The Biggest Financial Decisions to Make in the 5 Years Before Retirement
If retirement is on the horizon, you are probably starting to look at your finances a little differently.
For most of your career, the goal was fairly simple: save, invest, and keep working.
But as retirement gets closer, the questions change.
How much can I actually spend? When should I claim Social Security? Should I pay off the mortgage? How much investment risk should I take? What will taxes look like?
And perhaps the biggest question of all:
“Am I actually ready to retire?”
These are the questions that become increasingly important as retirement approaches. They are also the questions where thoughtful financial planning can make a meaningful difference.
Here are some of the biggest financial decisions to start thinking about before retirement.
Figure Out What Retirement Is Actually Going to Cost
One of the first questions to consider is:
“What do you want your retirement to look like?”
The answer is different for everyone.
Maybe you want to travel. Maybe you want to spend more time with your family. Maybe you want to pick up hobbies you have put off for years. Or maybe your ideal retirement is simply having the freedom to wake up on a weekday morning without somewhere you need to be.
Whatever your vision is, it is important to put a realistic price tag on it.
This is where retirement planning gets more complicated than using a general rule of thumb based on current income. Some expenses may go down when you retire. Others will not. Some may increase.
You may spend more on travel and entertainment during the early years of retirement. Healthcare expenses can become more significant over time. You may also have occasional large expenses, such as a vehicle replacement, home renovation, family trip, or financial help for a child or grandchild.
The more realistic you can be about spending, the more confidence you can have in the retirement plan.
Decide When You Can Afford to Retire
There is a meaningful difference between when you want to retire and when you can afford to retire.
Sometimes those dates are the same. Sometimes they are not.
Continuing to work for an additional period can have a meaningful impact on a retirement plan. You may be able to save more, allow investments more time to grow, maintain employer benefits, and delay Social Security.
On the other hand, if you have accumulated enough and have a solid retirement-income strategy, continuing to work simply because you feel like you “should” may not be necessary.
That is why retirement should not be based on a magic number in an investment account.
Instead, consider a more useful question:
“If I stop working on this date, does the rest of my financial plan work?”
That is the question that matters.
Have a Social Security Strategy
Social Security is one of those decisions that can be easy to put off.
“I’ll figure it out when I get there.”
That is not the best approach.
When you claim Social Security can affect your income throughout retirement. Depending on your circumstances, it can also affect a spouse’s income and survivor benefits.
That does not mean everyone should claim early, and it does not mean everyone should delay.
It means the decision should be made as part of your overall retirement plan.
Your health, family situation, other income sources, retirement assets, and spending needs can all play a role. Social Security is too important to treat as an afterthought.
Take a Hard Look at Your Investment Portfolio
The investment strategy that worked earlier in your career may not be the same strategy you want as retirement approaches.
That does not mean you suddenly need to avoid the stock market. Most retirees still need exposure to stocks because retirement may last for many years.
The issue is that your portfolio now has a different job.
You are getting closer to the point where you will be taking money out of your portfolio rather than simply putting money into it. That makes diversification, liquidity, and your ability to handle market volatility increasingly important.
As retirement approaches, ask yourself:
How much of my portfolio is exposed to market risk?
Am I overly concentrated in one company, stock, or sector?
How much do I have in cash or short-term investments?
What happens if the market drops shortly after I retire?
How much will I need to withdraw from my portfolio each year?
You do not want to make investment decisions based on fear. But you also do not want to discover after retiring that your portfolio was not designed for the job you need it to do.
Figure Out Where Your Retirement Income Will Come From
During your working years, your income may have come from one primary source: your paycheck.
Retirement can look very different.
Your income might come from:
Social Security
A pension
A workplace retirement plan
An IRA
Taxable investments
Rental income
Part-time work
The challenge is figuring out how all of those pieces fit together.
Which accounts should you withdraw from first? How much should you take? Should you take more from certain accounts in some years and less in others?
Once you start thinking about retirement this way, you are no longer just asking, “How much money do I have?”
You are asking, “How do I turn what I have accumulated into a reliable income stream?”
That is a very different planning exercise.
Do Not Overlook Taxes
Taxes are another area where retirement planning can become particularly important.
Once you stop receiving a paycheck, your tax situation can change significantly. Depending on your income, retirement accounts, and other assets, the period immediately before and after retirement may create opportunities for tax planning.
That could include considerations such as:
Roth conversions
Managing taxable investment gains
Coordinating withdrawals from different accounts
Charitable giving strategies
Managing future required minimum distributions
Coordinating Social Security and other income
There is no single strategy that works for everyone. But one principle applies broadly:
Do not wait until tax season to think about retirement taxes.
Tax planning should be part of your retirement plan, not something you review after the year is already over.
Decide What You Want to Do About Your Mortgage
This is a question many people ask:
“Should I pay off my mortgage before I retire?”
The answer is not automatically yes.
For some people, eliminating the mortgage payment provides tremendous peace of mind and makes a monthly retirement budget easier to manage. For others, putting a large amount of money toward a low-interest mortgage may not be the best use of their assets.
It depends on the circumstances, and it depends on the person.
The important thing is to look at your mortgage as part of your entire financial picture rather than making the decision in isolation.
Plan for Healthcare and Long-Term Care
Healthcare is one of the biggest expenses people can underestimate when planning for retirement.
If you are retiring before Medicare eligibility, you need a plan for the period in between. Even after Medicare begins, there are still premiums, supplemental coverage, prescriptions, and other out-of-pocket expenses to consider.
There is also a larger question:
What happens if you eventually need significant long-term care?
No one knows exactly what their healthcare needs will look like in the future. But that does not mean you should not plan for the possibility.
Whether you ultimately decide to use insurance, dedicate a portion of your assets toward potential care costs, or take another approach, it is worth having the conversation before you need the care.
Stress-Test Your Retirement Plan
This may be one of the most valuable parts of retirement planning.
Do not just ask whether your plan works if everything goes right. Ask what happens if things do not.
What if the market drops significantly shortly after retirement?
What if inflation stays higher than expected?
What if you live longer than expected?
What if one spouse passes away earlier than expected?
What if you want to spend more on travel early in retirement?
What if you need long-term care?
These are not predictions. They are simply possibilities.
A good retirement plan should account for uncertainty and give you a framework for making decisions when life does not go exactly according to plan.
Get Your Estate Plan in Order
Estate planning tends to move up the priority list as retirement gets closer.
Make sure your will, trust documents, powers of attorney, and healthcare directives reflect your current wishes.
Do not forget about beneficiary designations. Retirement accounts and life insurance policies have their own beneficiary designations, and those should be reviewed regularly.
Estate planning is not just about what happens after you are gone. It is also about making sure someone you trust can step in and help if you are ever unable to make financial or healthcare decisions for yourself.
Retirement Planning Is About More Than Having Enough Money
If there is one thing to understand as retirement approaches, it is this:
Retirement planning is about much more than reaching a certain dollar amount.
Having a particular account balance does not automatically tell you whether you are ready to retire. The more important questions are:
How much will you spend?
Where will your income come from?
How will taxes affect that income?
How much investment risk can you afford to take?
When should you claim Social Security?
How will you pay for healthcare?
What happens if life does not go according to plan?
The years before retirement are a great time to start answering those questions.
You do not have to have everything figured out before your last day of work. But as retirement gets closer, it is important to move from simply saving for retirement to actively planning for retirement.
That is a very different conversation.
Thinking About Retirement?
If retirement is approaching, now is a good time to take a step back and look at the entire picture, not just your investment accounts.
A good retirement plan should connect your investments, income, taxes, Social Security, healthcare, and estate planning into one cohesive strategy.
If you are approaching retirement and are not sure whether all of the pieces fit together, we would be happy to have a conversation.
Sometimes the most valuable thing you can get from a retirement plan is not another number. It is confidence that you have thought through the important decisions before making the transition from a paycheck to retirement income.