Preparing for retirement is something most adults will do their entire working lives, but ensuring a successful post-retirement life has many different phases. While diligent retirement planning is crucial throughout one’s career, the last five years before retirement are significant. During this period, individuals can fine-tune their financial strategies, make necessary adjustments, and solidify their plans to embark on a fulfilling retirement journey.
By taking proactive steps in these final years, individuals can better align their financial resources, clarify their retirement goals, and ensure a smooth transition into the next chapter of their lives.
To ensure a successful transition into retirement, experts recommend taking specific steps during the five years leading up to retirement:
#1 Gaining clarity on future expenses:
Estimating your annual budget for retirement four decades in advance is vastly different from doing so in the immediate years preceding retirement. Inflation and the rising cost of living significantly impact your financial needs. Approaching retirement age allows a better understanding of the money required to achieve your desired retirement lifestyle, including monthly income goals.
#2 Strategizing retirement account withdrawals:
Different retirement accounts come with varying restrictions and benefits based on withdrawal age. For example, Social Security payments increase if you delay withdrawals until a later age. Knowing your planned retirement year enables you to develop a withdrawal plan that maximizes these rules and optimizes your future income.
#3 Assessing progress toward financial goals:
The final five years before retirement offer an opportunity to evaluate your investment portfolio and determine whether adjustments are necessary to meet your objectives. This period grants insight into how your savings align with your goals, allowing you to spot potential gaps and come up with strategies to fix them.
#5 Establish a comprehensive retirement budget:
Predicting your future expenses is crucial before retirement. Andrew Herron, the founding partner of Stone Pine Financial Partners, emphasizes the importance of estimating planned expenses. Consider any potential changes, such as relocation or reduced commuting costs, along with the likelihood of increased expenses like travel and healthcare. This budget will guide the allocation of various income streams, including investment portfolio withdrawals, Social Security, and pension payments.
#6 Plan income streams:
Once you clearly understand your retirement expenses, focus on securing the necessary income to cover them. Assess all available income sources and calculate the expected payouts from each. Be mindful of withdrawal restrictions based on retirement age for different accounts. Catherine Irby Arnold, Washington state market leader at U.S. Bank Private Wealth Management, suggests strategic withdrawal sequencing to optimize tax advantages and maximize Social Security benefits.
#7 Adjust investment strategies:
As retirement approaches, your risk tolerance for investments may change. The last five years are crucial for ensuring your funds align with your expectations. Consider modifying your investment strategy to reduce risk exposure and increase financial security. Consulting a financial professional can provide valuable guidance in this regard.
#8 Solidify healthcare plans:
Healthcare costs tend to rise with age, but at 65, you become eligible for Medicare. It is essential to plan how to cover medical expenses during retirement, particularly if you lose access to your employer’s health plan. Review your current expenses and anticipate potential changes in retirement. Evaluate whether Medicare will provide adequate coverage or if supplemental insurance is necessary. Seeking advice from a Medicare insurance broker can help determine the most suitable plan based on medical needs and costs.
Finding that you’re not on track to meet your retirement goals is not a cause for despair. Andrew Herron suggests focusing on key variables that can make a significant difference. After following the steps mentioned above, you’ll have a clearer picture of whether your income streams will adequately cover your expenses. If adjustments are needed, consider options such as working longer, part-time employment, or exploring opportunities within the shared economy.
Additionally, reducing expenses, including relocation or exploring retirement in other countries with lower living costs, can be viable alternatives. Careful planning and awareness of available options empower individuals in retirement planning.