Direct answer: The year before and the year of retirement are when several financial decisions must be made deliberately. Key tasks include: building a 1 to 2 year cash buffer in stable accounts so you do not have to sell investments during a market downturn in early retirement; confirming the Social Security claiming date; verifying Medicare enrollment; reviewing and updating all beneficiary designations; and establishing a withdrawal sequence (generally: taxable accounts first, then traditional tax-deferred accounts, then Roth accounts, adjusted for tax efficiency).
The Year You Retire: Portfolio Tasks Before the First Withdrawal
Why is a cash buffer critical in early retirement?
The first several years of retirement carry the highest financial risk from a portfolio perspective. If markets decline sharply in the early years of retirement and you are simultaneously withdrawing from investments to fund living expenses, you are selling shares at depressed prices. This leaves fewer shares to participate in a subsequent recovery, which can permanently shorten the life of your portfolio. This dynamic is called sequence-of-returns risk.
A cash buffer of 1 to 2 years of living expenses held in a high-yield savings account, money market fund, or short-term CDs allows you to cover expenses without selling investments during a downturn. You replenish the buffer from your portfolio when markets recover to acceptable levels.
Some financial planners use a three-bucket framework: a short-term bucket (0 to 2 years of expenses, cash equivalents), a mid-term bucket (2 to 10 years of expenses, bonds and balanced funds), and a long-term bucket (10 or more years of remaining assets, equities). The Swoopr Sequence-of-Returns Simulator can model the impact of early-retirement drawdowns on portfolio longevity.
What is the recommended withdrawal sequence for retirement accounts?
The conventional withdrawal order is designed to minimize lifetime taxes. It generally follows this sequence:
- Taxable brokerage accounts first. Withdrawals from taxable accounts may be taxed at lower long-term capital gains rates if the assets have been held more than one year. These accounts have no required minimum distributions, so depleting them first allows tax-advantaged accounts to continue compounding.
- Traditional IRA and 401(k) accounts second. Withdrawals are taxed as ordinary income. Drawing from these accounts in moderate amounts in the years before RMDs begin can help manage tax brackets and reduce future RMD amounts.
- Roth IRA and Roth 401(k) accounts last. Qualified Roth withdrawals are tax-free. Preserving Roth accounts as long as possible maximizes tax-free growth and provides a tax-efficient legacy for heirs.
This sequence is a starting framework, not a fixed rule. Tax bracket management, Medicare Income-Related Monthly Adjustment Amounts (IRMAA), charitable giving strategies, and Roth conversion opportunities all affect the optimal sequence in any given year. Work with a tax advisor or fee-only financial planner to model the optimal withdrawal path for your situation.
What administrative tasks must be completed before the first retirement income payment?
Several administrative tasks must be completed before your income streams are active and reliable. Working through these 6 to 12 months before your target retirement date is advisable:
- Contact Social Security to confirm your full retirement age and projected benefit at each claiming age. Determine whether delaying to age 70 is financially viable.
- Verify Medicare enrollment timing. Most people must enroll during the 7-month window around their 65th birthday (3 months before, the month of, and 3 months after). Missing this window results in permanent premium penalties in many cases.
- Review and update beneficiary designations on all retirement accounts, life insurance, annuities, and bank accounts. Beneficiary designations override the will and must reflect your current wishes.
- Evaluate whether you need to purchase a supplemental Medicare plan (Medigap policy) or whether a Medicare Advantage plan is more appropriate for your health needs and finances.
- Confirm how your employer pension or defined-benefit plan (if applicable) distributes benefits and whether you will select a single-life or joint-and-survivor annuity option.
- Set up regular distributions from your investment accounts in amounts that match your monthly spending need, accounting for Social Security income and any pension income.
Frequently Asked Questions
How much cash should I hold in a retirement cash buffer?
A common recommendation is 1 to 2 years of living expenses in a high-yield savings account, money market fund, or short-term CDs. This prevents the need to sell equities during a market downturn in early retirement (the sequence-of-returns risk). Some planners extend this to a bucket approach: short-term bucket (0 to 2 years, cash equivalents), mid-term bucket (2 to 10 years, bonds and balanced funds), long-term bucket (10+ years, equities).
What is the sequence-of-returns risk?
Sequence-of-returns risk is the danger that poor market returns in the early years of retirement can permanently impair a portfolio's longevity, even if long-term average returns are acceptable. Withdrawing from a portfolio that has just declined by 30% forces you to sell more shares to meet the same dollar need, leaving fewer shares to recover when markets rise. The cash buffer strategy is one way to mitigate this risk.
Should I take Social Security before or after I retire?
This is one of the most significant retirement income decisions. Delaying Social Security to age 70 (if financially feasible) maximizes lifetime income, particularly if you have good health and longevity in your family. Taking it at FRA or earlier makes sense if you need the income or have health concerns. Early retirement without Social Security income requires the portfolio to fully support spending until benefits begin. Each situation requires individual analysis; consult a financial planner.