As you approach retirement, the last five years are crucial for your financial planning. This period will determine if you are ready to retire or need to make adjustments to your plan. Your level of readiness depends on the preparation you have undertaken and its outcomes.
Being financially prepared means you can proceed smoothly towards your retirement objectives. However, inadequate preparation may necessitate changes to your retirement timeline or lifestyle.
Let’s develop an action plan to assess your readiness as you enter the final five years before retirement.
How Much Money Will You Need?
A comprehensive retirement needs analysis is crucial to avoid financial struggles post-retirement. Typically, this analysis involves estimating your retirement expenses, often pegged at 75% or 80% of your current income, although expenses do not always decrease after retirement.
To obtain a more accurate picture, your analysis should consider all financial aspects affecting your future cash flow and spending.
Here are some key questions to contemplate:
How Long do You Expect to be Retired?
An essential consideration with five years to retirement is determining if you can financially afford to retire by then, which involves estimating your life expectancy.
While certainty is impossible, health and family history can help make an informed estimate of your longevity.
For further assistance on crafting your retirement plan, check out the Investopedia’s Retirement Guide print edition.
Do You Need to Insure Your Assets Against Long Illness?
Considering your life expectancy, it’s important to evaluate the need for insuring your retirement assets, particularly if your family has a history of costly long-term illnesses.
Protecting your assets against unexpected expenses, like long-term care costs, is vital to safeguard your retirement savings.
What Will Your Expenses be During Retirement?
Forecasting your retirement expenses involves listing your anticipated spending items and estimating their costs, starting from your current budget.
Ensure to consider potential new expenses in retirement, such as increased home utility bills, to accurately project your financial needs.
Remember to account for any income-producing properties or assets that can bolster your financial resources.
How Much Income Will You Have?
Calculate your retirement income sources, including Social Security benefits, pensions, annuity payments, and other savings or assets that can support you post-retirement.
- Monthly Social Security benefits
- Pension income
- Regular payments from annuities
- Income from sold or rented properties
- Estimated required minimum distributions (RMDs)
In addition, consider other savings and assets, such as retirement accounts, inherited IRAs, investment accounts, Health Savings Account (HSA), real estate properties, and other valuable assets.
The age for taking RMDs was updated to 73 with the SECURE Act 2.0.
Doing the Retirement Math
Once you’ve estimated your expenses and income sources, calculate the additional funds you’ll need from your retirement savings and assets to sustain yourself throughout retirement.
Here’s an example calculation to illustrate the process:
- Plan to retire in five years
- Annual retirement expenses are 75% of pre-retirement income
- Expect 20 years of retirement
- Current income is $250,000 with a 5% annual salary increase
- Projected Social Security income: $24,528 yearly
- Current retirement savings balance: $1.5 million, growing at 8% annually
Assessing these figures helps determine if your current plan aligns with your retirement goals.
You can utilize a calculator for this calculation at www.choosetosave.org.
Considering the results, adjustments may be necessary if you aim to retire in five years with sufficient financial support.
Each individual’s circumstances are unique, so factors like savings, Social Security income, and retirement duration can significantly impact your financial standing.
Are You on Track or Off?
If you’re on track financially, continue managing your savings diligently and align your investment strategy with your retirement objectives.
For those not financially prepared for retirement in five years, consider adjusting your retirement lifestyle, boosting contributions, or exploring part-time work to enhance your financial position.
- Modify your retirement lifestyle for cost savings
- Enhance retirement savings contributions
- Explore part-time work for additional income
If necessary, delaying retirement can provide more time to build savings and reduce dependence on retirement funds.
How Much Money Will I Need for my Retirement?
The amount needed for retirement varies based on individual circumstances. It’s advisable to save enough to maintain your current lifestyle, typically around 70% to 80% of your current income. Create a detailed budget to estimate your retirement expenses accurately.
When Should You Reevaluate Your Retirement Plan?
Regularly review your retirement accounts and plans to accommodate changing circumstances like income adjustments and evolving financial goals. As you approach retirement, consider shifting to more stable investments and reassess your retirement timeline.
What Is the Full Retirement Age?
The full retirement age for those turning 62 by 2023 stands at 67, allowing full Social Security benefits. Adjustments to benefits occur if retirees choose to claim earlier.
The Bottom Line
Regularly monitoring your retirement strategy is essential, particularly in the pivotal five years before retirement. Stay proactive and be prepared to make necessary adjustments to secure your financial future.