividends alone.
6. How does Social Security fit into a retirement paycheck?
   Social Security often acts as the foundation of retirement income by covering a portion of essential expenses and reducing pressure on investment withdrawals.
7. How often should retirement income plans be reviewed?
   Most retirees should review income strategies annually to evaluate taxes, spending, investment allocation, withdrawal rates, and healthcare costs.
8. What is the biggest retirement income mistake?
   One of the biggest mistakes is withdrawing money randomly from investment accounts without coordinating taxes, cash reserves, and long-term income sustainability.

The First Year of Retirement: 7 Financial Moves to Make…and 5 to Avoid

The first year of retirement is one of the most important financial transition periods you’ll ever experience. Decisions around withdrawals, Social Security, taxes, investments, and healthcare can affect your retirement income for decades. Many retirees focus on enjoying newfound freedom but overlook key planning opportunities that exist before year-end and before required distributions begin. At Greenbush Financial Group, we often see that the retirees who build confidence early are the ones who slow down and make intentional first-year decisions.

The First Year of Retirement Is a Transition Year, Not Just a Celebration Year

Retirement changes more than your schedule. It changes how your household generates income, pays taxes, handles market volatility, and manages financial decisions.

For decades, most people operated under a simple formula:

• Work

• Receive paycheck

• Save for retirement

• Repeat

Then retirement arrives, and suddenly everything reverses.

Now your investments may need to generate income. Tax planning becomes more flexible but also more important. Healthcare costs become more visible. Market declines can feel more emotional once paychecks stop.

The first year of retirement is often what we call an “adjustment year.” The decisions made during this period can shape:

• Future tax brackets

• Medicare premiums

• Portfolio longevity

• Social Security income

• Roth conversion opportunities

• Spending habits

• Confidence during market volatility

The goal is not perfection.

The goal is avoiding expensive mistakes while building a sustainable retirement income strategy.

7 Smart Financial Moves to Make During Your First Year of Retirement

1. Build a Retirement Paycheck Plan Before Taking Withdrawals

One of the biggest mistakes new retirees make is randomly pulling money from accounts as expenses arise.

Retirement income should be coordinated intentionally.

Before taking withdrawals, determine:

• How much monthly income you actually need

• Which accounts will fund that income

• How taxes will affect withdrawals

• Which accounts should remain invested longer

• How cash reserves will be handled

Many retirees discover their actual spending differs from what they expected.

The first year is often more expensive because of:

• Travel

• Home projects

• Healthcare changes

• Helping family

• Celebration spending

A paycheck-style withdrawal strategy can create structure and reduce emotional decision-making.

Example

A retired couple needs $7,000 per month after taxes.

They have:

• $1.2 million invested

• $700,000 in IRAs

• $300,000 in taxable accounts

• $200,000 in Roth IRAs

• No Social Security yet

Instead of withdrawing entirely from their IRA, they may benefit from:

• Using taxable savings first

• Realizing lower capital gains

• Keeping taxable income lower

• Preserving future Roth growth opportunities

The order of withdrawals matters more than many retirees realize.

2. Reevaluate Whether to Claim Social Security Immediately

Many retirees automatically claim Social Security as soon as work ends.

That decision can permanently reduce lifetime income.

For healthy retirees with adequate assets, delaying benefits can sometimes improve long-term retirement security.

Key factors include:

• Health and longevity expectations

• Spousal benefits

• Survivor income planning

• Tax brackets

• Portfolio withdrawal needs

• Other income sources

Important Note

Claiming early is not always wrong.

But the first year of retirement is the time to evaluate the decision carefully rather than defaulting to “I stopped working, so I should claim now.”

Example

A retiree eligible for $2,200/month at age 62 may receive roughly $3,900/month if delaying until age 70.

For married couples, this can significantly affect survivor income later.

3. Review Roth Conversion Opportunities Before Year-End

The years between retirement and Required Minimum Distributions (RMDs) can create unusually low-income tax years.

Those years may offer valuable Roth conversion opportunities.

This is one of the most overlooked planning opportunities in retirement.

Converting portions of a traditional IRA to a Roth IRA during lower-income years may help:

• Reduce future RMDs

• Lower future tax exposure

• Create tax-free income later

• Reduce widow’s tax risk

• Improve long-term tax flexibility

Example

A couple retires at 64 and delays Social Security until 67.

For several years, their taxable income may be significantly lower than during their working years.

They may intentionally convert enough IRA assets annually to “fill up” a lower tax bracket before:

• RMDs begin

• Social Security increases taxable income

• Medicare IRMAA thresholds become an issue

Key Insight

The first retirement year is often more valuable for tax planning than people realize because income may temporarily drop before other retirement income sources begin.

4. Review Medicare IRMAA Exposure Early

Many retirees are surprised when Medicare premiums increase because of prior-year income.

IRMAA stands for Income-Related Monthly Adjustment Amount.

Higher-income retirees can pay significantly more for Medicare Part B and Part D premiums.

Common triggers include:

• Large IRA withdrawals

• Roth conversions

• Capital gains

• Selling property

• Large bonuses during retirement year

Why This Matters in Year One

The retirement transition often creates unusual tax years.

Without planning, retirees can accidentally trigger higher Medicare premiums two years later.

Important Note

Sometimes triggering IRMAA still makes sense.

For example, a strategic Roth conversion today may still save substantial taxes later.

The key is understanding the tradeoff before making the move.

5. Keep a Larger Cash Reserve Than You Think You Need

The first few years of retirement are emotionally different from the accumulation years.

Market volatility can feel more stressful when paychecks stop.

A properly structured cash reserve can help retirees avoid selling investments during market declines.

This reserve may cover:

• 12–24 months of spending needs

• Major healthcare expenses

• Home repairs

• Unexpected family support

• Market downturns

What Many Retirees Get Wrong

Some retirees stay fully invested because they fear missing returns.

Others hold too much cash and reduce long-term growth potential.

The goal is balance.

A thoughtful reserve strategy can improve both flexibility and emotional confidence.

6. Recheck Your Investment Risk Now That You’re Retired

Many investors discover they were comfortable with risk only while employed.

Once retirement begins, market declines feel different.

This does not mean retirees should abandon growth investments entirely.

But it does mean portfolios should reflect:

• Withdrawal needs

• Time horizon

• Income stability

• Emotional tolerance for volatility

• Sequence-of-returns risk

What Is Sequence Risk?

Poor market returns early in retirement can create lasting damage when withdrawals are occurring simultaneously.

This is why investment structure matters more after retirement begins.

Common First-Year Mistake

Making aggressive investment changes during a market drop.

Some retirees panic after their first retirement correction and move heavily to cash after losses already occurred.

That can permanently damage long-term retirement sustainability.

7. Review Estate Documents and Beneficiaries

Retirement is a major life transition and an ideal time to revisit estate planning.

Review:

• Wills

• Trusts

• Powers of attorney

• Healthcare directives

• IRA beneficiaries

• Life insurance beneficiaries

Common Issue

Beneficiary designations often override wills.

We regularly see outdated beneficiaries remain unchanged for decades.

Also Important

Review how retirement accounts align with tax planning and legacy goals.

For some households, Roth accounts may be more attractive legacy assets than traditional IRAs because of future tax implications for heirs.

5 Financial Moves to Avoid During Your First Year of Retirement

1. Avoid Major Lifestyle Purchases Too Quickly

Many retirees make large purchases immediately after retiring:

• Vacation homes

• RVs

• Boats

• Major renovations

• Large gifts to children

The issue is not the purchase itself.

The issue is making irreversible financial decisions before understanding your long-term retirement spending pattern.

Better Approach

Give yourself time to observe:

• Actual spending

• Healthcare costs

• Tax changes

• Lifestyle adjustments

• Market conditions

Your first-year spending may not reflect your long-term retirement reality.

2. Avoid Claiming Social Security Without Running the Numbers

Social Security timing is often permanent.

Many retirees underestimate:

• Survivor implications

• Inflation protection

• Longevity risk

• Tax coordination opportunities

Even delaying benefits by a few years can substantially improve long-term retirement income in some situations.

3. Avoid Taking Large IRA Withdrawals Without Tax Planning

Large withdrawals can create ripple effects:

• Higher tax brackets

• Increased Medicare premiums

• Taxation of Social Security

• Reduced Roth conversion opportunities

Example

A retiree withdraws $150,000 from an IRA for home renovations and gifting.

That single decision could:

• Push income into higher brackets

• Trigger IRMAA surcharges

• Increase future tax exposure

Coordinating withdrawals over multiple years may create a better outcome.

4. Avoid Panic Decisions During Market Declines

The first market downturn after retirement can feel emotionally different.

This is often when retirees second-guess their entire plan.

Selling after declines can lock in losses and reduce future recovery potential.

Better Approach

Build a plan before volatility happens:

• Maintain cash reserves

• Diversify appropriately

• Understand withdrawal flexibility

• Revisit spending priorities

The goal is not eliminating volatility.

The goal is reducing the need for emotional decisions during volatility.

5. Avoid Treating Retirement Like a Permanent Vacation

Many retirees spend aggressively during the first year before understanding what sustainable retirement spending actually looks like.

This does not mean retirement should be restrictive.

But retirees benefit from observing:

• Real monthly expenses

• Healthcare changes

• Inflation effects

• Travel patterns

• Long-term lifestyle costs

The first year should help establish sustainable habits and confidence.

A Real-World First-Year Retirement Scenario

John and Susan retire at 64.

They have:

• $1.2 million invested

• $80,000 in cash

• A paid-off home

• No pension

• Estimated spending needs of $7,000/month after taxes

Their first instinct is:

• Claim Social Security immediately

• Withdraw additional income entirely from IRAs

• Renovate the home

• Increase stock exposure after hearing “retirees need growth”

Instead, after planning carefully, they decide to:

• Delay Social Security until age 67

• Use taxable savings for part of their income

• Complete partial Roth conversions annually

• Maintain 18 months of cash reserves

• Reduce portfolio volatility modestly

• Delay large home projects for one year

The Result

They create:

• Lower projected lifetime taxes

• Higher future guaranteed income

• Better Medicare premium management

• Greater flexibility during market declines

• More confidence about long-term sustainability

None of the decisions were dramatic.

But together, they improved the odds of long-term retirement success.

Questions to Review Before December 31 of Your First Retirement Year

Your first retirement year may create unique tax planning opportunities before year-end.

Questions worth reviewing include:

• Should you do a Roth conversion this year?

• Are capital gains unusually low this year?

• Should you harvest gains before Social Security begins?

• Are Medicare IRMAA thresholds an issue?

• Are you withholding enough taxes from withdrawals?

• Should you rebalance investments?

• Are charitable giving strategies appropriate?

• Have beneficiaries been updated?

These decisions are often easier and more valuable before future retirement income sources begin.

Common First-Year Retirement Mistakes

Here are several patterns we frequently see:

• Spending before building a withdrawal strategy

• Claiming Social Security too quickly

• Ignoring Roth conversion windows

• Taking unnecessary taxable withdrawals

• Underestimating healthcare costs

• Overreacting to market volatility

• Maintaining outdated investment allocations

• Forgetting beneficiary reviews

• Making emotional investment changes

The first year of retirement often sets the tone for future decision-making.

Final Thoughts

Your first year of retirement is not just about leaving work. It is about transitioning from accumulation to distribution, from saving to creating sustainable income.

The retirees who navigate this transition best are usually not the ones making dramatic moves.

They are the ones slowing down, reviewing tax opportunities carefully, building intentional withdrawal strategies, and avoiding irreversible mistakes too early.

At Greenbush Financial Group, we often find that the most successful retirement transitions come from thoughtful planning rather than reacting emotionally to headlines, market volatility, or uncertainty.

The goal of year one is not perfection.

It is building confidence, flexibility, and a financial foundation that can support the next several decades.

Rob Mangold

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.

FAQ

1. What is the biggest financial mistake retirees make in their first year?
   One of the biggest mistakes is withdrawing money from retirement accounts without a coordinated tax and income strategy. Poor withdrawal sequencing can increase taxes, Medicare premiums, and long-term portfolio stress.
2. Should I take Social Security as soon as I retire?
   Not necessarily. Many retirees benefit from delaying benefits, especially if they expect longer life expectancy or want to maximize survivor income for a spouse.
3. Should retirees use cash first before withdrawing from investments?
   In many cases, maintaining a cash reserve for near-term spending can reduce the need to sell investments during market declines. The right approach depends on taxes, market conditions, and withdrawal needs.
4. Why are Roth conversions often valuable early in retirement?
   Early retirement years may temporarily lower taxable income before RMDs and Social Security begin. This can create opportunities to convert IRA assets at lower tax rates.
5. How much cash should retirees keep during the first year?
   Many retirees benefit from holding 12-24 months of spending needs in cash or short-term reserves, especially during the retirement transition period.
6. Can retirement withdrawals increase Medicare premiums?
   Yes. Large IRA withdrawals, Roth conversions, and capital gains can increase income enough to trigger IRMAA surcharges for Medicare Part B and Part D.
7. Should retirees change investments immediately after retiring?
   Not automatically. However, retirement is a good time to reassess whether your portfolio still aligns with your income needs, risk tolerance, and withdrawal strategy.
8. What should retirees review before the end of their first retirement year?
   Retirees should review taxes, Roth conversions, Medicare income thresholds, investment allocations, withdrawal strategies, and beneficiary designations before December 31.

College Savings or Retirement First? How to Decide in 2026

One of the most common financial planning questions we hear at Greenbush Financial Group is whether to prioritize saving for your children’s college or for your own retirement. Both goals are important—but when resources are limited, the right order can make a major difference in your long-term security. In most cases, it makes sense to secure your retirement first, then allocate additional savings toward education goals. Here’s why that order matters and how to balance both effectively.

Why Retirement Comes First

Retirement should almost always take priority for one simple reason: there are no loans for retirement. Your future financial independence depends on your ability to replace your income when you stop working—and that window to save is limited.

Key Reasons to Prioritize Retirement

• You can’t borrow for it. Your children can access student loans, grants, or scholarships; you cannot do the same for retirement income.

• Compounding works best early. The earlier you contribute to retirement accounts like a 401(k) or IRA, the more time your investments have to grow tax-deferred or tax-free.

• Employer matches add free money. If you skip retirement contributions to fund college, you may also miss out on employer matching contributions that could increase your savings rate.

• Tax advantages are stronger. Retirement accounts typically offer better tax deferral and protection benefits than education accounts.

The Case for Funding College Early

While retirement usually takes priority, it’s also important to plan for education costs strategically. A balanced approach can help you avoid high student loan debt while still protecting your own future.

Benefits of Starting College Savings Early

• Tax-free growth. 529 plans grow tax-free and withdrawals are tax-exempt when used for qualified education expenses.

• High contribution limits. You can contribute up to $19,000 per year per parent ($38,000 for married couples) in 2026 without triggering the gift tax, and you can front-load five years’ worth at once.

• State tax benefits. Many states offer income tax deductions or credits for 529 plan contributions.

• Investment flexibility. Funds can be used for tuition, room and board, and even graduate school.

For families with younger children, consistent 529 contributions—even modest ones—can grow meaningfully over 15–18 years while you continue building your retirement savings.

Balancing Both Goals

It doesn’t have to be all-or-nothing. You can take a blended approach:

1. Maximize employer match in your 401(k) or SIMPLE IRA first.

2. Open a 529 plan and set up automatic contributions (even $100 per month makes a difference).

3. Reevaluate each year—as income rises, you can shift additional funds toward college savings.

4. Use windfalls wisely. Bonuses, tax refunds, or side-income can go toward education savings without disrupting retirement.

5. Encourage student participation. Teen jobs, scholarships, or community college for core credits can reduce overall cost.

At Greenbush Financial Group, we often model side-by-side scenarios showing how redirecting amounts from retirement to college savings can alter your future income security.

How Retirement Savings Can Help with College

One overlooked advantage: saving for retirement can indirectly help with college funding.

• Lower FAFSA impact: Retirement assets aren’t counted toward federal financial aid formulas, while 529 balances are.

• Penalty-free withdrawals: The IRS allows penalty-free (but taxable) withdrawals from IRAs for qualified education expenses if needed later.

• Future flexibility: A strong retirement foundation may let parents help pay off loans later without jeopardizing their future.

Action Steps to Get Started

• Review your retirement contribution rate and increase it until you reach your employer’s match or target savings goal.

• Set up a 529 plan for each child, even if contributions start small.

• Reassess annually as college costs and retirement targets evolve.

• Meet with a financial planner to model the long-term trade-offs of different savings rates.

Rob Mangold

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.

FAQs: College Savings vs. Retirement

1. Should I ever prioritize college savings over retirement?
   Only if your retirement plan is fully funded or you’re on track with a strong pension. Otherwise, we believe that your future security should come first.
2. Can I use my IRA for college expenses?
   Yes, you can withdraw IRA funds penalty-free (though taxable) for qualified higher education costs, but this should often be a last resort.
3. How much should I contribute to a 529 plan?
   Many families aim for about one-third of projected costs; the rest can come from cash flow, aid, or loans. Even small, consistent contributions grow substantially over time.
4. What if I can’t afford both?
   Focus on retirement first. You could potentially help your child repay loans later, but you can’t finance your own retirement.
5. Are there other college savings options besides 529s?
   Yes—Coverdell ESAs and custodial UGMA/UTMA accounts can also be used, though they have different tax and financial aid impacts.

2026 Mandatory Roth Catch-Up Contributions for Higher Earners: What the New Rules Mean for Retirement Savers

Beginning in 2026, higher-earning workers will be required to make all retirement plan catch-up contributions on a Roth (after-tax) basis. This rule, created under SECURE Act 2.0, applies to individuals earning above a specific wage threshold and affects 401(k), 403(b), and governmental 457(b) plans. Our analysis at Greenbush Financial Group shows that while the change increases current taxable income, it can also create meaningful long-term tax benefits if planned correctly. This article explains who is impacted, how the rule works, and what planning steps to consider before 2026.

What Is the Mandatory Roth Catch-Up Rule in 2026?

The mandatory Roth catch-up rule requires certain high earners to make all catch-up contributions as Roth contributions, rather than pre-tax.

Under prior rules, employees age 50 and older could choose whether catch-up contributions were pre-tax or Roth. Starting in 2026, that choice is removed for higher earners.

At Greenbush Financial Group, this is one of the most common sources of confusion we see among pre-retirees who are aggressively saving in the final working years.

Who Is Subject to Mandatory Roth Catch-Up Contributions?

The rule applies if both of the following are true:

• You are age 50 or older

• Your prior-year wages exceed $150,000, indexed for inflation

• Wages are based on W-2 compensation

• Income from self-employment or investments does not count toward this threshold

If your wages are at or below the threshold, you may still choose between pre-tax or Roth catch-up contributions.

Which Retirement Plans Are Affected by the Rule?

Mandatory Roth treatment applies to catch-up contributions made to:

• 401(k) plans

• 403(b) plans

• Governmental 457(b) plans

It does not apply to:

• IRAs (Traditional or Roth)

• SEP IRAs

• SIMPLE IRAs (which follow separate contribution rules)

Catch-Up Contribution Limits for 2026

While final IRS-indexed numbers will be confirmed closer to 2026, current rules provide context for how the change applies.

General framework:

• Standard elective deferral limit (under age 50): indexed annually

• Catch-up contributions (age 50+): additional amount above the standard limit

• Ages 60–63: enhanced catch-up limits under SECURE Act 2.0, also subject to Roth-only treatment for higher earners

Our analysis at Greenbush Financial Group suggests that many high earners will still benefit from maximizing these Roth catch-up dollars despite losing the immediate tax deduction.

Why Congress Implemented the Mandatory Roth Requirement

The shift to Roth catch-up contributions serves two primary purposes:

• Increases near-term tax revenue for the federal government

• Expands long-term tax-free retirement savings for participants

Because Roth contributions are taxed upfront, the rule accelerates tax collection while potentially reducing future required minimum distributions.

Tax Impact: Higher Income Today, Lower Taxes Later

Mandatory Roth catch-ups create a trade-off.

Short-term impact:

• Higher taxable income

• Reduced ability to lower current-year tax bills

Long-term benefits:

• Tax-free growth

• Tax-free withdrawals in retirement

• Reduced exposure to future tax rate increases

• Potentially lower Medicare IRMAA and Social Security taxation later in life

At Greenbush Financial Group, we often see this rule align well with broader Roth conversion strategies already being implemented for higher-income households.

Employer and Plan Administration Considerations

Employers must ensure their retirement plans are properly updated to allow Roth catch-up contributions.

Key considerations:

• Plans that do not allow Roth contributions may need amendments

• Failure to comply could eliminate the ability to make catch-up contributions entirely

• Payroll and recordkeeping systems must track Roth-only catch-ups correctly

This is an important operational issue for both employers and employees to confirm well before 2026.

Planning Strategies Before 2026

There is still time to plan proactively.

Strategies to consider:

• Evaluating partial Roth conversions during lower-income years

• Coordinating catch-up contributions with overall tax bracket management

• Reviewing whether employer plans are Roth-enabled

According to guidance from the Internal Revenue Service, compliance will be strictly tied to wage reporting, making advance planning essential.

Rob Mangold

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.

Frequently Asked Questions About Mandatory Roth Catch-Up Contributions

1. What is the mandatory Roth catch-up rule starting in 2026?
   It requires higher-earning employees age 50+ to make all retirement plan catch-up contributions on a Roth (after-tax) basis.
2. What income level triggers mandatory Roth catch-ups?
   The rule applies to individuals with prior-year W-2 wages above $150,000 (2025 amount), indexed for inflation.
3. Does this rule apply to IRAs?
   No. The mandatory Roth catch-up requirement only applies to employer retirement plans, not IRAs.
4. Can I still make pre-tax contributions if I’m a high earner?
   Yes. The rule only affects catch-up contributions; standard employee deferrals may still be pre-tax.
5. What happens if my employer’s plan doesn’t offer Roth contributions?
   If Roth contributions are not available, catch-up contributions may not be permitted until the plan is amended.
6. Is mandatory Roth catch-up a bad thing for retirees?
   Not necessarily. While taxes may increase today, Roth catch-ups can significantly reduce taxes in retirement if used strategically.

Last updated June, 2026

Retirement Tax Traps and Penalties: 5 Gotchas That Catch People Off Guard

Even the most disciplined savers can be blindsided in retirement by unexpected taxes, penalties, and benefit reductions that derail a carefully built plan. These “retirement gotchas” often appear subtle during your working years but can cost tens of thousands once you stop earning a paycheck.

Here are five of the biggest surprises retirees face—and how to avoid them before it’s too late.

1. The Tax Torpedo from Social Security

Many retirees are surprised to learn that Social Security isn’t always tax-free. Depending on your income, up to 85% of your benefit can be taxed.

The IRS uses something called “provisional income,” which includes half your Social Security benefit plus all other taxable income and tax-free municipal bond interest.

• For individuals, taxes begin when provisional income exceeds $25,000.

• For married couples, it starts at $32,000.

A well-intentioned IRA withdrawal or capital gain can push you over these thresholds—causing a sudden jump in taxes. Strategic Roth conversions and careful withdrawal sequencing can help smooth this out over time.

2. Higher Medicare Premiums (IRMAA)

The Income-Related Monthly Adjustment Amount (IRMAA) is one of the most overlooked retirement costs. Once your modified adjusted gross income (MAGI) exceeds certain limits, your Medicare Part B and D premiums increase—often by thousands of dollars per year.

For 2025, IRMAA surcharges begin when MAGI exceeds roughly $103,000 for single filers or $206,000 for married couples. The catch? Medicare looks back two years at your income. A Roth conversion, property sale, or large one-time distribution can unexpectedly trigger higher premiums two years later.

Proactive tax planning can prevent crossing these thresholds unintentionally.

3. Required Minimum Distributions (RMDs)

Once you reach age 73, the IRS requires you to start withdrawing from pre-tax retirement accounts each year—whether you need the money or not. These RMDs are taxed as ordinary income and can increase your tax bracket, raise Medicare premiums, and reduce your eligibility for certain deductions.

The biggest mistake is waiting until your 70s to plan for them. Roth conversions in your 60s can reduce future RMDs, and charitable giving through Qualified Charitable Distributions (QCDs) can offset the tax impact once they begin.

4. The Widow’s Penalty

When one spouse passes away, the surviving spouse’s tax brackets and standard deduction are cut in half—but income sources often don’t decrease proportionally. Social Security may drop by one benefit, but RMDs, pensions, and investment income remain largely the same.

The result is a higher effective tax rate for the survivor. This “widow’s penalty” can last for years, especially when combined with RMDs and Medicare surcharges. Couples can reduce the long-term impact through lifetime Roth conversions, strategic asset titling, and beneficiary planning.

5. State Taxes and Hidden Relocation Costs

Many retirees move to lower-tax states hoping to stretch their income, but state-level taxes can be tricky. Some states tax pension and IRA withdrawals, others tax Social Security, and a few impose taxes on out-of-state income or estates.

Additionally, higher property taxes, insurance premiums, and healthcare costs can offset income tax savings. A comprehensive cost-of-living comparison is essential before relocating.

Our analysis at Greenbush Financial Group often reveals that the “best” retirement state depends more on quality of life, healthcare access and total cost of living than on income tax rates alone.

How to Avoid These Retirement Surprises

Most retirement gotchas come down to timing and coordination—especially between taxes, Social Security, and healthcare. A few key steps can make a major difference:

• Run retirement income projections that include taxes and IRMAA thresholds.

• Consider partial Roth conversions before RMD age.

• Sequence withdrawals intentionally between taxable, tax-deferred, and Roth accounts.

• Evaluate the long-term impact of home state taxes before moving.

• Review beneficiary and trust structures regularly.

The earlier you identify potential traps, the easier they are to fix while you still control your income and withdrawals.

The Bottom Line

Retirement is more complex than simply replacing a paycheck. The interplay between taxes, healthcare, and income sources can turn small decisions into costly mistakes. By spotting these gotchas early, you can preserve more of your wealth and enjoy a smoother, more predictable retirement.

Our advisors at Greenbush Financial Group can help you identify your biggest risk areas and design a plan to minimize the tax and income surprises most retirees never see coming.

FAQs: Retirement Planning Surprises

Q: Are Social Security benefits always taxed?
A: No. But depending on your income, up to 85% of your benefits may be taxable.

Q: How can I avoid higher Medicare premiums?
A: Manage your income below IRMAA thresholds through strategic Roth conversions and tax-efficient withdrawals.

Q: What happens if I miss an RMD?
A: You could face a 25% penalty on the amount not withdrawn, reduced to 10% if corrected quickly.

Q: Why do widows and widowers pay more in taxes?
A: Filing status changes from joint to single, cutting brackets and deductions in half while much of the income remains.

Q: Are all retirement states tax-friendly?
A: No. Some states tax retirement income or have higher overall costs despite no income tax.

Rob Mangold

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.

Social Security Cost of Living Increase Only 2.8% for 2026

By Michael Ruger, CFP®
Partner and Chief Investment Officer at Greenbush Financial Group

The Social Security Administration (SSA) has announced that the annual Cost-of-Living Adjustment (COLA) for 2026 will be 2.8%, up slightly from 2.5% in 2025, but still below the ten-year average of about 3.1%. While any increase in Social Security benefits is welcome news for retirees, many experts and retirees alike worry that this modest adjustment may not be enough to keep pace with rising living costs.

In this article, we’ll cover:

• How the 2026 COLA compares to previous years

• Why this year’s increase may not keep up with inflation

• The lag retirees face when inflation heats up

• Possible strategies to help offset higher costs

The 2026 COLA: Modest in Historical Context

While the 2.8% increase may seem like a fair bump, it’s actually on the lower end of recent COLA adjustments. Here’s a look at the last five years of Social Security COLAs:

As the table shows, retirees experienced significant boosts during the high-inflation years of 2022 and 2023, but those increases have tapered off as inflation cooled — at least according to official data. However, many households continue to feel that everyday prices for groceries, utilities, and especially healthcare haven’t truly come back down.

Why the 2026 COLA May Not Be Enough

Although the 2.8% COLA aims to help beneficiaries keep up with inflation, many retirees report that their actual cost of living has increased by well over 3%. Everyday expenses — particularly healthcare premiums, prescription drugs, and food — have outpaced average inflation in recent years.

For retirees living on a fixed income, this can feel like a slow squeeze. Even small differences between the COLA and real inflation can add up to a meaningful loss in purchasing power over time.

The Timing Problem: If Inflation Heats Up, Help May Be a Year Away

One major challenge with the COLA system is timing. Adjustments are made once per year, based on inflation readings from the third quarter of the previous year.

That means if inflation begins to surge again in mid-2026 — say, to 4% or higher — retirees won’t see an increase in their Social Security benefits until January 2027. By then, a full year of higher prices could have eroded much of their financial cushion.

For retirees already struggling to cover basic costs, that lag can create a serious hardship.

What Can Retirees Do?

If the COLA isn’t keeping up with rising expenses, retirees may need to take proactive steps to protect their financial well-being. A few options to consider:

• Reevaluate annual spending. Look for non-essential expenses that can be trimmed or delayed.

• Explore part-time or flexible income. Even modest earnings can help bridge the gap during higher-inflation periods.

• Lean on family support if necessary. Having an honest discussion about temporary help from family members can make a meaningful difference.

• Revisit your financial plan. This is a good time to review your withdrawal strategy, investment income, and emergency savings to make sure your plan can weather inflation surprises.

The Importance of Adjusting Retirement Projections for Inflation

When planning for retirement, it’s critical to adjust annual expenses for inflation in your projections. Even modest inflation can dramatically change your future spending needs.

Let’s look at an example:

• A 65-year-old retiree today has annual living expenses of $60,000.

• If inflation averages 3% per year, by age 75, those same expenses would grow to roughly $80,600.

That’s over $20,000 more per year — just to maintain the same standard of living.

Failing to account for inflation in your retirement projections can lead to underestimating how much income you’ll truly need down the road. Whether you’re living off investment withdrawals, pensions, or Social Security, it’s essential to plan for rising costs and ensure your income sources can keep pace.

Final Thoughts

Now more than ever, staying proactive about budgeting, income planning, and inflation protection strategies is essential. Social Security was never meant to cover all retirement expenses — and in today’s environment, it’s important to ensure your broader financial plan can pick up where the COLA falls short.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQ)

How much will Social Security benefits increase in 2026?
The Social Security Administration announced a 2.8% Cost-of-Living Adjustment (COLA) for 2026, a modest rise from 2.5% in 2025. This increase remains below the ten-year average of roughly 3.1%.

Why is the 2026 COLA increase considered modest?
While the 2.8% adjustment helps offset inflation, it’s smaller than the larger increases retirees saw in 2022 and 2023 during periods of high inflation. Many retirees feel everyday costs, especially for healthcare and essentials, continue to rise faster than official inflation measures suggest.

How does the timing of COLA adjustments affect retirees?
COLA calculations are based on inflation data from the third quarter of the previous year, meaning there’s often a delay in responding to rising prices. If inflation increases during 2026, beneficiaries won’t see higher payments until 2027, leaving a potential gap between expenses and income.

What can retirees do if their Social Security increase isn’t keeping up with inflation?
Retirees can review spending habits, trim non-essential costs, explore part-time income opportunities, and update financial plans to better manage inflation risks. Maintaining flexibility and preparing for price changes can help preserve purchasing power.

How can inflation impact long-term retirement planning?
Even moderate inflation significantly raises living costs over time. For example, a retiree spending $60,000 annually could need over $80,000 within ten years if inflation averages 3%, underscoring the importance of including inflation adjustments in retirement projections.

Why is it important to revisit a financial plan regularly during retirement?
Regularly reviewing your financial plan helps ensure that income sources, such as investments or pensions, continue to meet rising expenses. Adjusting for inflation, healthcare costs, and market changes can help retirees maintain their desired standard of living.