The First 3 Years of Retirement: 7 Financial Decisions That Matter More Than You Think

The first three years of retirement can offer valuable planning opportunities, particularly when your paycheck has stopped but Social Security and required minimum distributions have not started. Decisions about withdrawals, Roth conversions, investments, and Medicare often affect one another. Greenbush Financial Group recommends looking at these early retirement decisions as one coordinated plan rather than a series of separate choices.

Why the First Three Years Matter

When your paycheck stops, you suddenly have to decide where your income will come from.

Should you spend cash? Sell investments? Take money from your IRA? Start Social Security?

These decisions are connected.

An extra $50,000 IRA withdrawal, for example, can increase taxable income, reduce your Roth-conversion opportunity, affect capital-gains taxes, potentially increase future Medicare premiums, and reduce future RMDs.

The first few years of retirement may also be some of your lowest-income tax years. If you do nothing, some of those opportunities can disappear.

Consider Mark and Susan.

They are both 64 and retiring with $1.8 million:

• $1.2 million in traditional 401(k)s and IRAs

• $200,000 in Roth IRAs

• $300,000 in a brokerage account

• $100,000 in cash

They expect to spend about $90,000 per year after tax and have not started Social Security.

Their situation illustrates seven decisions that can shape the next several decades.

1. Decide Where Your Retirement Paycheck Comes From

There is no universal rule that says you should spend taxable accounts first and Roth accounts last.

Instead, ask:

Which combination of accounts gives us the income we need without creating unnecessary taxes?

Mark and Susan might fund part of their first year's spending from cash, dividends, and their brokerage account rather than automatically taking $90,000 from an IRA.

That could keep their taxable income lower and leave room for another strategy, such as a Roth conversion.

Retirees should also consider directing dividends and interest to cash instead of automatically reinvesting them.

A reasonable cash reserve depends on the household, but maintaining roughly 12 to 24 months of expected portfolio withdrawals in cash and short-term investments can provide flexibility during a market decline.

Key Insight: Your withdrawal strategy should be based on taxes, markets, and future income, not simply which account has the easiest transfer button.

2. Take Advantage of the Retirement Tax Window

For many retirees, there is a gap between their final paycheck and the beginning of Social Security and RMDs.

That can create unusually low taxable-income years.

Mark and Susan have $1.2 million in tax-deferred retirement accounts. If they leave that money untouched, it could grow substantially before RMDs begin.

Instead, suppose they convert $75,000 per year to Roth for their first three years.

They move:

$225,000 from tax-deferred accounts into Roth accounts.

They pay tax today, but future growth on those dollars occurs inside the Roth, and those converted dollars no longer contribute to their future traditional IRA RMD balance.

If $225,000 subsequently grew at 5% for eight years, it would become roughly $330,000.

The goal is not to convert as much as possible. A conversion can affect tax brackets, capital-gains taxes, Medicare premiums, and other parts of the plan.

The better question is:

How much can we convert at a tax rate we are comfortable paying today compared with the tax rate we may face later?

3. Coordinate Social Security With IRA Withdrawals

Social Security should not be considered separately from investment withdrawals.

Suppose Mark is the higher earner and has a $3,200 monthly benefit at full retirement age. Delaying until age 70 could increase that benefit by approximately 24%, before future cost-of-living adjustments.

But delaying means Mark and Susan need to fund those years from somewhere else.

That can be useful.

They might spend taxable assets while completing Roth conversions before Social Security begins. Later, the larger Social Security benefit reduces the amount the portfolio needs to provide.

There is also a survivor consideration.

If Mark dies first, Susan generally does not continue receiving both Social Security benefits. The higher benefit can therefore become particularly important to the surviving spouse.

Key Insight: Delaying Social Security is not always best. Health, longevity, taxes, portfolio size, and survivor needs all matter.

4. Coordinate Roth Conversions, Capital Gains, and Medicare

This is where retirement tax planning becomes a balancing act.

Suppose Mark and Susan own an investment worth $60,000 with a $30,000 cost basis.

Selling it creates a $30,000 long-term capital gain.

During a low-income retirement year, some or potentially all of that gain could qualify for the 0% federal long-term capital-gains rate, depending on their other income.

That could allow them to diversify the portfolio while increasing the cost basis of their taxable investments.

But there is a catch.

If they complete a large Roth conversion first, that additional income can reduce the amount of capital gains eligible for the 0% rate.

Medicare creates another consideration.

Medicare generally uses income from two years earlier when determining IRMAA surcharges. A large Roth conversion or capital gain today could therefore increase Medicare premiums later.

That does not automatically make the transaction a bad idea.

Sometimes paying additional tax or Medicare premiums today creates greater long-term savings.

The important part is knowing the tradeoff before making the decision.

5. Prepare for RMDs Before You Have RMDs

One of the biggest retirement mistakes is waiting until RMDs begin to start planning for them.

Mark and Susan already have $1.2 million in tax-deferred accounts at age 64.

If those accounts continue growing, future RMDs could create more taxable income than they actually need.

Before RMDs begin, they have more control through:

• Roth conversions

• Strategic IRA withdrawals

• Social Security timing

• Charitable planning

This becomes even more important when one spouse dies.

The surviving spouse may eventually file as single while still owning much of the same IRA assets. That means narrower tax brackets and lower Medicare IRMAA thresholds.

A Roth conversion today should therefore sometimes be evaluated against the survivor's future tax rate, not just the couple's current rate.

6. Have a Plan for a Bad Market in Year One

Imagine stocks fall 25% six months after Mark and Susan retire.

Their expenses do not fall 25%.

Where does their income come from?

This is why retirement portfolios should be designed differently from portfolios that are still accumulating.

If Mark and Susan need $50,000 annually from their portfolio and maintain $75,000 to $100,000 in cash and short-term investments, they may have roughly 18 to 24 months of withdrawals available without relying heavily on stock sales.

During a major decline, income could come from:

• Cash

• Short-term bonds

• Dividends and interest

• Investments that held up better

The goal is to avoid being forced to sell stocks after a major decline simply because the monthly bills are due.

This is called sequence-of-returns risk. Poor returns early in retirement can be particularly damaging when withdrawals are occurring at the same time.

That does not mean retirees should abandon stocks. A retirement lasting 25 or 30 years still needs long-term growth.

The objective is to balance short-term spending needs with long-term growth.

7. Plan for the Expenses and Life Changes That Do Not Fit the Spreadsheet

Retirement rarely follows a perfectly predictable annual budget.

Suppose Mark and Susan decide to spend $100,000 remodeling their home.

Taking $100,000 from an IRA could create a much larger tax bill, reduce Roth-conversion capacity, affect capital-gains taxation, and potentially increase future Medicare premiums.

Paying cash, selling taxable investments, taking an IRA distribution, or financing the project can each produce a different result.

The same planning applies to an RV, new vehicle, vacation home, or other major purchase.

Retirement is also a natural time to review:

• Beneficiaries

• Wills and trusts

• Powers of attorney

• Account titling

• Long-term-care funding

• Emergency reserves

• Charitable giving

Charitably inclined retirees may also benefit from donating appreciated securities, using donor-advised funds in certain situations, or eventually making qualified charitable distributions from IRAs after reaching the eligible age.

One practical question is especially useful for married retirees:

If one of us died tomorrow, could the other person manage everything?

The surviving spouse should know where accounts are held, how income is generated, where estate documents are located, and who to contact.

Option A vs. Option B: What Coordination Can Change

Consider Mark and Susan's first three years.

Option A: Autopilot

They withdraw whatever they need from their IRAs, claim Social Security relatively early, complete no Roth conversions, and wait until RMDs begin to worry about taxes.

Their plan may still work.

But several planning opportunities may disappear.

Option B: Coordinated Planning

Instead, they:

• Fund some spending from cash and taxable investments

• Convert approximately $225,000 to Roth over three years

• Delay the higher earner's Social Security when appropriate

• Realize selected capital gains during lower-income years

• Monitor Medicare IRMAA

• Maintain short-term reserves for market declines

They might actually pay more tax during their first three years.

That can be intentional.

They are potentially trading a higher tax bill today for smaller future RMDs, more Roth assets, a larger Social Security benefit, and greater flexibility for the surviving spouse.

That is the difference between minimizing taxes this year and managing taxes throughout retirement.

How Much Can You Safely Spend?

There is no single withdrawal percentage that answers this question.

Your sustainable spending depends on:

• Portfolio size

• Social Security and pensions

• Taxes

• Investment allocation

• Inflation

• Healthcare expenses

• Longevity

• Large future purchases

For Mark and Susan, the better question is not simply whether $90,000 is a safe percentage of $1.8 million.

It is:

How much does the portfolio need to provide before Social Security begins, and how much will it need to provide afterward?

Retirement income changes over time. Your spending plan should account for those changes.

The First Three Years: A Simple Checklist

Year One

Determine how much you can spend, establish where your retirement paycheck will come from, build cash reserves, review the portfolio, and calculate whether a Roth conversion makes sense.

Year Two

Recalculate taxes, Roth-conversion capacity, capital gains, Medicare exposure, and Social Security timing based on what actually happened during year one.

Year Three

Stress-test the plan for a major market decline, future RMDs, long-term-care costs, large purchases, and the death of either spouse.

What Opportunities Disappear If You Do Nothing?

This may be the most important question.

Doing nothing during the first few years of retirement may not create an immediate problem.

But you may lose:

• Lower-income years for Roth conversions

• Opportunities to realize gains at favorable tax rates

• Additional Social Security growth

• Opportunities to reduce future RMDs

• Years of planning while both spouses can use joint tax brackets

The cost may not show up today.

It may appear 10 or 15 years later.

Final Thoughts

The first three years of retirement are about more than replacing your paycheck.

Withdrawals affect taxes. Taxes affect Roth conversions. Roth conversions can affect Medicare. Social Security affects future withdrawals. Today's IRA balance affects future RMDs. And all of those decisions can look very different after one spouse dies.

There is no universal withdrawal order or Roth-conversion strategy.

At Greenbush Financial Group, we believe the opportunity is in coordinating these decisions around the household's complete retirement plan.

The first few years of retirement give you something valuable: choices.

The goal is to use those choices before they begin disappearing.

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

1. Which account should I withdraw from first in retirement?
   There is no universal order. The best approach may combine cash, taxable investments, traditional retirement accounts, and Roth accounts based on taxes, spending needs, future RMDs, and Social Security.
2. Should I take Social Security or spend investments first?
   It depends on longevity, taxes, portfolio size, and survivor needs. Spending investments first can sometimes create additional Roth-conversion opportunities while allowing Social Security benefits to grow.
3. Should I convert my IRA to Roth before RMDs?
   A partial Roth conversion may make sense if your current tax rate is attractive compared with the rate you or a surviving spouse could face later.
4. How much should I convert to Roth?
   Consider tax brackets, capital gains, Medicare IRMAA, state taxes, and future RMDs. The appropriate amount should generally be recalculated each year.
5. What happens if the market crashes right after I retire?
   Cash and short-term investments can provide spending money without requiring immediate stock sales. This is one reason retirement portfolios should be structured around both withdrawals and long-term growth.
6. Why should I worry about RMDs years before they begin?
   The years before RMDs often provide the most flexibility to reduce future tax-deferred balances through Roth conversions and strategic withdrawals.

This article is for educational purposes and uses simplified hypothetical examples. Tax laws, Medicare rules, investment returns, and individual circumstances can change. The examples are not intended as individualized tax, investment, or legal advice.

Still Working at 65? Here’s What to Do About Medicare and Social Security

Turning 65 is a milestone that often raises questions about Medicare and Social Security. But if you’re still working — and especially if you have employer-sponsored health insurance — your decisions may not follow the traditional retirement playbook.

This guide outlines what you need to know about how continued employment affects Medicare enrollment and Social Security strategy.

Medicare: Do You Need to Enroll at 65?

You become eligible for Medicare at age 65, but whether you need to enroll right away depends on your health insurance situation.

If You Have Employer Coverage Through a Company with 20 or More Employees

• You can delay Medicare Part B (medical insurance) and Part D (prescription drug coverage) without penalty.

• Many people still choose to enroll in Part A (hospital insurance), which is typically premium-free, while keeping their employer plan as primary coverage.

• However, if you're still contributing to a Health Savings Account (HSA), be careful — enrolling in Medicare Part A makes you ineligible to continue making HSA contributions.

• Once you leave your job or lose coverage, you’ll qualify for a Special Enrollment Period and have eight months to sign up for Medicare Part B without facing late penalties.

If Your Employer Has Fewer Than 20 Employees

• You generally need to enroll in Medicare Parts A and B at age 65. Medicare becomes your primary payer, and your employer plan pays secondary.

• Failing to enroll can result in a gap in coverage and a permanent late enrollment penalty on your Medicare premiums.

• We strongly recommend reaching out to the HR contact at your employer well in advance of your 65th birthday to fully understand what actions you need to take with regard your Medicare enrollment for both you and your spouse if they are covered by your plan as well. 

Don’t Overlook Part D Requirements

If you delay enrolling in Medicare Part D, you must have “creditable” prescription drug coverage through your employer — meaning coverage that is expected to pay, on average, as much as Medicare’s standard prescription drug plan.

Be sure to confirm with your employer that your current plan meets Medicare’s creditable coverage standard to avoid future penalties.

How Social Security Fits Into the Picture

While you can claim Social Security as early as age 62, most people don’t reach their full retirement age (FRA) until age 67. While you are eligible to begin collecting your social security benefit while you are still working and prior to recaching age 67, it may make sense to delay receiving your social security benefits to avoid the earned income penalty.

If you claim before your full retirement age and your earnings exceed the annual limit ($23,400 in 2025), an earned income penalty is assessed against your benefit. For every $2 earned over the limit, $1 in benefits is withheld. These withheld benefits are not lost — your benefit is recalculated at FRA to account for months when payments were withheld.

Example:

If you earn $30,000 in 2025 before reaching FRA, you are $6,600 over the earnings limit. This would result in $3,300 of your Social Security benefits being withheld that year.

After you reach FRA, there is no reduction in benefits, no matter how much you earn.

Also by delay the receipt of your social security benefits, your benefit increase by about 6% per year between the ages of 62 and 67, and then increase by 8% per year between ages 67 and 70.

Key Action Steps at 65 If You're Still Working

• Review your employer health plan: Determine whether it’s considered creditable coverage and how it coordinates with Medicare.

• Decide on Medicare Part A: Enrolling may make sense, but if you're still contributing to an HSA, delay enrollment to remain eligible.

• Verify Part D creditable coverage: Confirm with your employer that your prescription plan meets Medicare’s standards.

• Review your Social Security strategy: Consider whether it makes sense to delay benefits to avoid earnings penalties and increase your monthly payout.

Final Thoughts

Working past age 65 can offer financial flexibility and allow you to delay drawing on Social Security, but it also comes with specific rules around Medicare and benefit eligibility. Taking the time to coordinate your health coverage, HSA contributions, and income planning now can help you avoid unnecessary penalties and make more informed decisions later.

Once you are within 5 year to retirement, it can be beneficial to work with a Certified Financial Planner to create a formal retirement plan which include reviewing what your expenses will be in retirement, social security filing strategy, Medicare coverage, distribution planning, and tax strategies leading up to your retirement date.

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 (FAQs):

Do I need to sign up for Medicare when I turn 65 if I’m still working?
If your employer has 20 or more employees and provides group health coverage, you can delay Medicare Part B and Part D without penalty. However, if your employer has fewer than 20 employees, you generally need to enroll in Medicare Parts A and B at 65, as Medicare becomes your primary insurance.

Can I keep contributing to my Health Savings Account (HSA) after enrolling in Medicare?
No. Once you enroll in any part of Medicare, including Part A, you can no longer make HSA contributions. To continue contributing, you must delay all parts of Medicare enrollment until after you stop HSA-eligible coverage.

What happens if I delay Medicare Part B & D while keeping employer coverage?
You can delay Part B & D of Medicare if your employer’s health plan is considered “creditable coverage,” meaning it’s as good as or better than Medicare’s standard plan. If your coverage isn’t creditable, you may face a permanent late enrollment penalty when you eventually sign up for Medicare Part B & D.

How does working past 65 affect Social Security benefits?
You can begin Social Security as early as age 62, but if you earn more than the annual limit before reaching full retirement age (FRA), your benefits may be temporarily reduced. After FRA, your earnings no longer affect your Social Security payments, and delayed benefits increase your monthly amount by up to 8% per year until age 70.

Should I enroll in Medicare Part A at 65 even if I’m still covered by my employer?
Many people enroll in premium-free Part A at 65 while keeping their employer plan as primary coverage. However, if you’re still contributing to an HSA, you should delay Part A enrollment to avoid losing HSA contribution eligibility.

What steps should I take as I approach age 65 while still working?
Confirm whether your employer plan is creditable coverage, decide whether to enroll in Medicare Part A, and review how your plan coordinates with Medicare. Also, evaluate your Social Security filing strategy to balance income needs, taxes, and future benefit growth.