The California Retirement Reality Check

California can be a wonderful place to retire. It can also be expensive. Housing, property taxes, insurance, healthcare, utilities, travel, and everyday expenses can consume a significant portion of retirement income. As a California resident, you also need to account for state income taxes on many sources of retirement and investment income. This makes retirement planning about much more than reaching a certain account balance.

Start With the Life You Want to Fund

Begin by estimating what your retirement will actually cost. Separate your expenses into two categories:

• Core expenses may include housing, food, utilities, insurance, healthcare, transportation, and taxes.
• Discretionary expenses could include travel, dining, hobbies, gifts, charitable giving, and the maintenance of a second home.

This distinction can become particularly valuable during difficult markets. You may not be able to change your property tax bill, but you might have flexibility around travel or a major purchase.

Next, compare your anticipated expenses with income from Social Security, pensions, rental properties, investments, and retirement accounts.

The difference is what your portfolio may need to provide.

"With more than 25 years of wealth management experience, I've seen that clear, confident financial decisions are rooted in understanding global market dynamics and how they directly impact a local California retirement strategy." — Shawn McElmoyl, Fiduciary Financial Advisor

Plan Beyond Your First Few Years

Your spending at 65 probably won't look exactly like your spending at 85+.

You may travel more early in retirement. Healthcare could consume a larger share of your budget later. You may eventually sell your home, relocate, help family members, or need additional care.

Inflation also means the same lifestyle could cost considerably more in 10 or 20 years.

Your retirement strategy should therefore consider five interconnected areas:

• Income: Where will your paycheck replacement come from?
• Investments: How much market exposure makes sense while taking withdrawals?
• Taxes: Which accounts should you draw from and when?
• Healthcare: How will you pay for Medicare and expenses it doesn't cover?
• Legacy: How do you want your assets managed and eventually transferred?

A decision in one area can affect the others.

Ask Yourself: If you retired tomorrow, could you identify where your monthly income would come from and how much of it would be taxable?

California has a reputation for high taxes, but retirement taxation is more nuanced than a simple look at the state's income tax rates.

Understanding what California taxes, and what it doesn't, can help you make more informed retirement-income decisions.

California Doesn't Tax Social Security

One important benefit is that California does not tax Social Security benefits, even when some of those benefits are taxable on your federal return.

Other sources of retirement income receive different treatment.

Distributions from traditional 401(k)s, traditional IRAs, and many pensions are generally subject to California income tax for California residents.

This makes the types of accounts you own important.

If most of your retirement savings are held in traditional tax-deferred accounts, withdrawals generally create taxable income. Having a mix of traditional, Roth, and taxable accounts may give you more choices about where your income comes from each year.

Where Can Roth Accounts Fit?

Qualified Roth IRA withdrawals generally aren't subject to federal or California income tax.

That can make Roth assets useful during years when additional taxable income could create unwanted tax consequences.

But converting traditional retirement assets to a Roth creates taxable income in the year of conversion. Before converting, consider your current and future tax brackets, California taxes, required minimum distributions (RMDs), Social Security, Medicare income-related surcharges, and estate goals.

For some retirees, the years between leaving work and beginning RMDs can present a valuable tax-planning window.

Your salary has stopped, but mandatory distributions may not have started. Depending on your circumstances, this could be a time to discuss partial Roth conversions or the realization of investment gains.

"Minimizing your retirement tax footprint requires looking past a single tax year. Incorporating a fee-only financial plan perspective allows us to strategically evaluate Roth conversions and income streams to optimize your lifetime tax picture." — Shawn McElmoyl, Bulman Wealth Group California

Capital Gains Matter Too

California generally taxes net capital gains as ordinary income rather than offering a separate preferential state capital-gains rate.

For retirees with sizable taxable portfolios, deciding when to sell investments is especially important.

Tax-loss harvesting, charitable gifts of appreciated securities, and coordinating investment sales with other income can all be worth discussing with your financial and tax professionals.

The objective shouldn't simply be minimizing this year's tax bill. Consider how today's decisions may affect your lifetime retirement tax bill.

Market declines can have a greater impact once your paycheck stops and you begin relying on your investments for income.

While you’re working, a downturn may give you an opportunity to invest at lower prices and wait for the market to recover. In retirement, however, you may need to sell investments after they’ve declined to cover living expenses. This creates sequence-of-returns risk, where the timing of market losses and withdrawals can significantly affect how long your retirement savings last.

For example, imagine you retire with a $1 million portfolio and begin withdrawing $50,000 per year for living expenses. If the market drops 20% early in retirement, you may need to sell investments at lower values to fund those withdrawals.

Those dollars are no longer invested when the market eventually recovers, making it harder for your portfolio to regain lost ground. That's why retirement investing isn't only about your average return. The timing of returns matters when you're withdrawing money.

"Market downturns are inevitable, but panic doesn't have to be. Successful market navigation comes down to face-to-face preparation rather than reactive fear, ensuring your cash flow remains steady regardless of short-term volatility." — Shawn McElmoyl, Financial Advisor in Roseville, CA

Know Where Your Income Will Come From

Don't wait for a market decline to decide how you'll pay your bills.

Your retirement income strategy might incorporate:

• Social Security and pensions
• Cash reserves
• Short-term fixed-income investments
• Interest and dividends
• Portfolio withdrawals
• Adjustments to discretionary spending

Suppose the market dropped substantially during your first year of retirement:

• Could you temporarily draw from cash or other assets rather than selling stocks after a decline?
• Could you postpone a large discretionary purchase?
• Would your recurring income cover most of your core expenses?

These are easier questions to answer before markets become turbulent.

Don't Abandon Growth

Avoiding volatility entirely creates another problem.

A retirement lasting 20 or 30 years generally requires some opportunity for assets to grow and keep up with inflation. Holding too much cash can gradually reduce your purchasing power.

Your investment mix should reflect your income needs, time horizon, and comfort with market fluctuations.

A portfolio built primarily for accumulation during your working years may also need to change once that portfolio becomes a source of retirement income.

Ask Yourself: If the market dropped 20% shortly after you retired, would you know which assets you would use to fund your expenses?

Changing employers can leave you with an important retirement decision: what should you do with your old 401(k)?

Depending on the plan, your choices may include:

1. Leaving your assets in your former employer's plan.

2. Rolling them into your new employer's plan.

3. Rolling them into an IRA.

4. Taking a distribution.

Each option can have different implications for investments, fees, taxes, withdrawal rules, creditor considerations, and account management.

Compare Before You Move Your Money

A rollover isn't automatically better than leaving your money in an employer plan.

Compare investment choices, administrative and investment fees, withdrawal options, account-management services, and any special features available through the existing plan.

Be particularly careful about taking the money directly.

When certain eligible employer-plan distributions are paid directly to you, federal rules generally require 20% withholding on the taxable portion. A direct rollover to another eligible retirement plan or IRA generally avoids mandatory federal withholding at the time of the transfer.

If your 401(k) includes employer stock, additional tax considerations may also apply.

Before moving a large retirement account, understand what you're giving up as well as what you may gain.

Long-term care is different from routine healthcare.

Medicare generally doesn't cover extended custodial care simply because you need ongoing assistance with activities such as bathing, dressing, eating, or moving around.

Care could be provided at home, through community programs, in assisted living, or in a skilled nursing facility.

Your financial strategy could involve personal assets, long-term care insurance, certain insurance or annuity strategies with long-term care features, government programs, or a combination of resources.

California's Medi-Cal rules deserve particular attention because they have changed. Asset limits for certain Non-MAGI Medi-Cal programs were reinstated beginning in 2026, and rules can apply to certain asset transfers when someone needs long-term care.

Rather than assuming you'll self-fund care or rely on a government program, think about what you would actually want.

Would you prefer to remain at home? Would family members be involved? How much of your assets would you be comfortable spending on care? How would significant care expenses affect a surviving spouse?

These are financial decisions, but they're family decisions too.

For many Californians, their home is one of their largest assets.

A property purchased decades ago may now be worth substantially more than its original purchase price. Add retirement accounts, investments, and other property, and estate planning becomes an important part of your retirement framework.

A revocable living trust is one tool frequently used in California estate planning.

A Will and Living Trust Serve Different Purposes

A will provides instructions for distributing certain property after your death and can address issues such as guardianship for minor children.

But a will alone doesn't necessarily keep an estate out of probate.

Assets properly titled in a living trust generally can pass according to the trust's instructions without going through the standard probate process.

California expanded its simplified procedures for certain primary residences beginning in 2025. Under current rules, a qualifying primary residence valued up to $750,000, subject to applicable requirements, may be eligible for a simplified court process.

That doesn't mean trusts are no longer useful. Many California homes exceed that amount, and families may own other assets or real estate.

Estate Planning Isn't Only About Death

A living trust can also help address incapacity.

If an illness, accident, or cognitive decline prevents you from managing your financial affairs, a properly drafted and funded trust can allow a successor trustee to manage trust assets according to its terms.

Your broader estate plan may also include:

• A will
• Durable financial power of attorney
• Advance healthcare directive
• Living trust
• Retirement account beneficiaries
• Life insurance beneficiaries

One frequently overlooked issue is beneficiary designations. Retirement accounts, life insurance, and certain other assets can pass according to the beneficiary designation associated with the account, not the instructions in your will.

Review your documents and beneficiaries after major life events such as marriage, divorce, a death, the birth of a child or grandchild, a real estate transaction, or a significant change in your finances.

And remember: creating trust is only part of the process. Assets intended to be controlled by the trust generally need to be properly titled or otherwise coordinated with it.