The Five Years Before Retirement: Decisions Worth Making Now

Five years before retirement is an interesting place to be. The finish line is close enough to see, but there is still time to change your pace. Maybe you picture travel, more time with family, or a calendar that no longer includes a Monday morning meeting. The harder question is whether the financial details support that picture.

Retirement planning at this stage is less about finding one magic number and more about connecting several decisions: spending, savings, taxes, healthcare, and when income begins. A strong plan should also leave room for life to be life. The refrigerator may decide to retire a year before you do.

Start with the life you want to fund

Begin by estimating what you actually spend, using bank and credit card records rather than a vague sense that it is “probably fine.” Separate regular living costs from travel, home improvements, gifts, and other occasional expenses.

Include costs that may change when work ends. Commuting and work clothes may fall; travel and hobbies may rise. If you plan to move, carry both the purchase costs and the ongoing costs of the new home into the projection. Property taxes, insurance, maintenance, and utilities do not disappear because the house has a nice view.

Then compare several versions of retirement. What happens if you stop working on the date you prefer? What if you work one year longer, work part time, or spend more in the first decade? The goal is to understand the tradeoffs before you have to make them.

Put the final working years to work

These may be valuable years for saving because earnings are often strong and some large family expenses may be behind you. Review your workplace plan contributions, any employer match, and whether catch-up contributions are available under your plan. Check the current rules before changing your elections; limits and eligibility can change.

Savings are only part of the picture. Decide how much cash you want available for a job change, a home expense, or a market decline near your retirement date. Review high-interest debt and the mortgage in the context of your entire plan. Paying off a mortgage can lower required monthly spending, but using too much cash to do it can reduce flexibility. There is no prize for arriving at retirement with no mortgage and no money for a roof.

Look at your investments as a future paycheck

While you are working, market declines are unpleasant. When you are drawing from investments, a decline can affect what you sell and when. Review the mix of stocks, bonds, and cash across all accounts, including old employer plans and any concentrated company stock. The question is whether the portfolio can support planned withdrawals while still having room to grow over a long retirement.

It helps to map the first several years of withdrawals before your final paycheck arrives. Which accounts could provide cash? How much should be held for near-term needs? When will the portfolio be reviewed if markets or spending change? This is a process, not a prediction about next year’s returns. No one needs a retirement strategy that depends on perfectly guessing next Tuesday.

Map taxes before the paycheck changes

Work income, retirement plan withdrawals, investment sales, Social Security, and other income may be taxed differently. Your final working years and your first retired years can look very different on a tax return. Estimate taxable income under each retirement scenario, including any deferred compensation, business income, or stock awards.

Consider whether there may be years when Roth conversions are worth evaluating. A conversion increases taxable income in the year it occurs, so the decision needs to account for other income, the money available to pay the tax, and possible effects on Medicare premiums.

Review the location of assets as well as the size of accounts. A traditional IRA, Roth account, and taxable account with the same balance do not produce the same after-tax spending. Coordinate substantial tax decisions with your tax adviser rather than treating April as a surprise party hosted by the IRS.

Plan the healthcare handoff

If you expect to retire before 65, price coverage for the years before Medicare eligibility. Employer coverage, a spouse’s plan, continuation coverage, and individual coverage can have very different costs and networks. Even if you retire at or after 65, plan for Medicare enrollment and compare the coverage choices available to you. Premiums, prescription coverage, deductibles, and out-of-pocket costs belong in the retirement budget.

Also check what happens to life, disability, and other benefits that currently come through work. An employer benefits package can be easy to overlook until the farewell cake is gone. If healthcare costs are a meaningful uncertainty, model a higher-cost scenario instead of assuming every year will look like a healthy one.

Make Social Security a household decision

Social Security is not simply a question of choosing the earliest date you can claim. Benefits can begin at different ages, and delaying an individual retirement benefit generally raises the monthly amount until age 70. The right choice depends on your health, work plans, other income, the needs of a spouse, and how withdrawals from investments would fill the gap.

Run several claiming dates in the retirement projection. If you will continue working while claiming before full retirement age, review how earnings may affect current benefit payments. For couples, consider the decision together. Two separate “best” answers may not produce the best household plan.

Try retirement before making it permanent

A useful final exercise is a rehearsal. For several months, live on the cash flow you expect in retirement and direct the difference into savings. Keep track of the expenses that surprise you. It is easier to adjust a projection while you still have a paycheck.

Finally, decide what retirement is for. Many people know exactly what they want to stop doing and have spent less time thinking about how they will spend an ordinary Wednesday. That question matters to the budget, but it also matters to the quality of life the budget is supposed to support.

Five years gives you time to build both plans. The purpose is not to make every uncertainty disappear. It is to make the important decisions deliberately, with enough flexibility to enjoy what comes next.