MML #070: Your retirement plan should answer to you

Last week I walked through Phase 2 of the Attorney Transition Plan, the Design phase. Timing scenarios, tax windows. If you missed it, the short version: a coordinated plan looks very different from a collection of accounts with a target date.

This week is Phase 3: Decision.

And the word "decision" is doing more work than you think.

The plan that looked perfect on paper.

I had a conversation recently with an attorney, mid-60s, who'd been through the Design phase with me. We had a plan that minimized her lifetime tax liability. Roth conversions in the right years. Social Security delayed to 70. Buyout structured over five years. Tight. Tax-efficient.

Then she told me about the condo.

She and her husband had been talking for years about a place on the coast. Something small, walkable, close to their grandkids. She wanted to buy it in the first year of retirement.

That purchase would put pressure on her portfolio early. From a pure modeling standpoint, it wasn't ideal. The sequence-of-returns risk alone made it a harder plan to defend.

So I told her that. And then I asked a different question: If the markets dropped 20% in year two, would you be willing to cut your spending by 15% for a year or two?

She didn't hesitate. Yes.

That changed the conversation. Because the plan she'd actually follow was one built around a life she'd actually want. Even if it wasn't the most efficient version on paper.

Whose taxes are we solving for?

Before we hit the tax optimization button, start with the following question: are we minimizing taxes during your lifetime, or your beneficiaries' lifetime?

Those are two different strategies.

Aggressive Roth conversions early in retirement can cut the tax burden your kids inherit. But they increase your tax bill now.

For some attorneys, that tradeoff is obvious. They want to leave the cleanest possible inheritance. For others, the goal is to keep their own tax bill as low as possible during the years they're spending the money.

There's no universally right answer here. But there is a wrong approach: optimizing for one without ever asking about the other. Where there’s a push, there’s a pull.

The Decision phase is where that question gets asked out loud, and where your answer shapes the rest of the plan.

The buyout question that rarely gets modeled correctly.

Most attorneys with an equity stake in their firm think about the buyout in terms of total dollars. I'm owed $800,000, paid out over five years. Simple.

But the structure of that payout changes the plan more than the amount does.

Take the same $800,000. Paid over five years, that's $160,000 a year. Paid over three years, it's roughly $267,000.

The three-year option is almost certainly less tax-efficient. Higher income in fewer years means higher brackets, potentially higher Medicare surcharges, and less room for Roth conversions.

On paper, five years wins.

But some attorneys will choose three. Because they want the obligation finished. They want to be completely disconnected from the firm by year three. That security, that clean break is worth more to them than the tax savings.

So we stress-test the three-year version, and see if the plan still works. Might not be optimal. But it can still be durable. Especially if it matches what they actually wanted their first few years of retirement to feel like.

The spending question that actually matters.

Retirement spending isn't static. David Blanchett has written extensively about the "retirement spending smile." Spending tends to be higher early in retirement (travel, that condo), dips in the middle years, and climbs again late as healthcare costs increase.

When I model a plan, I'm not assuming you'll spend the same amount every year for 30 years. That would produce a plan that's either too conservative early (when you're healthy and active) or too aggressive late (when costs are less predictable).

The real question in the Decision phase is: what does your spending actually look like, year by year, in the life you want to live?

That's a conversation. And it's one of the reasons a plan built around a 4% withdrawal rate and nothing else falls short. Your spending has a shape. The plan should match it.

Decision means choosing what you're willing to adjust.

Every retirement plan has variables you can flex if things go sideways. You can spend less. You can work part-time for a year or two. You can delay a big purchase. You can take Social Security earlier than planned.

You want to know which levers you'd pull, and when.

That's what stress testing is actually for. I run scenarios: a 30% market drop in year one, living to 95, a $200,000 health expense at 78. Each one shows what changes in the plan, and whether you're comfortable with those changes.

An attorney who says "I'd cut travel for two years if markets dropped hard" has a different plan than one who says "I won't change my spending regardless." Both are valid. But they produce very different financial strategies.

The Decision phase is where those conversations happen. And the plan that comes out the other side is one you've actually chosen, with eyes open.

Next up: Transition.

Phase 4 is where the plan becomes real. The day you stop practicing is where the real planning starts, and how you manage income and spending in those first few years matters more than most attorneys expect. That's next week.

If any of this landed, reply and tell me where you are in the process. I’d love to hear. 

— David