This “Drive-By” Planning Will Cost Retired Feds Thousands

There are two parts of retirement planning that, if you get them wrong, can have a major impact on your long-term retirement success.

I’ve seen all the common rules of thumb over the years. The 4% rule. A 60/40 portfolio. Variations of “set it and forget it.”

Many of these are helpful starting points, but there are a couple of areas where these shortcuts break down quickly. And unfortunately, they tend to be the ones that matter most.

The hard part? These concepts are simple, but the execution is not.

What Gets You to Retirement Isn’t What Keeps You There

As your wealth grows, the strategies that create success are relatively straightforward.

Managing cash flow: stay out of excessive debt, don’t be “house poor”, keep a reasonable budget.

Managing assets: invest consistently and for growth in the TSP (C, S, and I fund, or low-cost index funds if outside the TSP) and look away for 30 years while letting time do the heavy lifting.

If you did these correctly, this formula works very well for federal employees. Decades of disciplined saving, especially for those who maxed out their TSP, can lead to a seven-figure portfolio by retirement.

But then you approach retirement, and everything begins to change. You realize that what helped you build wealth is not what will help you preserve it in retirement. The job at hand has changed.

In retirement, taxes often become one of the largest expenses you’ll face, sometimes the largest. That’s why tax planning sits at the center of what we do with clients.

Here’s a simple way to think about it:

Saving and investing during your career is like driving down the highway. You may speed up or slow down, but you’re moving forward.

Retirement is different. Now you’re managing your money in reverse. It’s like driving backwards throughout retirement down that same highway. The consequences of mistakes become more significant and cost you more.

Why “Rules of Thumb” Around Roth Conversions Fall Short

I’ve heard them all in my time serving feds. Don’t convert in a high tax bracket. Only convert up to the 22%/24% bracket. Don’t convert while you’re still working.

These sound reasonable. In some cases, they’re not entirely wrong. But like most rules of thumb, they’re incomplete. This type of “drive-by” planning overlooks the bigger picture and glosses over important details.

Take the idea of converting only up to the 22% or 24% tax bracket. It’s often used as a guideline, but on its own, it can lead to poor decisions.

The only way to know if a conversion strategy makes sense is to project future expected income. You must understand what your taxable income will look like when required minimum distributions (RMDs) begin, and how today’s decisions affect future outcomes.

Roth conversions are not one-size-fits-all. They need to be evaluated continuously and adjusted over time.

When increasing taxable income (Roth conversion = increased taxable income), there’s much more to be concerned about than just the bracket.

1. IRMAA Surcharges – There are four surcharge levels within just the 22% bracket alone. Each one you miss by converting “through the 22% bracket” means higher taxes you created.
2. Timing – “I’ll start converting in retirement.” Wrong thought process. How do you know your expected future RMDs won’t increase your taxable income? Even if they don’t, are you confident tax rates will be lower then, relative to where they are today?
3. Effective Tax vs Marginal Rate – Know the difference. Your marginal rate is the 22% or 24% (or any other). Your effective rate is your tax bill which is seldom the same as your marginal rate. It needs to be calculated for every single Roth conversion. Period. Don’t know how? Watch the included video.
4. Lost Deductions – Converting through the 22% bracket also means you can lose certain tax deductions, which adds thousands in extra tax liability.
5. Net Investment Income Tax – That’s right, there’s more. ~3.8% additional tax if your income is within certain thresholds. If you’ve been a good saver and/or expect an inheritance, this could be a problem you have. We have many clients in this situation.

These are all hidden costs and additional taxes that people miss, not realizing the strategy they’re implementing is hurting them, not helping; all while “staying in the same bracket”.

Revisit Conversions Regularly

One of the biggest misconceptions is that you can create a Roth conversion plan and follow it through retirement. That’s not how it works. Aside from everything I’ve already shared, if you still need more convincing, consider the following.

We have some form of tax legislation almost every year. Few make headlines (like OBBBA), while most fly under the radar. Will Turbo Tax apply them? Sure, only to ensure you pay the tax, not help you reduce it.

Working with retirees has made it crystal clear to me: retirement is full of one-off expenses. This means your taxable income changes. Beyond that, markets change, which affects RMDs. Priorities and goals change, which affects your income. Each conversion becomes unique. This is a dynamic process. It requires ongoing recalibration and adjustment, so make sure you’re giving it the attention it deserves.

Thinking Beyond Your Lifetime

For families with significant retirement assets, especially those who expect to leave a legacy, there’s another factor to consider.

Under current law, non-spouse beneficiaries are generally required to withdraw inherited pre-tax retirement accounts within ten years. Those withdrawals are fully taxable to those beneficiaries.

When do children typically inherit? Judging by our clients’ experience, often during their peak earning years, when they’re already in a higher bracket.

That means they’re stacking inherited income on top of their own, potentially pushing them into even higher tax brackets.

Middle-class millionaires should focus their efforts beyond just about minimizing taxes during their lifetime. It’s about deciding which assets are most efficient to leave behind, and how to preserve wealth across generations.

How You Withdraw Matters More Than Performance

The other critical piece is how you take money out of your accounts. There are three key factors to think about:

• Sequence of returns
• Taxation of distributions
• Where you’re drawing from

Sequence of returns risk is one of the most overlooked issues. If markets decline and you’re forced to sell investments to generate income, those losses become permanent. The portfolio never gets the chance to fully recover. Over time, these small inefficiencies compound into a different retirement trajectory altogether.

Moreover, withdrawing from the wrong accounts at the wrong time can lead to unnecessary taxes year after year. Every extra dollar paid in taxes is a dollar no longer compounding for you.

Individually, these decisions may not seem significant. Over a long retirement, they can add up to hundreds of thousands of dollars. In some cases, the difference can approach or exceed seven figures in lost tax efficiency or missed Roth opportunities.

Final Thoughts

The biggest risks in retirement planning are often not obvious. They don’t come from a single bad decision, but from a series of small, seemingly reasonable choices that aren’t coordinated.

This is what I call “Drive-by Planning”. It’s easy to underestimate how deep the waters get once you move from saving to spending. But this is also where the most value can be created. This type of planning often ends up being the difference between a good retirement and a great one.

Getting these decisions right won’t just improve your plan on paper. It can materially change how much of your wealth you keep over time and for generations. After all, it’s not just your money, it’s your future.