The Last 5 Years Before You Retire Are Critical: Everything You Should Do Before Time Runs Out

why the last five years before you retire are critical

Retirement can seem like a faraway goal until all of a sudden, it’s not. When you only have a few years left until you retire, the financial decisions you make take on a new importance. Once you’re inside the five-year window, that’s a good time to review your plan to make sure you’re on track. It’s helpful to understand why the last five years before you retire are critical. Talking to a financial advisor can give you some clarity on what’s working in your plan or what isn’t.

Timing Matters for Retirement Planning

When you’re younger, time is on your side when it comes to investing for retirement. The more time you have to save and invest, the more opportunity your money has to grow. Waiting to start saving for retirement can mean having to play catch-up later. If you’re approaching the last five years before you retire, a late start can put you at a serious disadvantage. There are two reasons why.

First, you have less time to benefit from compounding interest. Even if you’re maxing out annual contributions to a 401(k) or IRA, including catch-up contributions because you’re 50 or older, that may not be enough to make up for lost time in the market.

The second reason is tied to the first. It’s natural that as you get older, you may begin to shift more of your assets toward safer investments. Moving into more conservative investments, such as bonds, can reduce the risk of losing money right before you retire. But you may also be trading off higher returns by doing so, something your portfolio may need if you got a late start on saving.

Why the Last Five Years Before You Retire Are Critical

The last five years before you retire are essentially a test of your preparation and planning up to that point. When there are five years left on the clock until your retirement, there’s one big question you need to answer: can I afford it?

Whether the answer is yes or no depends largely on everything you’ve done to plan ahead. Some of the most important factors that can influence retirement preparedness include:

  • What you’ve saved in workplace retirement plans or IRAs

  • The amount of debt you have, apart from your mortgage

  • Your expected expenses in retirement, based on your preferred lifestyle

  • How long your savings will need to last, based on your age at retirement

If you’ve planned well and remained consistent with your plan, then you may not need to do much tweaking in the last five years before you retire. On the other hand, if your plan has some holes or you’ve yet to start planning at all, you may have more work to do to get ready for retirement.

5 Years Until Retirement Checklist

why the last five years before you retire are critical

why the last five years before you retire are critical

If you have five years until you retire, it’s helpful to know what you should be doing to gauge your readiness. Here are some of the most important things to tackle to ensure that you can retire comfortably and on time.

Review your savings: In order to be where you want in retirement, you’ll need to know where you are right now. Specifically, that means understanding how much you have saved for retirement and how much you still need to save within the next five years to reach your goal.

Running the numbers through a retirement savings calculator can help you see how close or how far away you are from your goal. You can use the resulting number to shape the next steps in your financial plan.

If you’re behind, for example, then you may need to substantially increase 401(k) or IRA contributions. Or you may need to adjust your investment strategy in order to generate higher returns within the remaining years you have until you retire.

Know your income sources: It’s a good idea to know what sources of income you’ll be able to count on once you actually retire. Depending on your situation, that might include:

  • Withdrawals from a 401(k) or similar workplace plan

  • Traditional or Roth IRAs

  • Pension income if your employer offers a pension plan

  • Social Security benefits

  • Federal Employees Retirement System (FERS) benefits

  • Rental property income if you own real estate

  • Annuities

You may also have income from other sources, such as retirement accounts you inherit or a Health Savings Account (HSA). An HSA isn’t a retirement account, per se, as they’re intended to be used for eligible medical expenses. However, after 65 you can withdraw money from an HSA for any reason, penalty-free. You’ll just pay ordinary income tax on distributions.

Taking inventory of your potential income sources can give you a better idea of how much you may have to spend. It can also help you to determine things like when to begin taking withdrawals from tax-advantaged plans, how much to withdraw and the best age to apply for Social Security benefits.

Estimate retirement spending: Income is one side of your retirement budget and spending is the other. If you’ve got five years to go until retirement, that’s a good time to start thinking about what kind of lifestyle you want vs. what you’ll be able to afford based on what you’ve saved.

Typical retirement expenses include housing, utilities, food and health care. But your budget may also extend to travel, recreation or new hobbies you’ve been wanting to try. Creating a mock budget, then comparing the numbers to your expected monthly income can help you see how far apart the numbers are.

You may also take things a step further and try living on your retirement budget in the last five years before you retire. That can help you evaluate how realistic it is. If you expect to spend less in retirement than you are now, doing a test run of your budget could leave you with some additional money to save each month.

Consider long-term care needs: Long-term care costs can easily wipe out your retirement savings. If you’re in the five-year span before retirement, that’s a good time to assess your personal risk.

Medicare doesn’t pay for long-term nursing care, but Medicaid can. There’s a catch, however, as qualifying for Medicaid usually means spending down assets. If you don’t want to do that, you might consider buying a long-term care insurance policy in the five years before you retire.

Long-term care policies can pay out benefits to cover necessary nursing care. If you’re not sure whether you’ll need long-term care, you could consider a hybrid policy that also includes life insurance. If you don’t use the long-term care benefit, then the policy can still pay out a death benefit to your beneficiaries.

Review your tax situation: Managing tax liability in retirement can allow you to hold on to more of your savings. You may consider making some tax moves in the last five years before retirement that can position you to pay less to the IRS later.

For example, you might convert your traditional IRA to a Roth IRA to get the benefit of tax-free withdrawals in retirement. Converting a traditional IRA to a Roth doesn’t allow you to escape taxes completely; conversions are subject to the same tax rules as withdrawals.

However, once you’ve converted to a Roth account you won’t pay any tax on distributions going forward. That could yield significant tax savings if you expect to be in a higher tax bracket when you retire.

Bottom Line

why the last five years before you retire are critical

why the last five years before you retire are critical

The last five years before you retire can pass in the blink of an eye and there’s no time to waste when it comes to finalizing your plans. Taking time to review where you are and where you hope to be, can help to ensure that you don’t come up short once it’s time to leave the workplace behind for good.

Retirement Planning Tips

  • Creating a five-year plan for retirement can also include planning for any contingencies that might come along. Talking to a financial advisor can help you come up with a plan B if you’re worried about anything derailing your retirement timeline. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • Investing in tax-advantaged accounts, such as a 401(k) or IRA, is a smart move for retirement planning. If you want to add another savings option into the mix, you might consider opening a taxable brokerage account. Taxable accounts are subject to capital gains tax when you sell investments at a profit. However, they don’t have the same annual limits on contributions as tax-advantaged accounts and there are no early withdrawal penalties either.

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