Planning for Retirement

You can retire within five years — right?

If you’re planning on retiring in five years or so, now is a crucial time to evaluate your savings and your plan to determine whether you’ll have enough money to make the move. To help you in the process, we’ve rounded up 10 steps you can take.

Map out an accurate retirement budget

As you evaluate your plan, it may be tempting to start by thinking of the expenses associated with the retirement activities you dream of — like travel, new experiences, and entertainment. However, it’s just as important to plan for less-exciting things like monthly expenses. Be sure to carefully consider yours so you can create an accurate plan that includes mortgage/rent, utilities, vehicle expenses, groceries, and other basic needs.

Additionally, keep in mind that once you retire, it’s possible you’ll have a tighter budget, which may take some getting used to. If need be, think about the lifestyle changes you’d be comfortable with making — and those you wouldn’t — to make your future budget work for you. After all, you retired to gain some peace of mind, so being stressed about money each month shouldn’t be part of the plan.

Think about Social Security

How big of a role can you expect Social Security to play in your retirement finances? That answer depends on lots of factors you’ll need to consider. For starters, many experts predict that you’ll need about 70% to 85% of your pre-retirement income to maintain your current lifestyle through retirement — but for many people, Social Security may only provide about 40% of total retirement income needs.

One of the biggest decisions you’ll have to make about Social Security, then, is when to start collecting your benefits. There are several options available to you: You can 1) take a reduced benefit at 62, 2) wait until you’re eligible to receive your full benefit (at 65 to 67 years old, depending on when you were born), or 3) postpone your first payment to qualify for a larger amount. Just remember, the federal government requires that you start receiving your benefits no later than age 70, so there’s no real benefit to waiting any longer than that.

Evaluate your investment mix

While you’ve been working full time, your investments have likely been focused primarily on growth (such as stocks), which makes sense. If you're within five years of retiring, though, you may want to start shifting your investments to a more conservative asset allocation, putting more focus on income-oriented investments like bonds and cash equivalents. You’ll still want to own some growth investments — being too conservative leaves little room for market growth potential — but remember that taking on too much risk may lead to some difficult years if markets decline.

It’s often helpful to “bucket” assets for different time horizons; for example, allocate conservative investments for short-term needs, moderate investments for midterm goals (i.e., three to five years from now), and more aggressive investments for longer-term goals more than five years away.

This is also a great time to carefully reassess your risk tolerance, time horizon, goals, and other personal factors as you decide how to shift your allocations.

Consider taxes today vs. in retirement

Over the years, you’ve likely been putting money away in a 401(k) or similar employer-sponsored plan as you save for retirement. But when you’re actually retired and withdrawing money from that account, that money will be subject to tax — which means your retirement income might be lower than you’d anticipated.

To avoid this heavy-tax situation, consider converting some of this pretax savings to a Roth 401(k) or Roth IRA before you retire. You’ll owe income taxes on the amount you convert, but future earnings won’t be taxed when you withdraw them, which means they’ll be tax-free rather than tax-deferred.

You may also consider the possibility of doing a series of yearly Roth conversions after retirement. Given your reduced income in retirement, these conversions would have less of a tax impact than they would if you’d made them during your higher-income working years. Roth conversions are complicated, though, so be sure to discuss potential tax implications with your tax advisor before transferring assets.

Plan your living arrangements

Five years before retirement, it helps to begin planning where you’ll want to live in retirement, whether that means staying put, downsizing, or relocating. As you start considering your living situation, run through estimates of expenses associated with different housing options, including the cost of living, mortgage or rent, property taxes, closing and/or moving costs, condo fees, and home maintenance or upgrades.

Couples need to discuss and agree on where they’ll live once they have the flexibility of retirement. If you expect to move to a new location, spend some time there in advance, experiencing the different seasons, to make sure you know what you’re signing up for. It’s actually fairly common for people who relocate to end up returning back home for at least part of the year after experiencing a few full years far away from family and friends.

Consider refinancing your mortgage, if applicable

Conventional wisdom says it’s best to go into retirement without a mortgage, but sometimes that just isn’t possible. If you expect to carry your mortgage into retirement, refinancing now could reduce your monthly mortgage payments, which would be a big help when your income drops in retirement. Plus, by starting over on a 30-year mortgage, it may be possible to get an annual tax deduction now and offset taxable interest.

Factor in vehicle needs and costs

Cars are an expense that can really add up, especially because your income may shrink in retirement. Typically, it’s best to enter retirement with as little overhead cost as possible, so it’s advisable to avoid getting a new car loan if you can. However, if a car loan is needed, try to make sure the payments won’t throw off your retirement cash flow.

Bottom line: If you’re thinking about upgrading your wheels, it may be best to make that purchase before you retire, while you’re still making a higher income.

Evaluate your health insurance

When you enter retirement, you’re probably going to see a change in your medical insurance policies, and if you’re under 65, you won’t yet qualify for Medicare. That’s why it’s a good idea to give yourself a health insurance audit now and find out whether you’ll be able to carry into retirement any group health benefits you now receive through your employer.

If understanding and managing health costs in retirement causes you confusion, you’re not alone. According to a recent study conducted by Voya Financial, 42% of pre-retirees would like advice on planning for health care costs in retirement. So, sometime soon, sit down (ideally with your financial advisor) and study the health policies you now have. By determining which of your employer’s health benefits you’ll be able to keep in retirement, you may be able to maintain favorable premium rates and co-payments rather than paying more by purchasing a new policy on your own.

Finally, since your out-of-pocket health costs will more than likely rise when you enter retirement, take advantage of your employer’s medical benefits before you leave your job. Make those elective visits to your doctor, dentist, and optometrist that you’ve been putting off before there are any changes to your coverage.

Plan how you’ll use your time

Talk with your spouse, family, and friends to figure out how you’ll fill your retirement days with purposeful activities that will keep you busy and active. You deserve some downtime, but don’t let yourself fall into the habit of sitting on the couch every day. You might want to use your newfound free time to explore a new hobby, volunteer, get back in touch with old friends, or make new ones. Establishing a routine that will be full of physically and socially beneficial activities will ensure that you won’t find yourself bereft or bored when you aren’t going to work every day.

Consult a financial planner

When you retire, you’ll probably share a common experience with almost everyone who has already made the change: You won’t get a paycheck anymore. Somehow you’ll have to replace this steady stream of earned income. Don’t forget to factor in income sources such as alimony or disability payments. They can really make a difference in your retirement plan.

To help you figure out the best way to replace your income, discuss these questions with your financial advisor:

  • What sources of income are you confident you can count on?
  • How much income will they provide each year?
  • How will you coordinate payments from different sources to create a steady stream of income so you can pay your bills when they’re due?

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Learning Center articles, guides, blogs, podcasts, and videos are for informational purposes only and are not an advertisement for a product or service. The accuracy and completeness is not guaranteed and does not constitute legal or tax advice. Please consult with your own tax, legal, and financial advisors.

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