Retirement is a milestone you've likely thought about and worked toward for decades. After planning and saving for so many years, you may imagine you can coast right into it.
But in the five years or so right before your retirement, your savings and investment accounts need your attention more than ever. While risk is something you always need to think about with your finances, this is the time you need to be the most vigilant about your money's security and performance.
We'll explain why the last five years before you retire are critical and explore steps you can take during this time to build and protect your nest egg.
Evaluate your retirement readiness
While you can't predict exactly how much money you'll have or spend in retirement, you'll be closer to seeing the full picture in your last few working years than ever before. As variables move from fuzzy to sharp, you'll likely be able to tell if you're on track for covering your costs as well as pursuing other goals, such as spending time with your family, traveling and living generously.
What retirement income sources can you count on?
You may have multiple sources of income to draw from once you're no longer receiving a paycheck. Take stock of your financial resources, which may include:
- Retirement savings from IRAs and employer accounts like 401(k)s
- Balances in brokerage accounts that hold investments like stocks, bonds and mutual funds
- Your expected Social Security benefit
- Work income from a part-time job
- Any other assets you may have, like rental property or your financial stake in a business
You could add
After reviewing your income sources, add your data into a
Prepare for the 5 risks to your retirement savings
With five years to go before retirement, you probably have a good idea whether you want to continue your current lifestyle, what debts you'll carry into retirement and other planned changes that may affect your cost of living. But there are hard-to-predict factors you need to consider as well:
1. Outliving your money.
A long and healthy life is a blessing. But it's natural to worry that you'll run out of funds at some point, which could create a financial burden for your loved ones. Careful financial planning today can help you avoid this scenario.
2. Market volatility
Markets rise and fall, and that volatility is inevitable. Reassess your asset mix with a financial advisor and stay the course. Keeping this truism in mind is critical when investing for the short- and long-term.
Rising prices can impact your future spending power, which can be especially worrying if you're living on a fixed income. You can put
4. Changing tax laws.
New legislation frequently contains tax provisions, and while some updated rules can benefit retirees, others create additional burdens. Since it's hard to predict future tax-related developments, you need to take defensive measures to safeguard your savings from the potential impact of rising taxes.
5. Health challenges that can drain your assets.
Take time now to study health insurance options for retirement, including Medicare supplemental insurance if you're eligible for Medicare. Also evaluate
With all these possibilities in mind, you can account for the known expenses and then add some buffer room. If you expect a gap between your income and expenses, now's the time to make adjustments by reassessing your budget, making strategic moves with your investments or considering delaying retirement.
But there are also benefits to having a mortgage in retirement.
Keep contributing to your retirement accounts
If you've been saving for years with retirement accounts like a 401(k) or IRA, you've likely built up a significant balance. Don't stop now—you're still benefiting from
Reassess your investment risk tolerance
At the same time, your investments need to align with your retirement goals. Staying too safe with your assets can limit your ability to generate more income for retirement. One way to achieve a balance with a growth-focused portfolio is to choose short-term investments that are relatively conservative as well as longer-term assets that have a higher risk.
Diversify the tax status of your assets
Taxes can eat away at your savings, and you'll need to assess the
You can explore avenues that may help ensure you don't have to pay a chunk of taxes at the same time. For example, you might consider moving money from a tax-deferred retirement savings account like a traditional IRA or 401(k) into a
You'll pay taxes on the amount you convert but won't be taxed again when you make qualified withdrawals.* One potential drawback: When you convert money to a Roth IRA, you'll see an increase in your taxable income for that year, which could propel you into a higher tax bracket.
Roth IRAs have another benefit, however. They don't have
However, you might have some control over the timing and amount of your withdrawals, and the strategies around RMDs are worth contemplating with a tax professional or financial advisor in pre-retirement.
Seek professional guidance for the tasks ahead
The right expert also can advise you about other aspects of your five-year plan for retirement, including mitigating your risks, coordinating plans with a spouse or partner, helping you choose optimal investments and ensuring your income and expense assessments are on target.