Being five years away from retirement might make you feel like you’re in limbo. You’re not super close to wrapping up your career, but you’re probably in a place where you want to coast toward that next stage calmly. The good news is that the moves you make in the near term could set you up for the retirement you’ve always wanted. Here are five moves to prioritize at the five-year mark.
Retirement Series:
Part 1:When you’re 30 years away
Part 2:When you’re 10 years away
Think about the retirement lifestyle you want
Planning for retirement isn’t just about crunching numbers. It’s also a matter of deciding how you want to live, where you want to live, and what you want to do with your time.
Before you can finalize a retirement budget, ask yourself:
- Will I stay in my current home or downsize?
- Will I move somewhere less expensive, more expensive, or similar?
- Do I plan to work in any capacity?
- Do I plan to do a lot of travel, and what type?
- How will I spend my days when I’m not traveling?
If you’re married, these are conversations to have together. You don’t, for example, want to base your retirement plans on a move from Connecticut to Florida if your spouse isn’t on board.
Read:Why more seniors are working past retirement age
Estimate your annual spending needs
Once you have a vision of what you want your retirement to look like, you can start assigning dollar amounts to the expenses you expect to incur. Granted, with retirement being five years away, you’ll need to be prepared to adjust some of those numbers for inflation. But generally speaking, you should be able to put together a rough budget of your annual expenses.
Your retirement budget should account for costs like:
- Essential expenses (housing, food, utilities, transportation)
- Lifestyle expenses (travel, hobbies, entertainment)
- Irregular or emergency expenses (home or car repairs, large medical bills)
- Insurance (long-term care premiums, health insurance/Medicare premiums)
Coming up with an annual budget can help you determine if your savings are on track for retirement or if they need a late-stage boost.
Make sure your savings are on track
If the amount of savings you’re bringing into retirement can’t support the lifestyle you want, you may be in for a big disappointment. But with five working years ahead of you, there’s time to play catch-up if you need to. So now’s the time to assess your savings and see if you’re close to reaching your target number.
A good rule of thumb is to take your annual spending needs in retirement, subtract your estimated Social Security benefits, and then multiply the remaining number by 25 to come up with your target number. So let’s say you anticipate needing $120,000 a year in retirement income and expect $36,000 of that to come from Social Security. That means your savings will need to support $84,000 of annual withdrawals. If you multiply $84,000 by 25, you get to $2.1 million.
But don’t panic if you’re not quite there. Remember, you have five more years of retirement plan contributions and growth ahead of you. If you have $1.6 million saved for retirement already and you plan to save an additional $1,000 per month over the next five years, with a conservative 5% annual return, your portfolio should hit $2.1 million by the time your career comes to an end.
If you aren’t on track to meet your retirement savings target, use the next five years to ramp up. Take advantage of catch-up contributions in your IRA or 401(k). And consider a side hustle to boost your income so there’s more money to put into your savings.
Incidentally, if you’re at all interested in working as a retiree, now’s a good time to start exploring different options. So if your savings happen to need a boost, working a side hustle could not only help you meet that goal, but give you a gig to ramp up on later.
Work toward being debt-free
Retiring with debt gives you less flexibility with your money and plans. If you’re on the hook for a few thousand dollars a month, or even a few hundred, in debt payments, it could limit your ability to spend more freely and cover your essential costs. With retirement being five years away, now’s the time to get serious about paying off debt. Prioritize debts with high interest rates, like credit cards, and then move on to secured debts, like your car, which may not be costing you as much from an interest rate perspective.
If you’re able to pay off your mortgage ahead of retirement, that, too, is one less bill to contend with. But a lot of people refinanced into very low mortgage rates during the pandemic. If you were one of them, and your mortgage payments are affordable, you don’t necessarily need to push yourself to own your home outright by retirement as long as you’re confident those payments won’t be a burden.
Scale back portfolio risk
With only five years until retirement, protecting the portfolio you’ve built becomes increasingly important. A significant market downturn just before you retire could upend your plans in a very big way. That doesn’t mean now’s the time to abandon stocks. Even in retirement, you may want to have anywhere from 40% to 60% of your portfolio in the stock market, depending on your personal risk tolerance.
What you should do now, though, is ask yourself whether you’re too concentrated in stocks and whether it’s time to scale back. You may want to consider shifting some of your assets out of stocks and into bonds or even cash.
Now’s also a good time to start focusing on income-producing investments. Those include:
- Bonds (corporate and government)
- Dividend stocks and ETFs
- Real estate investment trusts
Within each asset class, though, make sure your portfolio is diversified. If you’re aiming to load up on dividend stocks, don’t just focus on a single market sector, like retail. Instead, spread your money out across different market segments – for example, utility companies, energy companies, and bank stocks.
At this stage of your career, retirement is getting closer. It’s important to make the most of the upcoming five-year period.
That means:
- Thinking through your retirement lifestyle
- Estimating your annual retirement income needs
- Assessing your savings
- Reducing or eliminating debt
- Rebalancing your portfolio
With any luck, these key moves will help you feel more confident about retirement as that milestone gets closer.
