A secure retirement depends on a lifetime of working, saving and planning — but what you do and don’t do in the five-year runup could make or break it all.
From taxes and income to investments and Social Security, the runway to retirement comes with a whole new to-do list for planning and preparation — and unlike all the previous phases, you won’t have time to adjust if you make mistakes this time around.
It’s not impossible to re-enter the workforce or change your mind about claiming Social Security early, but it’s much better to get those considerations — and the many others you’re facing just like them — right the first time.
A half-decade might sound like a lot, but if you’re five years out from the finish line, you have work to do. Avoid unpleasant surprises as your timeline narrows by following this guide to pre-retirement planning. After all, your actions over the next few years will determine how you live for all the years that follow.
Stress Test Your Retirement Plan
If you have a retirement plan, now is the time to stress-test it against scenarios that could throw things off course — income loss, an expensive emergency, high inflation, recession, falling stock prices, etc.
“As you get close to retirement, you should have a financial plan run,” said Kendall Meade, CFP at SoFi. “This can give you the opportunity to see if you are on track or if any changes are needed before making any irreversible decisions such as leaving the workforce permanently.”
Prudential Financial states that the test should challenge not just your portfolio, but your planned location. You might even consider living there for a period to get a real feel for its daily expenses while living on your projected retirement budget.
Reduce Your Risk Level
The five-year mark is the time to reassess your portfolio and mitigate risk where needed.
“As you near retirement, it becomes imperative to reduce investment risks since any losses incurred may be difficult to recover from due to the limited amount of time available,” said Baruch Silvermann, financial expert and CEO of The Smart Investor.
“As retirement approaches, it’s generally recommended to shift your investment portfolio to more conservative investments to help protect your retirement savings.”
Everyone will allocate their assets according to their own goals and strategy, but According to T. Rowe Price, the following ranges make the most sense for most people upon turning 60:
- Stocks: 45%-65%
- Bonds: 30%-50%
- Cash: 0%-10%
Stuff Tax-Advantaged Accounts With Every Possible Dollar
If you have a pre-tax retirement fund, you still have five years to overstuff it — use them.
“This means contributing as much as possible to 401(k) and IRA accounts and taking advantage of catch-up contributions if over the age of 50,” said Silvermann. “Catch-up contributions allow individuals to contribute more to their retirement accounts, which can help them make up for any missed savings opportunities in the past.”
In 2023, maximum 401(k) catch-up contributions increased to $7,500 from $6,500 in 2022 — on top of the $22,500 standard contribution.
Create a Plan For Social Security
Are you five years away from retiring and claiming Social Security, or are you five years from your full retirement age? The two don’t always align, and since the SSA reduces benefits for claiming early, your choices could mean a difference of thousands of dollars per year — and the age you claim benefits isn’t the only consideration when planning for Social Security.
“Look at your estimated Social Security benefits,” said Eva Rosenberg, founder of TaxMama and author of “Small Business Taxes Made Easy.” “If they are going to be low, or you don’t have 40 quarters of work, start doing some catch-up to fill that income pipeline. There are many other ways to maximize Social Security benefits. They all take planning.”
Factor Insurance Into Your Strategy
The SSA advises signing up for Medicare as soon as you become eligible at 65, but health insurance isn’t the only type of coverage that you need to consider.
“Evaluate the purchase of long-term-care insurance coverage,” said Kyle Enright, president of Achieve Lending. “This insurance can sometimes cover expenses that Medicare or private health insurance do not. Do some thorough research and/or talk with a financial planner to determine if it is right for you, and if so, to find the right policy.”
Eliminate Debt — But Narrow Your Focus to the Most Toxic Accounts
According to Forbes, seniors have been steadily taking more and more debt into retirement over the last 30 years — and more debt equals fewer options.
“Work on paying off any debt,” said Enright. “That includes a mortgage if you have one.”
With that in mind, Vanguard advises against making extra mortgage payments if your loan has a low interest rate since you could earn higher returns by funneling those extra payments to an investment fund. On the other hand, it might be worth delaying retirement if doing so lets you pay off toxic debt like credit cards and even auto loans.
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