Retirement doesn’t begin on your last day of work; it begins with the decisions you make in the years leading up to it. The five years before retirement are one of the most important planning periods. During this time, you can fine-tune your finances, make informed healthcare decisions, and create a clear vision for the lifestyle you want.
Whether retirement is exactly five years away or just over the horizon, this checklist can help you prepare with confidence.
Five Years Before Retirement
1. Define What Retirement Looks Like
Before running the numbers, take some time to think about what you want your retirement to look like. Consider where you want to live, whether you plan to travel frequently, and if you would like to work part-time or volunteer. Think about the hobbies and activities you want to pursue and how much time you hope to spend with family and grandchildren. Having a clear vision for your retirement can help you estimate how much income you will need and create a retirement budget that reflects the lifestyle you want to enjoy.
2. Estimate Your Retirement Income
Make a list of every potential source of retirement income, including Social Security, employer pensions, 401(k), 403(b), and 457 plans, traditional and Roth IRAs, taxable investment accounts, rental property income, and part-time employment. Once you have identified your expected income sources, compare them with your projected retirement expenses. This can help you identify potential income shortfalls and give you time to adjust your savings, spending, or retirement strategy before you leave the workforce.
3. Review Your Investment Strategy
As retirement approaches, your investment allocation should reflect both your need for long-term growth and your comfort with investment risk. Take time to evaluate whether your portfolio is appropriately diversified, whether you are taking more risk than necessary, and whether you have enough liquid assets to cover your expenses during the first several years of retirement. It is also important to consider how a significant market downturn could affect your withdrawal strategy. The goal is not to eliminate investment risk entirely, but to ensure your portfolio is structured to support your long-term income needs while providing an appropriate balance between growth, stability, and flexibility.
4. Maximize Retirement Contributions
Your highest-earning years often occur just before retirement, making them an important opportunity to strengthen your financial position. Take advantage of catch-up contributions to retirement accounts if you are eligible, contribute enough to receive any available employer matching contributions, and consider maximizing Health Savings Account (HSA) contributions if you have a qualifying health plan. Taking advantage of these opportunities can help increase your retirement savings and provide additional financial resources as you transition into retirement.
5. Eliminate High-Interest Debt
Entering retirement with unnecessary debt can place added pressure on your monthly budget and reduce the flexibility of your retirement income. Before retiring, consider prioritizing high-interest debt such as credit cards, personal loans, and auto loans. Paying down these obligations can help reduce monthly expenses and provide greater financial flexibility. It is also worth evaluating whether paying off your mortgage before retirement makes sense based on your interest rate, available savings, cash flow, and overall financial plan. The goal is to enter retirement with a manageable level of debt that supports your long-term financial security.
Three to Four Years Before Retirement
6. Estimate Healthcare Costs
Healthcare can become one of the largest expenses in retirement, making it an important part of your overall retirement plan. Before retiring, review your Medicare eligibility, supplemental insurance options, prescription drug costs, and potential long-term care needs. If you plan to retire before becoming eligible for Medicare, it is especially important to understand how you will obtain health insurance during those years and account for the associated costs. Planning for healthcare expenses in advance can help you avoid unexpected costs and provide greater confidence as you transition into retirement.
7. Review Your Social Security Strategy
Deciding when to claim Social Security can have a significant impact on your lifetime benefits and should be considered as part of your overall retirement strategy. Factors to evaluate include your health and life expectancy, marital status, other sources of retirement income, potential tax implications, and the advantages of delaying benefits. Because the timing of your Social Security decision can affect your income for many years, it is important to carefully evaluate your options and choose an approach that aligns with your financial needs and long-term retirement goals.
8. Build a Retirement Spending Plan
Your retirement budget will likely look different from your current household budget, so it is important to estimate how your expenses may change once you stop working. Consider costs such as housing, healthcare, food, travel, entertainment, taxes, gifts and charitable giving, and unexpected or emergency expenses. Keep in mind that retirement spending may also change over time. Many retirees spend more on travel, entertainment, and other discretionary activities during the early years of retirement, while healthcare and other costs may become more significant later. Building a budget that accounts for these changing expenses can help create a more realistic picture of your long-term retirement needs.
Two Years Before Retirement
9. Stress-Test Your Retirement Plan
A strong retirement plan should account for the possibility that things may not unfold exactly as expected. Consider what could happen if inflation remains elevated, the market experiences a significant decline early in retirement, one spouse lives considerably longer than anticipated, or unexpected healthcare expenses arise. Testing your plan under different scenarios can help identify potential weaknesses and give you an opportunity to adjust before these challenges become real financial concerns. By preparing for a range of possibilities, you can build greater resilience and confidence in your retirement strategy.
10. Review Insurance Coverage
As retirement approaches, it is important to review your insurance coverage and make sure your policies still align with your needs and financial situation. Consider reviewing your homeowners, auto, and umbrella liability coverage, as well as disability insurance if you are still working and life insurance. Some policies or coverage amounts may no longer be necessary once you retire, while others may become more important as your circumstances change. Taking the time to reassess your insurance needs can help ensure you have appropriate protection without paying for coverage you may no longer need.
11. Update Your Estate Plan
Retirement is an excellent time to review your estate planning and legal documents to make sure they reflect your current wishes and circumstances. Review your will, durable power of attorney, healthcare proxy, living will, and beneficiary designations on retirement and investment accounts. If you have a trust, review those documents as well. Keeping these documents current can help ensure that your financial and healthcare wishes are clearly documented and that the right people are authorized to make decisions on your behalf if needed.
One Year Before Retirement
12. Create an Income Withdrawal Strategy
Determine which accounts you’ll draw from first. A thoughtful withdrawal strategy can help improve tax efficiency and potentially extend the life of your retirement savings.
13. Understand Required Minimum Distributions (RMDs)
If you’ll eventually be subject to Required Minimum Distributions, begin planning now. Consider whether Roth conversions or other tax strategies may reduce future tax obligations.
14. Practice Living on Your Retirement Budget
Try spending only what you expect to have available in retirement for several months. This trial run can help identify spending adjustments before retirement becomes permanent.
15. Prepare Emotionally
Financial readiness is only one part of preparing for retirement. It is equally important to think about how you will spend your time and maintain a sense of purpose and fulfillment. Consider establishing meaningful daily routines, staying connected with friends and family, exploring volunteer opportunities, pursuing lifelong learning, and making time for activities that support your physical well-being. Many retirees discover that having a plan for how they will spend their time can be just as important as having a plan for how they will manage their money.
Final Thoughts
Retirement isn’t just a financial event; it’s a major life transition. The more preparation you do during the five years leading up to retirement, the more flexibility and confidence you’ll have when your final day of work arrives.
Rather than trying to accomplish everything at once, tackle one item on this checklist each month. Small, consistent steps can make the transition smoother and help you enter retirement prepared for both the expected and the unexpected.
The best retirement plans don’t happen by accident; they’re built thoughtfully over time.
Sandra L. Kobel, CFP®, CLU®, ChFC®
T 585.381.8100
Sandra@KobelFinancial.com
www.sandrakobel.com
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.
Frequently Asked Questions
When should I start preparing for retirement?
Ideally, retirement preparation should begin several years before you plan to stop working. The five years leading up to retirement are especially important because they give you time to review your finances, make healthcare decisions, reduce debt, refine your investment strategy, and prepare for the lifestyle changes ahead.
What should I do five years before retirement?
Five years before retirement, focus on defining your desired retirement lifestyle, estimating your future income and expenses, reviewing your investment strategy, maximizing retirement contributions, and reducing high-interest debt. These steps can help strengthen your financial position while you still have time to adjust.
How do I estimate my retirement income?
Start by identifying all potential income sources, including Social Security, pensions, retirement accounts, taxable investments, rental income, and potential part-time employment. Compare your expected income with your projected expenses to determine whether there may be a shortfall that needs to be addressed.
Should I change my investment strategy before retirement?
As retirement approaches, it is important to review your investment allocation, diversification, risk level, and access to liquid assets. Your portfolio should balance the need for long-term growth with your ability to withstand market downturns and generate income during retirement.
Should I pay off debt before retiring?
Paying off high-interest debt before retirement can reduce monthly expenses and provide greater financial flexibility. You should also evaluate whether paying off your mortgage makes sense based on your interest rate, cash flow, savings, and overall financial plan.
How should I plan for healthcare expenses in retirement?
Review Medicare eligibility, supplemental insurance, prescription drug costs, and potential long-term care expenses. If you plan to retire before becoming eligible for Medicare, determine how you will obtain health insurance and include those costs in your retirement budget.
When should I claim Social Security?
There is no universal answer to when you should claim Social Security. Your decision may depend on factors such as your health, life expectancy, marital status, other income sources, taxes, and the potential advantages of delaying benefits. Because the decision can affect your income for many years, it should be evaluated as part of your broader retirement plan.
How much should I budget for retirement?
Your retirement budget should reflect your expected lifestyle and may include housing, healthcare, food, travel, entertainment, taxes, charitable giving, gifts, and emergency expenses. Keep in mind that spending patterns can change throughout retirement, with discretionary spending potentially higher early on and healthcare expenses becoming more significant later.
How can I stress my retirement plan?
Consider how your plan would perform under different circumstances, such as higher inflation, an early market downturn, unexpected healthcare costs, or a longer-than-expected retirement. Stress testing can help uncover potential weaknesses while you still have time to make changes.
What insurance should I review before retirement?
Review your homeowners, auto, umbrella liability, life, and disability insurance, particularly if you are still working. Some coverage may become less important after retirement, while other types of protection may become more important as your circumstances change.
What estate planning documents should I update before retirement?
Review your will, durable power of attorney, healthcare proxy, living will, beneficiary designations, and any trust documents. Keeping these documents current can help ensure your financial and healthcare wishes are properly documented.
What is a retirement withdrawal strategy?
A withdrawal strategy determines which retirement and investment accounts you will use for income and when you will draw from them. Coordinating withdrawals across different account types can help manage taxes and potentially make your retirement savings last longer.
What are Required Minimum Distributions (RMDs)?
RMDs are withdrawals that may be required from certain retirement accounts once you reach the applicable age. Planning ahead can help you understand how future RMDs may affect your taxable income and whether strategies such as Roth conversions may be appropriate for your situation.
Should I practice living on my retirement budget before I retire?
Yes. Spending according to your expected retirement budget for several months before leaving work can provide a valuable trial run. It may reveal expenses that need to be adjusted and help you become more comfortable with your anticipated retirement lifestyle.
How important is emotional preparation for retirement?
Emotional and lifestyle preparation can be just as important as financial preparation. Consider how you will spend your time, maintain social connections, find purpose, pursue hobbies, volunteer, continue learning, and stay physically active. Having a plan for life after work can make the transition more fulfilling.
What is the most important thing to remember when preparing for retirement?
Retirement preparation is a process, not a single event. You do not need to accomplish everything at once. Taking consistent steps throughout the five years before retirement can give you more flexibility, help you prepare for unexpected challenges, and increase your confidence when the time comes to leave the workforce.