What to Do With Your Finances the Year Before You Retire

The average American retires at age 62, but only 48% of pre-retirees have calculated how much income they will actually need in retirement, according to the 2025 Employee Benefit Research Institute Retirement Confidence Survey. That means more than half walk into retirement without a number. They know they want to stop working. They do not know if they can afford to.

The year before retirement is different from every other year of your financial life. You are transitioning from accumulation mode to distribution mode. The rules change. Withdrawals replace contributions. Tax-deferred accounts start requiring distributions. Health insurance shifts from employer to Medicare. Social Security goes from a future promise to a claiming decision with permanent consequences. Getting this year right matters more than any single investment decision you made in the 30 years before it.

This post covers the 8 financial moves to make in the 12 months before retirement, in chronological order: calculate your retirement income, decide when to claim Social Security, enroll in Medicare, build your retirement budget, shift your portfolio for income, pay off high-interest debt, plan your withdrawal strategy, and build a 12-month cash buffer.

Move 1: Calculate Your Retirement Income

The 3 income layers

Your retirement income comes from three layers. Layer 1 is guaranteed income: Social Security, pension, annuity. This is the floor. It arrives every month regardless of markets. Layer 2 is portfolio withdrawals: 401(k), IRA, Roth IRA, brokerage. This is the variable layer. It depends on market performance and your withdrawal rate. Layer 3 is other income: part-time work, rental income, royalties. Optional but helpful for reducing portfolio pressure.

The SSA.gov Retirement Benefits planner lets you see your benefit estimates at different claiming ages, spousal benefits, and survivor benefits. Create a my Social Security account and download your statement. The number on your statement is the starting point for Layer 1.

The number you need

Calculate your total monthly expenses, including taxes. Subtract your guaranteed income (Social Security plus pension). The gap is what your portfolio must cover. If the gap is $30,000 per year and you use the 4% rule, you need $750,000 in investable assets. If the gap is $50,000 per year, you need $1.25 million.

For the full calculation framework, read our guide on how much you need to retire.

The honest assessment

If your portfolio cannot cover the gap at a 4% withdrawal rate, you have three options: delay retirement, reduce expenses, or work part-time in retirement. Do not skip this calculation. Hoping the numbers work is not a strategy.

Move 2: Decide When to Claim Social Security

The claiming decision is permanent

Claiming at 62 means reduced benefits, up to a 30% reduction from full retirement age. Claiming at full retirement age (67 for most people retiring in 2026) means 100% of your benefit. Claiming at 70 means 124% of your benefit, because delayed retirement credits add 8% per year past full retirement age.

The 2026 COLA is 2.8%, bringing the average retired worker benefit from $2,015 to $2,071 per month, according to the SSA 2026 Cost-of-Living Adjustment Fact Sheet. The maximum benefit for a worker retiring at full retirement age in 2026 is $4,152 per month.

The breakeven analysis

Claiming at 62 versus 70 produces a breakeven at approximately age 80 to 82. If you expect to live past 82, delaying to 70 produces more lifetime income. If you have health concerns or immediate cash needs, claiming earlier may be correct.

Spousal benefits add complexity. The higher earner should generally delay to 70 to maximize the survivor benefit, because when one spouse dies, the surviving spouse receives the higher of the two benefits, not both.

For the full claiming comparison, read our guide on Social Security at 62 vs 67 vs 70. For the claiming strategy framework, read our guide on when to claim Social Security.

The 2026 specific note

Full retirement age for people born in 1960 or later is 67. If you turn 67 in 2026, you were born in 1959. Check your specific full retirement age at SSA.gov, because it affects your benefit calculation. The Social Security Administration recommends applying 3 months before you want benefits to start.

Move 3: Enroll in Medicare

The 7-month Initial Enrollment Period

Your Initial Enrollment Period starts 3 months before the month you turn 65, includes the month you turn 65, and ends 3 months after the month you turn 65. Sign up 3 months before your 65th birthday for coverage that starts the month you turn 65. The Senior65 Turning 65 in 2026 Medicare Enrollment Checklist walks through the enrollment timeline, late penalties, and plan selection step by step.

If you are still working at 65

If your employer has 20 or more employees, you can delay Medicare without penalty and enroll later via a Special Enrollment Period. If your employer has fewer than 20 employees, Medicare may be primary. Check with HR. Do not assume your employer plan covers you. Confirm the coordination rules.

For Medicare coverage details, read our guide on what Medicare actually covers.

2026 Medicare costs

The standard Part B premium is $202.90 per month in 2026, up from $185.00 in 2025, according to CMS.gov 2026 Medicare Parts A and B Premiums and Deductibles. The Part B deductible is $283.

IRMAA surcharges apply if your modified adjusted gross income from 2 years ago exceeds $109,000 for single filers or $218,000 for joint filers. If you are retiring, your income will drop. File Form SSA-44 to request a reduction in IRMAA based on your current (lower) income. This can save you hundreds of dollars per month.

Move 4: Build Your Retirement Budget

The shift from saving to spending

Your working budget had a savings line. Your retirement budget replaces it with a withdrawal line. Track the last 6 months of spending to establish your baseline. Categorize expenses as essential (housing, food, utilities, insurance, healthcare) or discretionary (travel, dining, hobbies).

Essential expenses should be covered by guaranteed income (Social Security plus pension). Discretionary expenses can be covered by portfolio withdrawals, which gives you flexibility in down markets.

Healthcare costs in retirement

A 65-year-old couple retiring in 2026 needs approximately $351,000 to cover healthcare costs in retirement, according to the Milliman 2025 Medical Index. Medicare does not cover everything. Dental, vision, hearing, and long-term care are largely out-of-pocket. Budget $300 to $500 per month for Medicare premiums plus out-of-pocket costs.

For the emergency fund in retirement context, read our guide on what an emergency fund is really for.

Moves 5 and 6: Shift Your Portfolio and Pay Off Debt

5. Shift your portfolio for income

In accumulation, you optimize for growth. In distribution, you optimize for stability. Build a 2 to 3 year cash buffer in a high-yield savings account or money market fund. This prevents selling investments during market downturns.

Shift 2 to 3 years of expenses into bonds, CDs, or Treasury bills. The bucket strategy separates short-term needs from long-term growth. Keep the rest invested in stocks for growth. You may live 25 to 30 years in retirement, and inflation will erode a portfolio that is too conservative.

For the bucket strategy framework, read our guide on bucket strategy retirement income. For why withdrawal order matters, read our guide on sequence of returns risk.

Fidelity's 5 ideas to refine your 2026 financial plan covers net worth review, cash flow forecasting, and rebalancing as you approach retirement.

6. Pay off high-interest debt

Credit card debt at 21% or higher APR is toxic in retirement. Pay it off before your last paycheck. The guaranteed return of eliminating a 21% APR balance beats any investment you can make.

The mortgage decision is more nuanced. If your rate is 3%, keeping the mortgage and investing the difference may produce more wealth. If your rate is 6% or higher, paying it off reduces monthly expenses and risk.

Auto loans should be paid off before retirement if possible. A $500 per month car payment consumes a large portion of a fixed income.

For the mortgage payoff decision, read our guide on whether to pay off your mortgage or invest in your 50s.

Moves 7 and 8: Withdrawal Strategy and Cash Buffer

7. Plan your withdrawal strategy

The 4% rule says to withdraw 4% of your portfolio in year 1, then adjust for inflation each year. This has historically sustained a 30-year retirement.

The tax-efficient withdrawal order is: taxable brokerage first, then tax-deferred (traditional 401(k) or IRA), then tax-free (Roth IRA). This sequence minimizes taxes over the long run.

RMD considerations: if you are 73 or older, you must take Required Minimum Distributions from traditional accounts. Plan withdrawals to satisfy RMDs while minimizing taxes. If you are in a low tax bracket before RMDs begin, convert traditional IRA funds to Roth IRA to reduce future RMDs and your tax burden.

For the withdrawal rate analysis, read our guide on the 4% rule safe withdrawal rate. For the conversion strategy, read our guide on Roth conversion before retirement. For RMD rules, read our guide on required minimum distributions explained.

8. Build a 12-month cash buffer

Keep 12 months of expenses in cash, in a high-yield savings account or money market fund. This is separate from your investment portfolio. It is your spending buffer.

In down markets, you spend from cash instead of selling investments at a loss. Refill the cash buffer during up markets by selling appreciated investments. This is the single most effective protection against sequence of returns risk.

Pre-Retirement Checklist: 8 Moves in Chronological Order

Real-World Examples

Example 1: The 63-year-old who discovered her gap

A 63-year-old plans to retire at 64. She has $680,000 in her 401(k), $45,000 in a Roth IRA, and $20,000 in savings. Her monthly expenses are $4,200. Social Security at 64 would pay $1,650 per month. Her gap is $2,550 per month, or $30,600 per year. At a 4% withdrawal rate, she needs $765,000. She is $85,000 short.

She decides to work 18 more months, contributing $1,500 per month to her 401(k), reaching approximately $710,000. She also reduces expenses to $3,900 per month by paying off her car loan. Her new gap is $2,250 per month, or $27,000 per year, requiring $675,000. She can now retire comfortably at 65 and 6 months. The income calculation told her the truth 18 months before she would have made a mistake.

Example 2: The 66-year-old who enrolled in Medicare while working

A 66-year-old is still working and has employer health insurance. He turns 67 (his full retirement age) in March 2026. He plans to retire in June 2026. He enrolls in Medicare Parts A and B in December 2025, 3 months before his 67th birthday, but delays claiming Social Security until 70 to maximize his benefit.

His employer plan remains primary until he retires in June, at which point Medicare becomes primary. He files Form SSA-44 to reduce his IRMAA surcharge because his income drops from $145,000 to $52,000 at retirement. His Part B premium drops from the IRMAA surcharge tier to the standard $202.90 per month. Enrolling in Medicare while still working and filing the IRMAA reduction saved him approximately $974 per year in premium surcharges.

Example 3: The 64-year-old who cleaned up debt and built a buffer

A 64-year-old retires with $1.2 million in investments, a $280,000 mortgage at 3.25%, and $14,000 in credit card debt at 22% APR. He pays off the credit card immediately from savings. He keeps the mortgage because the 3.25% rate is lower than what he earns on his investments.

He builds a 12-month cash buffer of $48,000, representing his annual expenses minus Social Security. He invests the remaining portfolio in a 60/40 stock and bond allocation. When the market drops 15% in his second year of retirement, he spends from cash and does not sell a single share. By year 3, the market recovers and he refills his cash buffer. The cash buffer and debt cleanup prevented a market downturn from becoming a permanent loss.

Common Mistakes

• Not calculating your income gap. Walking into retirement without knowing if your portfolio can cover the gap between expenses and guaranteed income is the most common and most dangerous mistake. Run the numbers 12 months before your last paycheck.

• Claiming Social Security at 62 out of habit. The reduction is permanent. If you live to 85, claiming at 70 instead of 62 produces approximately $250,000 more in lifetime benefits for an average earner.

• Missing Medicare enrollment deadlines. Late enrollment penalties are permanent and cumulative. The Part B late penalty is 10% of the premium for every 12 months you were eligible but did not enroll.

• Retiring with credit card debt. A 22% APR on a $14,000 balance costs $3,080 per year in interest. On a fixed income, this is devastating.

• Keeping a 90/10 stock allocation. A market crash in the first 2 years of retirement can permanently impair your portfolio if you are too aggressive. Shift to 60/40 or 50/50 before you retire.

• Not building a cash buffer. Without 12 months of expenses in cash, a market downturn forces you to sell at a loss. This is sequence of returns risk, and it is the biggest threat to a new retiree.

• Forgetting to file Form SSA-44 for IRMAA. If your income drops at retirement, you can request an immediate IRMAA reduction instead of waiting 2 years for the tax return to catch up.

Conclusion

The year before retirement is your last chance to get the numbers right. Calculate your income gap. Decide when to claim Social Security, knowing that delaying to 70 increases benefits by 8% per year. Enroll in Medicare during your 7-month Initial Enrollment Period, which runs from 3 months before your 65th birthday through 3 months after. Build a retirement budget that separates essential from discretionary spending. Shift your portfolio from growth to income with a 12-month cash buffer. Pay off high-interest debt. Plan your withdrawal strategy using the 4% rule and the tax-efficient withdrawal order. File Form SSA-44 if your income drops at retirement to reduce IRMAA surcharges.

You have spent 30-plus years accumulating wealth. The next 12 months are about converting that wealth into income. The transition is not automatic. It requires calculation, planning, and a few irreversible decisions. Get these right and the rest of retirement is about living, not worrying.

Calculate your retirement income gap today. Subtract your estimated Social Security benefit from your monthly expenses. If your portfolio cannot cover the gap at a 4% withdrawal rate, pick one action from this checklist to close it. Then read our guide on how much you need to retire for the full calculation framework.

This post is for informational purposes only and does not constitute financial advice. Consult a qualified financial advisor or tax professional before making retirement decisions.