What to Do in the Last 5 Years Leading to Retirement

The final five years leading up to your retirement offer you final chances for solidifying your financial security, ensuring you can enjoy your later years without financial worry. This period is an opportunity to make strategic decisions with expert advice from your CPA to maximize retirement readiness. The sooner you start the process, the more secure you may be during the time of your life when you want fewer things to worry about.

1. Assess Your Retirement Goals and Financial Needs

The first step in preparing for retirement is to have a clear understanding of what you want your retirement to look like. If you haven’t done this already, this is the time to really envision yourself retired. Do you have any goals about traveling in retirement? Are you thinking about downsizing in a new city or even abroad? Would you like to live nearer to your grandchildren? What kind of lifestyle do you wish to maintain? Answering these questions can help you estimate the necessary retirement budget. Work closely with your CPA to analyze your current financial situation and forecast your needs. This includes a detailed review of your savings, estimated Social Security benefits, pension details, investment income and other sources of income you can count on in your retirement.

2. Maximize Retirement Savings

As you approach retirement, it’s crucial to maximize your contributions to retirement accounts such as IRAs, 401(k)s, and other pension plans. Take advantage of your last remaining years earning a salary by making the highest contributions you can manage. The IRS allows individuals aged 50 and over to make catch-up contributions, enabling you to increase your savings significantly. Discuss with your CPA the best strategies for maximizing these contributions while considering your overall tax situation. 

3. Fine-Tune Your Investment Strategy

Review your investment portfolio with your CPA to ensure that it aligns with your risk tolerance and retirement timeline. You may also need to speak to your investment manager if you have one. As retirement nears, it's common practice to shift toward more conservative investments to protect your savings from market volatility. However, maintaining some exposure to growth-oriented investments can also be important to keep pace with inflation. Regular portfolio reviews and adjustments will help safeguard your assets as you move closer to retirement. This tip is not intended as investment advice, but only offers some aspects worth considering. 

4. Plan for Healthcare Costs

Healthcare is often one of the most significant expenses in retirement. As people age, they often develop conditions that require professional treatment. Consider your options for health insurance, such as Medicare and supplemental policies. It's also wise to look into long-term care insurance, which can cover costs not included in regular health insurance. Estimating potential medical costs and planning for them financially is something your CPA can assist with, ensuring you are covered for various health-related scenarios without leaving yourself short in the savings department.

5. Review Your Social Security Strategy

Deciding when to start taking Social Security benefits is a critical decision that impacts your retirement income. You can begin to receive benefits as early as age 62, but delaying benefits until full retirement age or even age 70 increases your monthly payments. Visit your local social security office to find out the exact dollar amounts you can expect when you retire. Then take these details and discuss with your CPA the best strategy for your specific financial situation, including how your decision will impact your taxes and overall retirement income.

6. Pay Down Major Debts

Entering retirement debt-free, or with minimal debt, is ideal. Focus on paying down high-interest debts such as credit card balances, personal loans and mortgages. A debt-free status can significantly reduce your monthly expenses, making your retirement savings stretch further. You’ll also sleep better at night knowing that you don’t have overwhelming debts. Your CPA can help you to devise a plan to tackle debt efficiently, considering the impact on your taxes and savings.

7. Understand Your Tax Situation

Taxes can significantly affect your retirement funds. Work with your CPA to understand how your income sources in retirement will be taxed, including Social Security benefits, withdrawals from retirement accounts and investment earnings. Planning for taxes before you retire can lead to substantial savings and more predictable financial planning.

8. Prepare Your Estate

Estate planning is vital to ensure that your assets are distributed according to your wishes and that your loved ones are cared for in your absence. This includes creating or updating your will, setting up trusts if appropriate, and ensuring all beneficiary designations are up to date on accounts like IRAs, 401(k)s, and insurance policies. Estate planning also involves preparing for potential incapacity through powers of attorney and healthcare directives. Your CPA, in collaboration with an estate attorney, can guide you through these preparations. Consider having a family meeting so that your beneficiaries and offspring can know what to expect after you’re gone.

9. Practice Living on Your Retirement Budget

One of the best ways to ensure you are ready for retirement is to practice living on your projected retirement budget. This can help you adjust your spending habits and identify any gaps in your financial plan. Use this trial period to refine your budget to reflect realistic spending in retirement. It may only take a month or two of this trial period to discover things you overlooked or expenses you underestimated, such as your food budget.

10. Consult Regularly with Your CPA

Regular consultations with your CPA throughout the last five years before retirement can ensure that you stay on track with your financial goals and adjust your plans as circumstances change. Your CPA can offer ongoing advice and support, helping you navigate the complex financial landscape as you transition into retirement.

The final five years before retirement are a critical time for making financial adjustments and decisions that will shape your future. By focusing on these strategic areas and working closely with your CPA, you can approach retirement with confidence, knowing that you are well-prepared for the years ahead.

by Kate Supino