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Want to Retire in Five Years? What You Must Know

The last five years before you retire is a critical point in time—at least when it comes to retirement planning. That's because you must determine whether you can truly afford to quit working. This determination will hinge heavily on the amount of preparation you've done, and the results of that preparation.

If you are financially prepared, you may just need to maintain your program and continue on towards your retirement goal. If you are not prepared, you may be looking at more than five years—or a modification of your planned retirement lifestyle.

Let's look at an action plan you can use to determine your level of readiness for retirement as you start this five-year stretch.

KEY TAKEAWAYS

  • If you hope to retire in five years, now's a good time to do a realistic retirement needs analysis.
  • Estimate how much you plan to spend each year by using your current budget.
  • Compare your planned expenses to how much retirement income you can reasonably expect.
  • Estimate your life expectancy and insure your assets against long illnesses.
  • If your expenses are too high or your income is too low, you may have to make some changes to your lifestyle or adjust your retirement schedule.

How Much Money Will You Need?

Failing to do a proper retirement needs analysis is one reason many people find themselves struggling financially during their post-work life. At its most basic level, an analysis of your retirement needs might consist of multiplying your current income by some recommended percentage, such as 75% or 80%. That's based on the assumption that your expenses are likely to go down after you retire, which unfortunately may not be the case.

To get a more realistic picture of how much money you'll need for retirement, your analysis should take a holistic approach. This means considering all aspects of your finances, including items that could affect your cash flow and expenditures.

Below are some questions to ask yourself.

How Long Do You Expect to Be Retired?

With half a decade left until your planned retirement date, the key objective is to determine if you can afford to retire by then. To make this determination, you must first consider how long you expect to live.

Unless you are clairvoyant, there is no way to be sure. However, you can make a reasonable estimate based on your general level of health and family history. For example, if your family members typically live into their 80s and you are in good health, then you may want to assume that you'll still be around at that age.

Do You Need to Insure Your Assets Against a Long Illness?

While you're pondering life expectancy, also consider whether your family has been prone to costly, long-term illnesses. If so, insuring your retirement assets should be high on the list of items to include in your analysis. You may want to consider long-term care (LTC) insurance to pay for nursing home care or similar services should you eventually need them.

Having to use your retirement savings to pay expenses could wipe out your nest egg in no time. This is especially true if your assets are significant enough that it's unlikely you will qualify for Medicaid-supported nursing home care—but you're not so wealthy that your assets will easily cover whatever happens to you. If you're married, consider what would happen if one partner became sick and drained the savings intended to support the other partner after a spouse's death.

What Will Your Expenses Be During Retirement?

Projecting your expenses during retirement can be one of the easier parts of your needs analysis. This is as simple as making a list of the items or experiences you expect to spend money on and determining how much they are likely to cost.

One way is to use your current budget as the starting point. Then eliminate or lower the expenses that will no longer apply, such as the gasoline you use to commute to and from work, and add or increase the items that will represent new expenses during retirement (such as more leisure travel).

When you tally up your financial resources, don't forget any property that might produce income or that you could sell.

How Much Income Will You Have?

Next, add up the income you are guaranteed to receive in retirement. This includes:

Also, inventory any other savings and assets you have that you could draw on in retirement:

The age to take RMDs was increased to 73 with the passing of the SECURE Act 2.0. If you turn 73 on or after Jan. 1, 2023, you must begin taking distributions from your qualified retirement account(s) by April 1 of the following year. Prior to this, the age to take RMDs was 72 if account holders turned that age between Jan. 1, 2020, and Dec. 31, 2022.

Doing the Retirement Math

Once you have established your projected expenses and the amount of income you will regularly receive, the next step is to determine how much additional money you'll need to draw from retirement savings and other assets to support yourself.

Are You on Track or Off?

If the result of your retirement needs analysis shows that you are on track, congratulations! You'll still want to keep adding the recommended amounts to your savings and rebalancing your portfolio as necessary so that it's suitable for your retirement horizon.

If the results of your needs analysis show that you are not financially prepared to retire in five years, here are some things to consider:

  • Could you make some changes to your planned retirement lifestyle that would significantly reduce your annual expenses?
  • Would you be able to increase your retirement account contributions enough over the next five years so that they'll produce sufficient income once you retire?
  • Could you work part-time in retirement and bring in additional income?

If there isn't much you can do to reduce your expenses or increase your income, your best option may be to put retirement off for a few more years. The longer you work, the more time you'll have to set money aside, and the fewer years you'll need to rely on your retirement savings to support yourself.

How Much Money Will I Need for My Retirement?

The amount of money you'll need during retirement depends on a number of factors. The general rule is that you should save up enough money to maintain your current lifestyle. Some experts believe this figure falls somewhere in the neighborhood between 70% to 80% of your current income. Keep in mind that some individuals may use more while others can use less than that. The best way to determine how much money you'll need is to try to estimate your costs, including housing, food, healthcare, travel, liabilities, and other expenses.

When Should You Reevaluate Your Retirement Plan?

It's always a good idea to review your retirement plan and accounts on a regular basis. That's because your situation may change over time, including your income, personal situation, and family life, among other things. And keep in mind that, as you age, your risk tolerance decreases, so as you age, you'll want more stable investments that may not be as volatile as those you invested in when you were younger. The last five years before you intend to retire may be the most important, as this is the point in your life when you can truly determine whether you can actually leave the workforce as you planned. If that isn't the case, you'll have to make some changes and adjust your retirement date.

What Is the Full Retirement Age?

The full retirement age for individuals who reach age 62 by 2023 is 67, according to the Social Security Administration. This is the age at which retirees can begin collecting full Social Security benefits. This means that anyone born in 1960 or later reaches full retirement age at 67. The benefit is decreased if a retiree chooses to take their benefits earlier.

The Bottom Line

Though it's always a good idea to review your retirement accounts and plan on a consistent basis, the last five years before your intended retirement date may be the most important. That's because things can change, whether that's your job, family situation, or your own goals. At this point, you'll know whether you're on track, and if retiring is still an option. Be prepared, though. If the stars don't align, you may need to make changes and alter your retirement date. You may also need to make some other adjustments, like rebalancing your portfolio.