MML #071: When the plan becomes a paycheck

Last week I wrote about Phase 3: Decision. The point in the process where the plan stops beyond the numbers and starts being a choice you actually want.

This week is Phase 4: Transition. The final phase in this series. And the phase where most plans quietly fall apart.

Phase 1 was about why you're leaving. Phase 2 was about modeling what's possible. Phase 3 was about choosing the version of the plan you actually want.

Phase 4 is what happens on the Monday after you stop practicing.

You're not getting a paycheck anymore.

For 30 or 40 years, money has shown up in your account every two weeks. Withholding handled. Health insurance handled. Retirement contributions handled. You didn't think about it.

Now you do.

The first thing Phase 4 sets up is the replacement: a synthetic paycheck. A predictable monthly amount that lands in your checking account so spending feels normal. Where it comes from changes year by year. What hits your account looks the same.

Seems simple right? But most attorneys I work with don't realize how much retirement anxiety comes from this one thing. The numbers says you have enough. The nervous system says "no money came in this week." The synthetic paycheck quiets that.

Where the money actually comes from in year one.

The sequencing matters more than the totals.

For a partner with a buyout, year one usually looks like this: buyout income covers most of the spending, the cash reserve covers the gap, and the retirement accounts get touched only if there's no reason to leave them alone.

Leaving them alone is tax planning happening in real time. Every dollar you pull from a pre-tax account in a low-income year is a dollar you can't convert to Roth at a low rate. The accounts you don't touch this year are the accounts that get converted instead.

For attorneys without a buyout, the order is different but the logic holds. Usually, cash and taxable accounts first. Pre-tax accounts last. Roth conversions running underneath, filling up the room in the lower brackets.

If the plan was modeled in Phase 2, this part should feel mechanical. If it wasn't, you're scrambling.

Taxes don't withhold themselves.

This trips up almost every attorney in year one.

When you were W-2, taxes came out before the money hit your account. Now you owe quarterly estimated payments to the IRS and your state. Miss them and the penalties stack up fast.

Buyout payments often arrive with no withholding at all. Same with portfolio distributions if you don't set them up correctly. Roth conversions create tax bills with nothing automatically set aside.

So Phase 4 includes a tax-payment schedule. April, June, September, January. You don't want to be writing a six-figure check next April because nobody set up the withholding.

The Roth conversion has to actually happen.

Phase 2 modeled the conversion. Phase 3 confirmed you wanted to do it. Phase 4 is where someone picks a Tuesday in November and executes.

This is the part that surprises people. The plan said convert $180,000 from the IRA to the Roth this year. It doesn't happen automatically. Somebody has to log in, fill out the form, decide which holdings to move, and confirm.

The timing matters too. Converting in January means a year of growth happens in the Roth. Converting in December means you know exactly where your income landed before you commit. Both are defensible. Neither is set-it-and-forget-it.

Healthcare is its own conversation.

If you're retiring before 65, the gap between your last day at the firm and Medicare eligibility is a planning problem on its own. COBRA buys you 18 months at full cost. ACA subsidies depend on your reported income, which you now have a lot of control over.

After 65, IRMAA is the surprise nobody warns you about. Pull too much from pre-tax accounts in a given year and your Medicare premiums jump for two years afterward. The Phase 2 model should have accounted for this. Phase 4 is where you verify it actually plays out the way it was modeled.

The 6-month review matters more than you'd think.

I sit down with attorneys six months in and ask the same questions. Is the synthetic paycheck the right number? Did spending land where we modeled it? Are the quarterly tax payments tracking? Did anything show up in actuals that needs to get folded into next year's plan?

Phase 2 was a forecast. The first six months of actuals are the data. Phase 4 is the loop that takes the actuals and updates what comes next.

A plan that doesn't get reviewed in year one is a plan you wrote and put in a drawer. Those don't survive contact with real life.

The series ends here.

Four phases. Foundation, Design, Decision, Transition.

If you've read all four and you're still in the "almost ready" stage I wrote about in Phase 1, that's worth a conversation. The longer the gap between deciding to retire and actually building the plan, the more options tend to fall away.

If anything in this series landed, reply and tell me where you are. I read every one.

— David