6 Things You Must Do to Retire in 5 Years

If you are at the exciting point in your life where retirement is a mere five years away, you may be getting increasingly excited about making your workforce exit. But before you start picturing your newfound freedom, make sure to tackle these particularly important moves.

1. Obtain an estimate of your future Social Security benefit.

Social Security may end up being an important income source of yours in retirement. And even if you bring in a hefty amount of savings, there is something to be said for the fact that the program is designed to pay you your monthly benefit for life. Basically, Social Security is a lifetime annuity of the tax dollars you contributed during your earning years.

Per a great TEDx Talk titled “An Honest Look at the Personal Finance Crisis,” I learned the three-legged retirement income stool (savings, pensions, and Social Security) has become very wobbly. According to White, Social Security was never supposed to be our only retirement plan. It was developed in 1935 to replace 40 percent of our preretirement income. 

If you want the full benefit you are owed based on your work history, you must wait until your full retirement age (FRA) to sign up. Please note that the earlier you retire, you will receive a smaller monthly amount for the remainder of your life than waiting until your FRA at roughly age 67 or even age 70 when you maximize your monthly benefit. My strong recommendation is to set up your own online Social Security Account at the following website: www.ssa.gov/myaccount. This allows you to review estimates of YOUR monthly benefit under various assumptions, which is great for retirement planning.

2. Build your retirement budget.

In the five years before retirement, you will have a better idea of your future needs. Start to consider anything that might change when you retire. While these numbers might look fairly similar to your current expenses, there are several things that will change. Oftentimes retirees’ commuting costs go down, ideally a mortgage has been paid off recently and budgeted expenses for personal items like new clothing can decrease. At the same time other expenses such as travel, and health care expenses could and most likely will increase.

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This is a critical step in your retirement planning, as it will guide how you will allocate your different income streams – including investment portfolio withdrawals, Social Security or pension payments. This leads nicely to the next critical step.

3. Determine your annual income from your savings. 

Hopefully, you will have a ton of money tucked away in various retirement vehicles such as IRAs, 401(k), 403(b), annuities, etc. From there, you or your advisor will need to calculate what annual income it will provide in retirement.

As my retirement approached in 2021 after a rewarding four-decade career, my wife and I collaborated with our financial advisor to determine our streams of income in retirement. As 2022 has taught us, inflation can have a major impact on our retirement needs. Higher prices combined with greater medical expenses in our older years make it critical to ensure our income and investments can support our longer lives. 

A nest egg worth $2 million may seem like a ton of money. If you intend to withdraw from your savings at the suggested withdrawal rate of 4% per year, that equates to $80,000 in annual income. That may be enough when combined with Social Security. But it is important to know what to expect in case you need to adjust some of your financial plans, such as where to live, your daily lifestyle, if you want to work in retirement, etc.

4. Take advantage of catch-up contributions while you are still working.

Once you turn age 50, you are eligible to contribute extra money to an IRA or 401(k). If you are lucky enough to be nearing retirement, it pays to take advantage of this option while you are still working and earning a salary. The 401(k)-contribution limit for 2024 is $23,000 for employee contributions. If you are age 50 or older, you are eligible for an additional $7,500 in catch-up contributions, raising your employee contribution limit to $30,500.

You might think that it does not make sense to boost your IRA or 401(k) contributions at a time when retirement is so close. But remember, you are (hopefully) not emptying out your nest egg in its entirety right away once your career ends. Thus, it still pays to fund your savings plan to the best of your ability, even if retirement is not far off.

5. Study and be prepared for Medicare.

Once you turn 65, you will be eligible to get health coverage through the Medicare program. Hopefully, you may be retiring at an earlier age than that if all goes according to the FIRE plan. But at some point, you are likely to turn to Medicare for your health-related needs. So, it is important to know what the program costs and covers.

While Part A, which covers hospital care, generally does not come with a monthly premium, Part B, which covers outpatient care, does. So does Part D, which you will need for prescription drug coverage. There are also certain services traditional Medicare will not pay for at all, like most dental care, so it is important to know what to anticipate and how best to cover all necessary expenses. It makes sense to use a Medicare insurance broker who can go through the various plans and see what makes the most sense for your situation from both a medical standpoint as well as from a cost standpoint. In discussion with our financial advisor, we plan on meeting with a Medicare Specialist this summer who can share his recommendations for a smooth transition to Medicare when I turn 65 in December. I plan to read articles (such as the helpful POF articles) and obtain advice from friends who have already experienced issues on the Medicare plan. 

6. Develop a long-term care plan.

Many seniors end up needing some type of long-term care in their lifetime and the costs can be exorbitant. While it is impossible to know if you will need long-term care, it is essential to plan for the possibility of needing it because accidents, illnesses and injuries can occur suddenly as we age.  At some point in our lives, about 70 percent of us will need assistance with things like getting dressed, driving to appointments, or making meals. Before you retire, make sure you have a plan for covering that large expense.

If you do not have long-term care insurance yet, it is something to consider. The optimal time to apply for a policy is during your 50s, but you may not be out of luck if that window has already passed. You may also want to talk to younger family members about long-term care if you expect them to step up and help with the costs related to long-term care.

While my wife and I were both earning salaries before entering our pre-retirement phase of life, we collaborated with our advisor to buy long term care insurance through a single premium paid upfront. I did not want to be subject to high annual premium increases, which has impacted others’ ability to maintain their long-term care insurance without reducing their benefits. At the time of this LTC policy inception, I was age 54 and my wife was age 48.

Final Thoughts

As you can see, the five-year period leading up to retirement is a crucial time. Make these key moves to set yourself up for a rewarding retirement that’s devoid of financial stress. 

My wife and I discussed many of the above items with our advisor well in advance of our eventual retirement in 2021. But it doesn’t end there as we continue to meet or speak with our advisory team often, which has been very comforting in our early phase of retirement. Together, you can look at the impact of taxes, evaluate your portfolio diversification, and prepare for the legacy you would like to leave your family and others.