6 Must-Dos in the Last 5 Years Before Retirement

As you close in on retirement, you’re feeling both excitement and trepidation. You have plans for all the things you’ll do once you punch the work clock one final time, but you also need to know your personal finances are ready for that day. To help you prepare, here are six steps for the last five years before retirement.

1. Cut Your Credit Card Debt

Make it a goal to enter retirement with little to no debt so you can enjoy more financial flexibility. Now is a good time to pay down (or off) your credit cards and other debt, such as car loans.

2. Determine Your Medicare Needs

You will sign up for Medicare soon, if you haven’t already. Do some advance work and understand what Medicare means for you—when you need to sign up, the services that are covered, and the costs involved.

Don’t make the mistake of believing that Medicare means all your health care costs are covered. Once you understand the Medicare basics, you can determine if you need supplemental coverage. You can also estimate how much health care will cost you given your current and potential needs. Make sure to work that amount into your retirement budget.

If you haven’t made a plan for long-term care costs, now is the time. There’s a 70% chance you will need long-term care as you age, according to the U.S. Department of Health and Human Services. And the price tag of that care could quickly erode your retirement savings.

Whether you decide to buy insurance or self-fund those costs, have a plan. Consider talking with a financial advisor to determine the options that work for your financial situation and goals.

3. Make a Decision About Social Security

Will you wait until full retirement age before you start Social Security benefits? Will you take them early for the income even though your benefit amount will be reduced for life? Or will you wait until age 70 so you can increase your monthly amount to the maximum?

If you are married, make sure to understand the impact those decisions could have on your spouse. If you die before they do, the survivor benefit may end up being higher than the benefit based on their work record. This is especially true if they didn’t have as high a salary as you or they took time off work for extended periods.

4. Determine Your Retirement Plan Distributions

As you get close to retiring, you need a budget that includes how much you will withdraw from your retirement accounts, such as your 401(k) or IRA. Very generally, this means totaling all your planned expenses and subtracting that amount from all your retirement income sources. The gap represents the amount you’ll need from your retirement accounts.

That’s a simplistic explanation, however. Your rate of withdrawal needs to sustain your account balance over your expected lifetime. In addition, you should account for required minimum distributions (RMDs), the return needs for your investments, the effects of inflation, and the potential impact of market volatility on your portfolio balance. 

A financial advisor can help provide detailed projections and recommendations as part of your retirement plan. You can also use online retirement calculators to determine how long your savings will last based on your expected distributions.

5. Give Your Retirement Plan a Test Run

At least a couple of years before you retire, do a test run of your retirement plan. You’ll want to live as though you have retired so you can determine if your retirement budget works.

If you’re scrimping to get by and unhappy with your quality of life, then you have time to revisit your retirement plan. You may need to work more to increase your savings or get creative in reducing expenses. Perhaps you’ll want to delay your retirement date by a year or two to build a bigger nest egg.

Although you may need to tweak your retirement plans, the positive is that you know while you have time to maneuver.

6. Adjust Your Asset Allocation

As people age, they generally want to adjust their portfolio so that the assets they have allocated expose them to less risk. That risk exposure needs to be balanced against the return needs mentioned in Step 4.

You may want to talk with a fiduciary financial advisor to determine the right allocation given your financial needs as you enter retirement. This is just one step in a comprehensive retirement plan that our Denver area financial planning firm helps clients determine.

Ideally, all the areas of your retirement plan will integrate as well so that you can feel confident in these final five years of your career that you are ready to begin an exciting new life stage as a retiree.

Our Greenwood Village, CO fiduciary financial advisory firm offers a complimentary 15-minute call. We can briefly discuss your financial situation and retirement concerns, and share how we may be able to help.

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