Avoiding Mistakes in the Five Critical Years Before and After Retirement

Retirement is an exciting transition, but as you enter the five critical years before and after retirement, the stakes get higher. This critical period is when many of your financial decisions will be irrevocable and permanent and can have lasting consequences. There are a lot of moving parts for you to think about, along with a ton of serious decisions to make so avoiding big mistakes is super important.

I’ll never forget a call I received in 2009 from a pharmacist who had planned to retire that year—until the 2008 market crash wiped out 40% of her 401(k). She had assumed she had more time to adjust her risky exposure in her investments, but unfortunately poor timing caused her to delay her retirement. Unfortunately, this is an example of exactly what not to do when preparing for retirement.

This is a stark reminder that retirement planning isn’t a last-minute drive-thru decision. You can’t wait until the last minute and order a plan from the menu. It requires careful, strategic preparation especially during the five critical years before and after retirement.

Key Considerations Before Retirement

Understanding Age-Related Rules

• 401(k) & 403(b) Withdrawals: Normally, there’s a 10% penalty for withdrawing funds before 59½. However, if you leave your employer at 55 (or 50 for public-safety employees), you may access funds penalty-free—if you keep them in your employer plan (see IRS.gov for more information).

• Social Security Timing: You can claim benefits as early as age 62 (or 60 for widows/widowers), but this permanently reduces your payments. While early claiming is an option, it’s often better for high-income earners in good health to wait. In many cases, the higher-earning spouse should delay benefits until 70 to maximize the survivor benefit. When one spouse passes, the surviving spouse receives the larger of the two benefits, making delayed claiming a strategic advantage for long-term financial security.

• Earnings Limit Rule: If you claim Social Security before full retirement age (66-67), continuing to work could temporarily reduce your benefits. Another factor to consider is the earnings limit rule, which is triggered if you claim Social Security before your full retirement age and continue to work. Social Security defines your full retirement age by your date of birth. For most it will be in the age 66‐67 range, but you can look up your exact full retirement age on the Social Security website. Once you reach full retirement age, the earnings limit no longer applies to you, meaning that you can continue to work and collect full benefits.

Preparing for Retirement: Next Steps

As you approach retirement, consider these steps to simplify your financial life:

• Building up cash reserves and reducing risk in your portfolio can help protect your savings from market volatility.
• Reevaluate your investment allocation to ensure it aligns with your retirement timeline. Your investment allocation should shift as you approach retirement.
• Begin exploring your ideal retirement lifestyle—where you’ll live, how you’ll spend your time, and what activities will bring you joy.
• Simplify your financial accounts by consolidating where possible.

Health Care Costs in Retirement

• Medicare Eligibility: Most qualify at 65. Part A (hospital coverage) is free if you or your spouse have paid Medicare taxes for 40 quarters, while Part B (doctor’s visits and other preventative services) requires a premium that increases with income.
• Early Retirement Options: Retiring before 65 may qualify you for an Affordable Care Act tax credit to help cover health insurance premiums, even if you’re affluent. This subsidy is based on your modified adjusted gross income (MAGI) and applies only to HealthCare.gov plans. Many retirees assume their income is too high to qualify, but strategic tax planning—such as timing pension withdrawals, Social Security, or 401(k) distributions—can lower MAGI and increase eligibility. For example, a couple with a $1.7 million net worth qualified for over $30,000 in annual health care tax credits by living off savings and reporting low taxable income. Proper planning can significantly impact your access to these benefits. For more information, see how and when to apply for Medicare at USA.gov.

The Value of Professional Guidance

Market volatility, inflation, and life’s unexpected events are inevitable—but a strong financial plan can provide stability, especially during the five critical years before and after retirement. At Theia Financial, we specialize in helping women build personalized retirement plans tailored to their unique needs. If you want to ensure you’re on the right track, let’s talk. Schedule a complimentary call today to start building a plan that gives you confidence in your financial future.