Retirement Within Reach: 5 Steps to Take in the Next 5 Years

Retirement marks a significant transition in one's life. We all hope for a smooth transition from salaried to retired life. As you approach the five-year mark before retirement, it's crucial to start making strategic decisions to ensure a smooth and financially secure transition. In this article, we'll explore the top five considerations you should keep in mind as you approach this milestone.

Build Your Retirement Budget

One of the most critical aspects of retirement planning is understanding your financial situation. Five years before retirement, you should clearly understand your retirement savings, pension, and other income sources. You’ll need to know how much you’ll need in retirement. Calculate your expected monthly expenses in retirement, including housing, healthcare, transportation, and leisure activities.

Consider meeting with a CERTIFIED FINANCIAL PLANNER^TM practitioner to evaluate your retirement portfolio, cashflow strategies, and projections, and any insurance you may hold that could influence your budget. Portfolio strategies can take many forms; usually, this is not a one-size-fits-all endeavor. Ensure your portfolio not only aligns with your retirement goals and risk tolerance, but also with your cashflow plan. Some financial advisors consider reducing risk as you get close to retirement a must, but this can be a misnomer and, at times, an incorrect strategy altogether.

Creating a detailed budget for retirement is important. This budget should account for both essential expenses and discretionary spending. Knowing your financial limits will help you make informed decisions during retirement and prevent running out of money.

Healthcare Planning and Estate Planning

Your health insurance will probably be the biggest new expense you'll face in retirement. Healthcare costs tend to increase as we age, and planning for healthcare in retirement is crucial. Five years before retirement, review your current health insurance coverage and understand how it will change once you retire. Medicare eligibility typically begins at age 65, but you may need to bridge the gap until then with private insurance or employer-sponsored plans.

Many professionals are available in this space to assist with determining the most cost-effective strategy for healthcare coverage pre-Medicare. As you near Medicare age, these experts can help you to prepare to make your selections accurately and in a timely manner.

Consider the potential need for long-term care insurance. It can protect your assets from the high costs of nursing homes or in-home care. Remember that premiums for long-term care insurance are more affordable when you're younger and healthier. At times, long-term care insurance can also be used as a tool to protect a legacy. Suppose you desire to leave financial assets to your heirs. In that case, even though you may be "self-insurable," this type of insurance can be an attractive way to do so.

Estate Planning is an area of financial planning that goes hand in hand with medical insurance. Having an estate plan in place can ease the overall burden on families when a loved one passes or experiences a health event that makes them unable to make their own decisions. The documents that can ease that burden can include a will, a living will, and a Power of Attorney for healthcare and financial decisions. When it comes to Estate Planning, the items listed above are just the basics, and this is another area that isn’t a one-size-fits-all endeavor. A proper estate plan can make decisions easier on your family and sometimes protect assets from unnecessary tax and expense.

Plan Your Income Streams: Social Security Strategy

Your Social Security benefits can be a significant source of retirement income. However, the timing of claiming these benefits can substantially impact on your monthly payments. As such, developing a Social Security strategy at least five years before retirement is advised. There are many things to consider when claiming a Social Security benefit other than maximum benefits. A detailed retirement analysis completed by a professional can help weigh your options regarding Social Security. Much like portfolio allocations, maximizing social security benefits is more than a one-size-fits-all endeavor.

While you can start claiming Social Security benefits as early as 62, doing so before your full retirement age (usually between 66 and 67) will result in reduced monthly payments. Conversely, waiting until after your full retirement age can increase your monthly benefits. It is important to consider your health, financial situation, and longevity expectations when deciding when to claim Social Security. Maximizing your Social Security benefits can help you with a more comfortable retirement.

Debt Management

It is critical to enter your retirement without the burden of significant debt, as it can put a considerable strain on your finances. To avoid this, evaluate your outstanding debts and create a plan to pay them off or reduce them as much as possible. Consider the interest rates, balances, and overall strain each can cause on your cash flow once you enter retirement. A detailed look at your cash flow may help you decide which types of debt you can manage and which kinds of debt you cannot.

Bear in mind that mortgages, credit card debt, and loans can all have a substantial impact on your retirement savings. To mitigate this risk, it is prudent to develop a debt reduction strategy and prioritize paying off high-interest debts.  Minimizing your financial obligations before retirement will liberate more resources for your retirement lifestyle, enabling you to relish your golden years without major financial concerns.

Lifestyle and Retirement Goals

Retirement isn't just about finances; it's also about lifestyle and personal fulfillment. As you approach retirement, take time to reflect on your goals and aspirations. What do you want your retirement years to look like? Do you plan to travel, pursue hobbies, or volunteer?

As retirement approaches, many of us fear running out of money. However, it’s important to assess your savings and understand their strengths or weaknesses. Some of us have more assets than necessary to maintain our lifestyle but are in fear of running out of savings. It’s essential to strike a balance between overspending and underspending your retirement funds. Detailed cash flow and retirement planning can help you understand the overall power of your financial position. If you fall into the category of “underspending your retirement,” it may make sense to consider various tax planning strategies that could help maximize lower tax brackets to ease the tax impact on your heirs when they inherit your assets.

Lastly, consider how you'll structure your daily life during retirement. Some retirees find fulfillment in part-time work or volunteering, while others prefer a leisure-focused lifestyle. Mapping out your retirement goals will help you determine how much income you need and how you want to spend your time.

Conclusion

The five-year mark before retirement is a critical period for careful planning and preparation. Start the process early, seek guidance from a CERTIFIED FINANCIAL PLANNER^TM practitioner, and make informed decisions to ensure your retirement years are the best they can be. If you are closer to retirement than five years, that is okay. Don't panic; seek professional guidance to help you prepare. With proper planning, you can look forward to a retirement that is both enjoyable and worry-free.

Author: Eric Matsko, CFP^® | Financial Advisor | Allegheny Financial Group

Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered Broker/Dealer. Member FINRA/SIPC.