5 Things To Do When You’re 5 Years From Retirement


If you’re five years from retirement (or will be soon), now is a great time for a reality check to ensure that you’re on track. You still have some time to influence the quality of your retirement and make adjustments, if necessary. “Winging it” is not the optimal strategy! Here are five things to do when you’re five years from retirement.

1. Estimate Your Monthly Investment Income

As you are well aware, when you stop working, your investments will start providing most of your monthly paycheck. But what kind of monthly paycheck can you realistically expect? After all, it will need to last your entire life – a span of up to 30 years or more for some people.

Here’s a quick process to get a ballpark estimate of the monthly paycheck that your investments can provide:

  • Add up all of your investment accounts. This includes any 401(k) accounts, IRAs, Roth IRAs, brokerage accounts and the like.
  • Subtract six to twelve months’ living expenses from this number. This is the amount we’ll hold aside for your cash emergency fund.
  • Project what your accounts will be in 5 years. Be sure to factor in your future savings and investment growth.
  • Multiply that number by 4%. The Four Percent Rule is a heuristic that represents a sustainable retirement portfolio withdrawal rate.

If you’ve done the math, you will now have an estimate of the sustainable income that your investments can provide over your lifetime. If you divide this number by 12, you now have your monthly retirement paycheck, courtesy of your investments.

Now that we understand what you can pay yourself, that leads us to the next item.

2. Plan Your Retirement Income and Taxes

Almost all of us will qualify for Social Security retirement benefits. But in order to make good decisions about your retirement, we’ll need accurate numbers. Be sure and visit the Social Security Administration’s website to get your latest statement.

If you’re so lucky to have a pension, now is also a great time to review those benefits and understand the details. Do you have a survivor’s benefit choice to make? Do your pension benefits adjust with inflation?

Finally, write down any other income you may have in retirement, such as property rental income.

These benefits, along with your monthly investment income, will give you a general idea of what your retirement budget will need to be.

Once you have a good idea of your income, you can work with a CPA to put together a retirement tax plan. Every situation is different, of course, but the timing and sequence of withdrawals from your investment accounts, IRAs, Roth IRAs and company plan benefits can produce a wide array of tax scenarios.

Creating a retirement tax plan to time your withdrawals can save you thousands over your retirement as well as create strategic tax opportunities along the way, such as occasional Roth IRA conversions at lower tax rates.

3. Price Out Healthcare

Speaking of expenses, we need to address a big one for retirement: healthcare.

Retiring at age 65 or later can have a big impact since you immediately qualify for Medicare. Medicare may not cover all of your healthcare expenses, however. For that reason, it’s a good idea to also plan for Medigap insurance to go along with Medicare.

The majority of clients that I’ve helped through retirement have purchased Medigap insurance. While these polices aren’t overly expensive, it’s important to factor the policy premiums into your retirement budget.

What if you’re retiring before age 65? Well, you’ll need to buy an individual health insurance policy. If you’ve been on a group plan up until now, you may have some sticker-shock when you go to buy your individual policy, even if you’re using the Affordable Care Act marketplace.

Finally, be sure and make a plan for long-term care expenses. These expenses can be difficult to estimate since they are (hopefully) far out into the future. That being said, they can also be pretty significant expenses, so planning is key. We don’t want you to have to resort to using Medicaid for the last years of your life.

For many, long-term care insurance will be a good option to pay for these expenses. Unfortunately, the premiums on these policies are fairly high. The environment for these policies is such that it creates a “Catch-22” for consumers. If you can afford the premiums, you can probably afford to pay these expenses out-of-pocket. If you do need the policy, the premiums will most likely be too high to afford.

That being said, there are still options out there, including a hybrid universal life / long-term care insurance policy product that has become popular these days. No matter what your choice, it’s important that you have a plan for these late-in-life expenses.

4. Create a Retirement Budget

If you’ve done the work up until this point, you already have a pretty good idea of how much money you’ll have coming in every month during retirement. The next step is to create a retirement budget.

The idea is simple: compare what you spend today against your expected monthly retirement income.

Will you need to cut back? If so, how much?

Without going through this process, a retiree may, at first, get the false sense of security that he or she is doing fine. After all, they started with a big pot of money!

In reality, they’re spending more than they can sustain over the long-term. It’s heartbreaking to see retirees struggle in the middle of retirement, but it happens. I’ve had clients that, in spite of my best efforts to encourage them to budget, still spent more than what was sustainable.

Going beyond the normal month-to-month expenses, how will you handle one-time expenses like buying a new car, remodeling your home or some unforeseen emergency? Remember when we put aside 6 to 12 months’ expenses? Creating a retirement budget will affect those calculations, so you may need to go back and adjust.

Your expenses may not always be even during your retirement, depending on how active you are in certain years. With a retirement budget, you’re creating the discipline that comes along with having a plan. While you may have to course-correct at some point, even a small amount of planning today can stave off disaster later.

5. Make a Plan for Your Debt

As a fiduciary financial advisor, I tend to be pretty conservative when it comes to debt. I encourage all of my clients to work toward being debt-free (or close to it) when they retire.

After you’ve created your retirement budget, think about making a plan for your debt. If you’re five years away from retirement, how can you eliminate all of your consumer debt before you retire? This includes credit cards, auto loans or any other type of debt associated with personal use assets.

What about your mortgage? It’s okay to have a mortgage in retirement. I’ve seen plenty of people include their monthly mortgage within their retirement budget, but having it paid off is nice. There’s a psychological benefit to being completely debt free once you start living off your investments.

Lather, Rinse and Repeat

One thing you may have recognized is that, after making a decision about how to handle one of these items, you may need to go back through this process again and adjust. Your debt plan may affect your investment income, which may affect your retirement budget. This is the essence of creating a good financial plan – it’s an iterative process.

In summary, here are the five things to do when you’re five years away from retirement:

  1. Estimate Your Monthly Investment Income
  2. Plan Your Retirement Income and Taxes
  3. Price Out Healthcare
  4. Create a Retirement Budget
  5. Make a Plan for Your Debt

Once you’ve done those five things, lather, rinse and repeat.

Of course, you can always hire a financial advisor to help guide you through this process. Retirement is something that a financial advisor can help you get right the first time. How much is your peace of mind worth?

Prana Wealth is a fee-only financial advisor in Atlanta that works virtually with clients across the U.S. If you are not working with a financial advisor (or if you are unhappy with your current advisor), click here to set up a quick, complementary introduction call to see if we are potentially a good fit.

Five years gives you plenty of time to make adjustments, if needed. Unfortunately, too many people wait until the last minute to start their retirement planning. If you can address these five things to do when you’re five years away from retirement, you’ll create a much less stressful retirement experience.

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