The financial landscape for retirees has undergone profound shifts in recent years, leaving many Americans increasingly anxious about their economic stability in later life. According to a revealing 2025 survey conducted by Clever Real Estate, the average retiree estimates they require $823,800 to enjoy a comfortable retirement, yet they have managed to save only approximately $288,700. This substantial shortfall of around $535,100 has prompted a notable trend: older workers are choosing to remain in employment longer, contributing to a rise in the average age of U.S. employees from 40.5 to 42 years over the past three years.
Why a Strategic Tax Plan is Critical for Retirement
Amid these mounting financial pressures, developing a coherent tax strategy for retirement has never been more vital. Armine Alajian, a Certified Public Accountant and CEO of the Alajian Group Inc., an accounting firm based in Los Angeles, emphasises that maximising your finances upon leaving the workforce permanently hinges on effective tax planning. With over twenty years of experience advising both corporations and individual clients on tax and financial matters at prominent U.S. firms, Alajian has shared her expert insights exclusively with The Independent.
The Indispensable Role of Professional Guidance
"In my professional experience, there is a common assumption that everyone inherently understands how to handle retirement taxes and possesses the optimal strategies—but this is far from the truth," Alajian explains. She observes that many individuals have not constructed a tax strategy that will serve them well during retirement, often overlooking crucial updates to tax regulations. This lack of foresight and awareness can lead to significant complications as people approach retirement age, potentially resulting in higher-than-expected tax bills.
Engaging a financial professional helps retirees comprehend the impact their financial decisions will have on their retirement income. "It is far preferable to obtain at least an approximate estimate of that financial impact rather than being unpleasantly surprised later on," Alajian advises. Therefore, before making any major tax-related decision—such as selling a substantial asset, commencing retirement, or undergoing another significant life event—consulting with an accountant is essential. They can perform calculations to illustrate how each option influences post-retirement income, enabling more informed and confident decision-making.
Understanding Required Minimum Distributions
Many common retirement accounts, including 401(k)s and traditional IRAs, feature what are known as "required minimum distributions." Generally, the Internal Revenue Service mandates that individuals begin withdrawing funds from these retirement accounts between the ages of 72 and 75, depending on their birth year. This requirement specifically applies to retirement accounts that do not collect tax at the time of deposit, such as 401(k)s and traditional IRAs.
As you plan for retirement, it is crucial to remember that you will be obligated to take withdrawals from a 401(k) or traditional IRA upon reaching a certain age. These withdrawals are typically taxed as income at the federal level and, in some instances, at the state level as well. Consequently, you must allocate funds to cover your tax liability when filing your return the following year.
The Overlooked Factor: State Taxes
Alajian notes that much of the discourse surrounding retirement taxes concentrates on federal obligations, yet retirees frequently neglect to account for state taxes. The resulting tax liability on income can come as a shock, particularly for those residing in states with high income tax rates, such as California and Hawaii, where rates exceed 10 percent.
Her counsel for prospective retirees is to carefully consider their intended retirement location. If you plan to remain in a state that imposes income tax, you must incorporate this into your retirement income calculations. Alternatively, if you are open to relocating, there are eight states without income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming. Depending on the size of your retirement distributions, moving to a state without income tax could save you thousands of pounds annually. For current retirees, it is imperative to ascertain your state income tax rate and ensure you set aside sufficient money to meet your tax obligations when filing.
