Twenty years is a long time. It is roughly the amount of time that has passed since Twitter first launched, The Da Vinci Code became a cultural phenomenon and Taylor Swift released her first album.
It is also approximately how long many older Americans retiring today may spend outside the workforce.
According to the Social Security Administration, a 65-year-old man can expect to live an additional 18.5 years, while a 65-year-old woman can expect another 21 years. For some retirees, especially those in good health, retirement may last 25 or even 30 years.
That means retirement planning cannot focus only on whether a person has saved enough money. It must also address how income will be taxed over several decades.
Retirees may receive income from pensions, Social Security, traditional retirement accounts, Roth accounts, investments, rental properties, part-time work and business activities. Each source may be taxed differently, and the order in which funds are withdrawn can significantly affect how long retirement savings last.
“Most people have never been retired, so they can’t connect their present reality with their future unknown reality,” said Michael Crews, author of the retirement book Saturday Everyday and chief executive of North Texas Wealth Management.
Many people understand that they need to save for retirement, but fewer consider how their tax situation may change once their paychecks stop.
A person may retire in a relatively low tax bracket, begin collecting Social Security several years later and eventually face required minimum distributions from traditional retirement accounts. Those changes can increase taxable income, affect Medicare premiums and cause a larger portion of Social Security benefits to become taxable.
For that reason, one of the most important retirement questions is not simply, “How much money have you saved?” It is also, “How and when will you take that money out?”
Planning for Decades of Taxable Income
Millions of baby boomers are reaching age 65, and some will spend 30 years in retirement. Their decisions about where to live, whether to continue working and how much to spend will all influence their tax obligations.
“It’s not necessarily about optimizing your finances,” Crews said. “It’s about optimizing your life.”
However, optimizing retirement often requires coordinating lifestyle goals with tax planning.
For example, retirees who want to travel extensively during their first several years may need larger withdrawals from retirement accounts. If those withdrawals come entirely from a traditional IRA or 401(k), the additional taxable income could move them into a higher tax bracket.
A more tax-efficient approach may involve withdrawing from several account types, such as taxable brokerage accounts, traditional retirement accounts and Roth accounts. The best combination depends on the retiree’s income, deductions, filing status and long-term financial goals.
For Liz Klohmann, 64, retirement planning began several years before she left her career in parks, recreation and youth development.
Physical activity had always been an important part of her life. After a back injury led her to discover Pilates, she became certified to teach Pilates and yoga. What began as a small side business eventually became part of her retirement plan.
About five years before retiring, a leadership coach encouraged her to imagine “Liz 2.0” and consider what she wanted her next chapter to look like. She decided she wanted to operate a studio and teach more classes.
After meeting with a financial planner, Klohmann retired at age 62 with a pension and began building her business.
Her situation illustrates how retirement income may come from multiple sources. Her pension provides one stream of income, while her fitness business creates self-employment income. Her husband receives Social Security, while Klohmann has chosen to delay claiming her own benefits.
Each of those decisions has tax consequences.
Pension income is generally taxable at the federal level. Self-employment income may be subject to both income tax and self-employment tax. Social Security benefits may be partially taxable depending on the couple’s combined income. Delaying Social Security may produce a larger future benefit, but it can also affect the timing of taxable income.
Their financial planner reviewed their pension income, Social Security options, expected inheritances and retirement goals before confirming that they could afford to retire.
That type of planning should also include estimates of future federal and state taxes.
Working During Retirement
Not everyone leaves work permanently. Some retirees return as part-time employees, consultants or small-business owners.
An AARP study found that some retirees returned to work because they were bored or wanted to help others. Nearly half, however, said they needed the money.
Returning to work can strengthen a retiree’s finances, but it may also create additional tax issues.
Wages, consulting income and business profits can increase taxable income. Self-employed retirees may need to make quarterly estimated tax payments. Additional earnings may also cause more of their Social Security benefits to become taxable.
For retirees who have not yet reached full retirement age, employment income may also temporarily reduce Social Security benefits if earnings exceed the applicable annual limit.
Part-time work can still be financially beneficial, especially if it allows a retiree to delay Social Security or reduce withdrawals from retirement accounts. However, the after-tax value of the income should be considered before deciding whether returning to work is worthwhile.
Some retirees may also continue contributing to retirement accounts if they have earned income. Depending on eligibility, contributions to a traditional IRA, Roth IRA, SEP IRA or solo 401(k) may provide additional tax-planning opportunities.
Retirement Is Not Equal for Everyone
The ability to enjoy a long and financially secure retirement is not equally available to all workers.
People who spent their careers in physically demanding or low-wage jobs may enter retirement with fewer savings, limited pension income and greater health expenses. They may also need to claim Social Security earlier or continue working longer.
Black and Hispanic Americans, as well as individuals supporting parents, children or grandchildren, may be more likely to work beyond the traditional retirement age.
These financial differences also create tax-planning differences.
A higher-income retiree may have several account types and the flexibility to decide when to recognize taxable income. A lower-income retiree may depend almost entirely on Social Security and wages, leaving fewer opportunities to control the timing of income.
Tax planning can still be helpful, but the available strategies depend heavily on a person’s income, savings and access to retirement benefits.
The Three Tax Stages of Retirement
A retirement lasting 20 years or longer can often be divided into three broad stages. Each stage may bring different spending needs and tax consequences.
Phase One: The Active Years
The first stage begins shortly after retirement. Retirees are often healthier and more active during this period. They may travel, relocate, renovate their homes, start businesses or pursue new hobbies.
Spending may actually increase during these years.
From a tax perspective, this period can also create valuable planning opportunities. A retiree may have stopped earning wages but may not yet be collecting Social Security or taking required minimum distributions.
That temporary period of lower income may provide an opportunity to withdraw funds from traditional retirement accounts at lower tax rates or complete partial Roth conversions.
A Roth conversion moves money from a traditional retirement account into a Roth account. The converted amount is generally taxable in the year of the conversion, but qualified future Roth withdrawals are tax-free.
Conversions may reduce future required minimum distributions and provide greater flexibility later in retirement. However, a large conversion can increase taxable income, affect health insurance subsidies before Medicare and increase Medicare premiums in future years.
Phase Two: The Slower Years
After approximately 10 to 15 years, retirees may begin traveling less and spending more time near home.
By this stage, many retirees are receiving Social Security and may also be required to take distributions from traditional retirement accounts.
Required minimum distributions can increase taxable income even when the retiree does not need the money for current expenses. Higher income may cause up to 85% of Social Security benefits to become taxable and may increase Medicare Part B and Part D premiums.
Careful planning during earlier retirement years may help reduce these effects.
Retirees who do not need their entire required distribution may also consider qualified charitable distributions, when eligible. These distributions allow funds to be transferred directly from an IRA to a qualifying charity and may satisfy part or all of the required minimum distribution without including the amount in adjusted gross income.
Phase Three: The Caregiving Years
During the final stage of retirement, health and caregiving expenses may become the largest financial concern.
As of 2025, the median annual cost of nonmedical in-home caregiving was approximately $80,000, based on 44 hours of care per week. Assisted living cost slightly more than $74,000 annually, while a private nursing home room cost around $130,000.
Some medical and long-term-care expenses may be tax deductible if the retiree itemizes deductions and the costs exceed the applicable percentage of adjusted gross income. Certain long-term-care insurance premiums may also qualify as medical expenses, subject to age-based limits and other requirements.
However, not every caregiving cost is deductible. Families should not assume that tax savings will cover a significant portion of long-term-care expenses.
Retirees should also consider how large withdrawals used to pay for care will affect taxable income. Taking a substantial amount from a traditional IRA in one year could create a larger tax bill, increase Medicare premiums and make more Social Security income taxable.
Maintaining a mix of taxable, tax-deferred and tax-free assets may provide more flexibility when unexpected expenses arise.
Inflation and Taxes Can Both Reduce Purchasing Power
Lifestyle planning cannot be separated from financial and tax planning.
At an annual inflation rate of 2%, someone spending $5,000 per month in 2026 would need more than $7,400 per month to maintain similar purchasing power 20 years later.
Taxes can create an additional burden.
A retiree may need to withdraw more than $7,400 to have that amount available after federal and state taxes. The amount required will depend on whether the money comes from taxable investments, a traditional IRA, a Roth account or another source.
Inflation can also push retirees into higher tax brackets over time, although tax brackets are generally adjusted annually. Some important tax thresholds, however, may not rise at the same rate as inflation.
This makes long-term projections especially important.
Building a Tax-Smart Retirement Plan
A complete retirement plan should evaluate more than a person’s investment balance. It should consider:
- When to begin Social Security
- When to begin pension payments
- Which accounts to withdraw from first
- Whether Roth conversions may be beneficial
- How required minimum distributions may affect future taxes
- Whether retirement income will increase Medicare premiums
- How part-time work or business income will be taxed
- Whether moving to another state will change income or estate taxes
- How charitable giving can be structured efficiently
- How medical and long-term-care expenses will be funded
Retirees should also review their tax withholding and estimated payments each year.
Unlike employees, retirees may receive income from several sources that do not automatically withhold enough taxes. Pension administrators and retirement account custodians may allow voluntary withholding, while individuals with investment or business income may need to make quarterly estimated payments.
Tax planning should be updated regularly because income, tax laws, health needs and family circumstances can change throughout retirement.
The most important retirement question may still be how a person plans to spend their time. But once that lifestyle is defined, the next question should be how to fund it in the most tax-efficient way possible.
A successful retirement plan does not simply prevent a person from running out of money. It helps ensure that unnecessary taxes do not prevent retirees from enjoying the life they spent decades preparing for.