The Retirement Risk Many People Underestimate: Taxes

When people plan for retirement, much of the attention goes to one thing: investment returns.

Will the portfolio grow enough?
Can I hit my number?
What rate of return do I need?

But there’s another variable that can significantly shape retirement outcomes: Taxes (Dun Dun Dun…)

A large majority of U.S. retirement assets are held in account-based retirement vehicles such as IRAs and defined contribution plans, including 401(k)s. Because much of this money is held in traditional, tax-deferred accounts, many retirees have accumulated future tax liabilities alongside their retirement savings.¹

The hidden shift in retirement planning

During accumulation years, taxes often feel relatively simple: contribute to retirement accounts, potentially receive tax benefits, and defer taxes on eligible savings. But in retirement, the structure changes completely. For example, Medicare’s IRMAA rules can increase Medicare premiums when income crosses specific thresholds. This means even small increases in taxable income that cross certain thresholds, can trigger higher costs.² It can further affect:

• Income tax brackets
• Social Security taxation
• Roth vs. traditional withdrawal strategy
• Long-term legacy planning

Two people with identical portfolios can end up with very different after-tax outcomes depending on how withdrawals are structured.

The real question in retirement isn’t “how much do I have?”

It’s how much of this do I actually get to keep? That gap is where tax planning lives. Imagine two retirees each have $1.5 million saved.

• Retiree A accumulated almost everything in traditional retirement accounts.
• Retiree B built assets across traditional, Roth, and taxable accounts.

When retirement arrives, Retiree B generally has more flexibility in controlling taxable income and managing Medicare premiums. So, although the portfolios were similar, the tax outcomes may not be.

Now to be clear, there are pros and cons to everything. One of the biggest trade-offs when electing Roth savings is you will pay the tax bill today, lowering your immediate cash flow. It’s important to know what your current incomes are and how much you can afford to pay in additional taxes before you start running into cash flow issues.

Why tax planning is often overlooked

There are three common reasons:

• It’s invisible during accumulation (money is growing, not being withdrawn)
• It feels complicated compared to investing
• It requires planning years in advance, not just reacting later

As a result, many people only start thinking about taxes after some planning opportunities have become more limited.

Where tax strategy actually shows up

The most impactful planning opportunities often come from:

• Timing withdrawals across different account types
• Managing income thresholds strategically
• Planning Roth conversions during lower-income years
• Coordinating investment location (taxable vs tax-deferred vs Roth)
• Understanding Medicare IRMAA thresholds before they are crossed

These are not “tax season” decisions. They are multi-decade decisions.

A simple mental model

Think of retirement planning as two parallel tracks:

• Investment Track: growing the pool of money
• Tax Track: determine how much of that pool is usable

Focusing only on the investment track is like filling a bucket without noticing the size of the hole underneath.

The takeaway

Investment returns help build wealth and tax strategy helps to preserve it. In many cases, what ultimately matters is not only what you earn, but also what you keep after taxes.