Retirement is one of life’s significant milestones, and if you’re planning to retire in 2025, the decisions you make now can significantly impact the quality of your post-retirement life. Whether you’re confident in your financial plan or still navigating some unknowns, several critical actions can help make your transition as smooth as possible. Below, we explore five steps to take now if you’re gearing up for retirement in the next year.

Step 1: Forecast Your Income— Know Where Your Retirement Money Will Come From

Understanding your future income sources is one of retirement preparation’s first and most essential steps. Knowing exactly where your money will come from when you retire helps provide peace of mind and gives you a clearer picture of how much flexibility you’ll have in your spending.

Key Questions to Consider:

• Are you planning to take distributions from investment accounts?
• Which accounts will you draw from first, and which funds should be liquidated to ensure the portfolio remains balanced?
• Are you delaying taking Social Security benefits? If so, how will that impact your overall cash flow?

Social Security will only cover some expenses for many retirees, and there may be gaps to fill. For those who have built a diverse portfolio, now is the time to assess whether your investments can sustain withdrawals without overstraining them.

Consider this: Do you have a tax-advantaged plan, such as a 401(k), IRA, or Roth IRA, that you’ll need to start tapping into?  Traditional accounts like 401(k)s and IRAs are subject to required minimum distributions (RMDs) starting at age 73. which may accelerate taxable income.

If you plan to rely heavily on your investment accounts for income, work with a financial planner to ensure your withdrawals are sustainable. Review each account’s performance, expected returns, and how inflation or market volatility may affect your portfolio. A well-diversified mix of assets can provide a steady income during retirement.

Step 2: Forecast Your Taxes— Strategize for Tax-Efficient Withdrawals

When it comes to taxes, not all income is created equal. Planning your retirement income tax strategy now can save you substantial amounts. One key strategy to explore before retiring in 2025 is deciding whether to convert traditional retirement accounts to Roth IRAs during your final year of earnings.

Why Consider Roth Conversions?

Traditional 401(k) and IRA withdrawals are subject to income taxes. However, Roth IRAs grow tax-free, and qualified withdrawals aren’t taxed either. If you anticipate that your income will be lower in retirement (or if tax rates rise in the future), this could be an ideal time to convert a portion of your savings into a Roth IRA.

By doing so in your last year of high earnings, you may pay taxes now, at historically low rates, rather than later, when you may be taxed at higher future rates.

Additional Tax Considerations:

• Can you bunch your income or defer certain income until retirement to manage your tax bracket?
• Should you accelerate certain deductions, such as charitable contributions or medical expenses, into this tax year while your income is still high?

Many retirees neglect the importance of tax-efficient withdrawal strategies. If your income sources include pensions, investment returns, and Social Security, each is taxed differently. A financial planner or tax advisor can help you structure your income to minimize unnecessary tax burdens.

Step 3: Charitable Giving— Maximize Tax Deductions While You’re Still Earning

If charitable giving is a part of your financial plan, 2024 might be the perfect year to maximize the tax benefits of those donations. Your income will likely decrease as you approach retirement, and you could end up in a lower tax bracket.

Why Bunch Charitable Contributions Now?

When you retire, the potential tax benefit from itemizing deductions may drop. It could make sense to “bunch” your charitable contributions into your last high-income year, where they may offer more significant tax relief.

For example, if you’re in a 22% or 24% tax bracket in your final year of work, donations made during this time will yield a larger deduction than those in the 12% or 22% bracket after you retire. If you plan to donate a set amount annually, consider making those contributions upfront in 2024 to take full advantage of your current tax bracket.

Donor-Advised Funds (DAFs)

Another tax-efficient way to manage charitable giving is by opening a donor-advised fund. A DAF allows you to contribute a large lump sum now, take an immediate tax deduction, and distribute the funds to your chosen charities over time.

Strategizing your charitable donations before you stop working is a great way to maximize your tax benefits and leave a lasting legacy of generosity.

Step 4: Plan Your Health Coverage— Preparing for Medical Expenses in Retirement

Healthcare costs can be one of the most unpredictable aspects of retirement planning. As you approach retirement, it’s critical to understand how your health insurance coverage will change.

Medicare and the Affordable Care Act (ACA)

If you retire before age 65, you must bridge the gap between your employer-sponsored health plan and Medicare eligibility. This is where the ACA (Affordable Care Act) may come into play. Consider your income levels during this transition period—income affects your qualification for subsidies through the ACA.

However, if you’re already 65 or older, Medicare can become your primary health insurance provider. But beware of hidden costs—while Medicare covers a substantial portion of medical expenses, it doesn’t cover everything. Consider the cost of Medicare premiums, supplemental coverage (Medigap), or Part D prescription drug plans in your budget.

Medicare Part B Premiums

Your income in the years leading up to retirement could also impact your Medicare Part B premiums. These premiums are means-tested, which means that higher-income retirees pay more. Planning your income in the years before you apply for Medicare can help reduce your monthly costs in retirement.

Working with a financial planner to optimize your income and tax strategy for both ACA and Medicare could mean substantial savings on health coverage premiums.

Step 5: Book a Trip to Celebrate— Enjoy the Milestone!

Retirement isn’t just about financial strategies and tax planning, it’s also a significant life achievement that deserves celebration. After years of hard work, you’ve earned the right to unwind and enjoy the fruits of your labor.

Planning a trip or unique experience to mark your retirement can create lasting memories and allow you to enter this new phase of life with excitement. Whether it’s a dream vacation abroad or a relaxing getaway closer to home, this is a time to honor yourself.

Bonus Tip

If booking a trip in 2025, consider travel insurance, particularly if you’re retiring early and may not yet have Medicare coverage. A well-planned trip now is not just a reward for your career; it’s a great way to embark on this exciting new chapter.

Conclusion

As you prepare for retirement in 2025, these five steps will help ensure a financially secure and fulfilling retirement. Forecasting your income, planning for taxes, maximizing charitable giving, securing health coverage, and celebrating your accomplishments are all critical components of a successful transition. Start today by reviewing your financial plan and working with a financial planner to make these crucial decisions—your future self will thank you.

If you’re nearing retirement and have questions about these steps, we’d be happy to help you develop a tailored retirement strategy. Contact us today for a complimentary consultation