Why the transition year matters

The transition year (the 12–24 months around the date you stop full-time work) is where good plans either pay off or reveal gaps. Paychecks stop, benefits and withholding change, and tax events (like large IRA distributions or Roth conversions) can move you into higher tax brackets. Income smoothing reduces short-term volatility so you can maintain your lifestyle while protecting long-term retirement resources.

In my practice working with people within five years of retirement, a short, disciplined transition plan prevents many common mistakes: liquidating tax-favored accounts too early, triggering avoidable tax on Social Security, or failing to cover Medicare and out-of-pocket health expenses. The key is a sequence that preserves optionality—keeping taxes, longevity risk, and liquidity in balance.

The basic sequence I use with clients

  1. Build a transition-year cash buffer: keep 6–12 months of living expenses in a high-yield savings account or short-term Treasury/municipal fund for liquidity and market protection.
  2. Map guaranteed income first: identify pension payments, spousal benefits, or immediate annuity options that create an income floor.
  3. Decide when to claim Social Security: delaying increases permanent benefits (~8% per year past FRA until age 70) but creates a gap if you retire early. Consider a bridge source if you delay claiming.
  4. Sequence withdrawals tax-efficiently: typically taxable accounts first, then tax-deferred IRAs/401(k)s with selective Roth conversions, and finally Roth assets. This order can minimize long-term taxes and manage future RMDs.
  5. Consider part-time or contract work to smooth taxable income in the first year.

Practical tactics to fund the transition year

  • Taxable-bucket withdrawals: Use low-basis or tax-loss-harvested taxable investments first to avoid triggering tax on retirement accounts and to take advantage of lower capital gains rates.
  • Short-term bond ladder or cash buffer: Avoid selling equities in down markets. A 6–12 month cash buffer reduces the need to sell when markets are down.
  • Roth conversions: Convert limited amounts from traditional IRAs to Roth IRAs during a low-income year to lock in lower tax rates and reduce future Required Minimum Distributions (RMDs). Keep conversions sized so you remain in the desired tax bracket.
  • Partial annuitization or immediate income annuity: If longevity or market risk is a top concern, buy a small annuity to cover essential expenses. Use annuities selectively—keep them proportional to liabilities.
  • 401(k) rollovers and plan options: Review withdrawal rules and penalty exceptions for in-plan distributions or early withdrawal exemptions (like the 72(t) SEPP) before deciding to roll to an IRA.

Tax-focused approach with sample numbers

A common client profile: Age 64, retiring at 65, $1.2M portfolio split 60% tax-deferred, 30% taxable, 10% Roth, plans to delay Social Security to 67.

Transition-year steps I recommend:

  • Maintain a $50k cash buffer (6 months expenses).
  • Withdraw $40k from taxable accounts first to fund living expenses and avoid raising ordinary income.
  • Limit Roth conversions to $20k that year so taxable income stays within the 12%–22% brackets (example only; bracket edges change yearly).
  • Defer large IRA withdrawals until RMDs begin (see RMD guidance) or until converting strategically in low-income years.

The math: moving some distributions from future RMDs to Roth conversions paid at low marginal rates can reduce lifetime taxes and lower future RMD-driven tax spikes. Use a tax-projection tool and consult up-to-date IRS guidance before converting (IRS: Roth IRAs, https://www.irs.gov/retirement-plans/roth-iras).

Social Security timing and bridging

If you delay Social Security to increase your guaranteed lifetime benefit, you need a bridge. Common bridge sources are taxable accounts, part-time work, or a temporary annuity. For people considering bridge strategies, see our related article on Bridging Strategies: Income Between Early Retirement and Social Security.

Be mindful: delayed claiming increases monthly Social Security benefits by roughly 8% per year after the full retirement age (FRA) up to age 70 (Social Security Administration: claiming rules and delayed retirement credits, https://www.ssa.gov/benefits/retirement/). The right choice depends on life expectancy, spousal claiming rules, and household cash flow.

Required Minimum Distributions (RMDs) considerations

RMD rules changed under SECURE 2.0. As of 2025, many taxpayers now face RMD rules that take effect later than under older law; check current IRS guidance on Required Minimum Distributions before planning withdrawals (IRS: RMDs, https://www.irs.gov/retirement-plans/required-minimum-distributions-rmds). Reducing future RMDs through Roth conversions during low-income years can be an effective smoothing tactic.

For step-by-step RMD planning, our glossary pages on Required Minimum Distribution (RMD) and RMD Strategies and Timing walk through timing, aggregation rules, and charitable options like qualified charitable distributions (QCDs).

Real-world examples (anonymized)

1) Couple delaying Social Security: A married couple with a $900k portfolio and defined-benefit pension delayed Social Security to age 68. They used taxable account withdrawals for the first three years and converted small IRA amounts to Roths when their taxable income dipped. The result: higher Social Security income later and a smaller RMD base.

2) Freelancer with uneven earnings: A self-employed 62-year-old established a monthly automated withdrawal plan from a taxable account and increased emergency savings to 9 months. He scheduled Roth conversions in years with low client revenue, keeping conversions within the 12% tax bracket.

These examples show the importance of a written, year-by-year plan. Use a retirement income calculator to stress-test scenarios under different market returns and longevity assumptions.

Checklist: action items for the transition year

  • Create a monthly cash-flow forecast and identify the exact gap between guaranteed income and expenses.
  • Establish a 6–12 month cash buffer in liquid assets before your last paycheck.
  • Run Social Security optimization scenarios and test delaying vs. claiming (see How to Coordinate Social Security and Retirement Account Withdrawals).
  • Model Roth conversions with tax brackets and future RMD impact in mind.
  • Review employer plan rules, distributions, and penalty exceptions before rolling over assets.
  • Consider small annuity purchases only after comparing implied costs and benefits.

Common mistakes to avoid

  • Selling equities during a market downturn to fund the transition—use a cash buffer or short-term ladder instead.
  • Converting too much to Roth in one year without modeling the long-term tax trade-offs.
  • Ignoring Medicare Part B/D premium timing and the income-related monthly adjustment (IRMAA) triggered by higher MAGI in a conversion year.
  • Forgetting to coordinate spousal claiming strategies and survivor income needs.

Tools, resources and further reading

Internal FinHelp articles referenced above:

Professional note and disclaimer

In my practice I prioritize a written transition-year plan with taxable-sequence modeling, Roth conversion scenarios, and a cash buffer. This article provides educational guidance and examples, not personalized financial or tax advice. Tax rules change and details—such as RMD age thresholds, tax brackets, and Medicare IRMAA—should be verified against current IRS and SSA guidance or with a qualified tax or financial advisor before implementing a strategy.

Sources: IRS, Social Security Administration, Consumer Financial Protection Bureau. Additional planning guidance appears in FinHelp glossary articles linked above.