The last five years before retirement are crucial: Everything you should do before time runs out

Why the last five years before retirement are crucial

Retirement seemed like a distant goal, but suddenly, it wasn’t. When you’re just a few years away from retirement, the financial decisions you make become even more important. Once you enter the five-year window, now is a good time to review your plan to make sure you’re on track. It helps to understand why the last five years before retirement are critical. Talk to a financial advisor This can give you a clear picture of what’s working and what’s not working in your plan.

Timing of retirement planning matters

When you’re young, time is on your side when it comes to investing for retirement. The more time you save and invest, the more opportunities your money has to grow. Waiting to start saving for retirement may mean having to play catch – later. If you’re approaching the last five years before retirement, starting late could put you at a serious disadvantage. There are two reasons.

First, you benefit from less time compound interestEven if you reach the maximum annual contribution to a 401(k) or IRA, including catch-up contributions because you are age 50 or older, it may not be enough to make up for the time lost in the market.

The second reason is related to the first. Naturally, as you age, you may start to shift more of your assets into safer investments. investAssets such as bonds can reduce your risk of losing money before retirement. But you may also be doing this in exchange for higher returns, which your portfolio may need if you start saving late.

Why the last five years before retirement are crucial

The last five years before retirement are essentially a test of your preparation and planning to date. When you’re five years away from retirement, you need to answer a big question: Can I afford it?

Whether the answer is yes or no depends largely on everything you do to plan ahead. Some of the most important factors that can affect retirement readiness include:

  • The amount you save in a workplace retirement plan or individual retirement account

  • The amount of debt you owe in addition to your mortgage

  • Your estimated expenses are retirebased on your preferred lifestyle

  • How long your savings will need to last based on your retirement age

If you plan well and stay consistent with your plan, you probably won’t need to make many adjustments in the last five years before retirement. Conversely, if your plan has some holes or you haven’t started planning anyway, you may have more work to do to be ready for retirement.

5 years until retirement list

Why the last five years before retirement are crucialWhy the last five years before retirement are crucial

Why the last five years before retirement are crucial

If you’re five years away from retirement, it’s helpful to know what you should be doing to gauge your readiness. Here are some of the most important things to address to ensure you can retire comfortably and on time.

View your savings: for Where do you want to retire?, you need to know where you are now. Specifically, this means knowing how much you’ve saved for retirement and how much more you need to save over the next five years to reach your goals.

by running numbers Retirement Savings Calculator Helps you understand how close or far away you are from your target. You can use the resulting numbers to develop next steps in your financial plan.

For example, if you’re behind, you may need to significantly increase your 401(k) or IRA contributions, or you may need to adjust your investment strategy to generate higher returns over the remaining time until you retire.

Know your sources of income: It’s best to understand the sources of income you can truly rely on in retirement. Depending on your situation, this may include:

  • Withdrawing from a 401(k) or similar workplace plan

  • Traditional IRA or Roth IRA

  • Pension income if your employer offers a pension plan

  • social security benefits

  • Federal Employees Retirement System (FERS) Benefits

  • Rental property income if you own real estate

  • annuity

You may also have income from other sources, such as a retirement account or health savings account that you inherited (human serum albumin). HSAs themselves are not retirement accounts because they are intended to be used for qualified medical expenses. However, after age 65, you can withdraw funds from an HSA for any reason without penalty. You only pay ordinary income taxes on the distribution.

Taking stock of your potential income sources can give you a better idea of ​​how much you might need to spend. It can also help you determine things like when to start withdrawing money from a tax-advantaged plan, how much to withdraw, and how much to withdraw. Best Age to Apply for Social Security Benefits.

Estimated retirement expenses: Income is one aspect of your retirement budget, expenses are another. If you’re five years away from retirement, now is a good time to start thinking about what kind of lifestyle you want and how much you can afford based on what you’ve saved.

typical retirement expenses Includes housing, utilities, food and health care. But your budget may also extend to travel, entertainment, or a new hobby you’ve always wanted to try. Building a mock budget and then comparing the numbers to your expected monthly income can help you see how far apart the numbers are.

You can also go a step further and try living on a retirement budget for the last five years before retirement. This can help you assess how realistic it is. If you expect to spend less in retirement than you do now, doing a test budget run could leave you with some extra money to save each month.

Consider long-term care needs: long term care Fees can easily drain your retirement savings. If you’re five years away from retirement, now is a good time to evaluate your personal risks.

Medicare doesn’t pay for long-term care, but Medicaid does. There’s a catch, though, because qualifying for Medicaid often means spending assets. If you don’t want to do this, you might consider purchasing long-term care insurance for the first five years of retirement.

Long-term care policies can pay benefits to cover the cost of necessary care. If you’re not sure whether you need long-term care, you might consider a hybrid policy that includes life insurance. If you do not use your long-term care policy long-term care benefits, the policy may still pay a death benefit to your beneficiaries.

Check your tax status: Managing your tax obligations in retirement allows you to keep more of your savings. You might consider making some tax moves in the last five years before retirement so you can pay less to the IRS later.

For example, you might Convert your Traditional IRA to a Roth IRA Enjoy the benefits of tax-free withdrawals in retirement. Converting a traditional IRA to a Roth doesn’t allow you to completely avoid taxes; conversions and withdrawals are subject to the same tax rules.

However, once you convert to a Roth account, you won’t have to pay any taxes on future distributions. If you wish to be at a higher level, this could result in significant tax savings. tax rate When you retire.

bottom line

Why the last five years before retirement are crucialWhy the last five years before retirement are crucial

Why the last five years before retirement are crucial

the last five years before you retire It went by in the blink of an eye and there was no time to waste in finalizing the plans. Taking the time to review where you are now and where you want to be can help ensure that there are no problems once your plan is complete. It’s time to leave the workplace for good.

Retirement Planning Tips

  • Creating a five-year retirement plan can also include planning for any contingencies that may arise. If you’re worried that anything will derail your retirement timeline, talking to a financial advisor can help you develop a backup plan. Find a financial advisor It doesn’t have to be hard. SmartAsset’s free tools You are matched with up to three vetted financial advisors serving your area, and you can be paired with your advisor for a free introductory call to determine which one you think is the best fit for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.

  • Investing in a tax-advantaged account, such as a 401(k) or IRA, is a smart choice for retirement planning.If you’d like to add other savings options to your mix, you might consider opening a taxable brokerage accountTaxable accounts are subject to capital gains taxes when you sell investments for a profit. However, they do not have the same annual contribution limits as tax-advantaged accounts, and there are no early withdrawal penalties.

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