Americans are seeing mixed results in their retirement savings this year as a roiling economy and higher inflation throw a wrench into the best-laid long-term savings plans.
Retirement savings problems aren’t ideal for any demographic, but they are a unique headache, especially for Americans five years away from their retirement date.
“At five years until retirement, you are at an inflection point when you’ve climbed a mountain, and it took great effort to get there,” said Scott Bishop, a financial advisor and managing director at Houston-based Presidio Wealth Partners, in an email. “At this point, learn how to spend down and not run out of money.”
Pre-retirees should review their retirement budget and have a disciplined investment plan as they close in on retirement. “You’ll also need to plan for eventual market volatility and know which dollars to touch first,” Bishop said. There are additional considerations as well, such as Social Security and Medicare.
As you take stock of your retirement plan at the five-year mark, focus on these planning points.
— Determine where your retirement income will come from.
— Plan your five-year budget.
— Curb your investment risk exposure.
— Consider adding annuities to your portfolio arsenal.
— Take a holistic view and include your estate plan.
— Factor in lifestyle goals and health care needs.
Determine Where Your Retirement Income Will Come From
“It’s important to understand how you’ll receive income,” said Melody Evans, a wealth management advisor at TIAA in Andover, Massachusetts, in an email. “Surprisingly, it’s an area many people overlook.”
Generally, retirees have three sources of retirement income: Social Security, a pension plan or a workplace retirement plan.
“Social Security often isn’t enough by itself, and pensions are becoming increasingly rare,” Evans said. “With narrower options, understanding how you’ll cover fixed expenses should be a vital element of a five-year retirement strategy.”
Look at the five-year review process as a household financial management plan bonus. “Getting your lifetime income straight is a good way to secure your bills are covered regardless of what the market brings in retirement,” Evans said.
Once you’ve figured out your income sources as you near retirement, you can move on to next-level questions.
“That’s when you’re figuring out your phases of income in retirement,” Evans said. “Will you start Social Security right away or delay taking it? When do you need to take the required minimum distributions? Have you saved for retirement outside of employer-sponsored plans, and how do those accounts get used? Those are the questions you need to answer close to retirement.”
Once those questions have been answered, you can start planning how your cash flow will work in retirement. “Doing so helps to strategically withdraw from retirement savings and integrate other income sources such as Social Security, pensions or annuities when you need the money in retirement,” said Tim Hurban, founder at Hurban Law LLC in Buford, Georgia, in an email.
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Plan Your 5 Year Budget
Figuring out how much you’ll need to spend every month in retirement is something you can and should start planning five years away from retirement.
“The key is knowing that budget number and where the funds will be coming from,” Bishop said. “You’ll also want to get a grip on discretionary versus mandatory spending and ensure you can handle the mandatory payments for things like mortgages, utilities and health care for the rest of your life.”
Curb Your Investment Risk Exposure
The five-year window until retirement is also the time to moderate riskier capital appreciation investments like growth and international stocks and emphasize capital preservation assets, like bonds and money market funds.
That does not mean curbing or eliminating riskier investments like stocks; it means balancing your portfolio so the risk is contained by adding more capital preservation weighting.
“Adjusting investments to more conservative options can help protect capital for retirement,” Hurban said. “It’s important to consider the timing of these withdrawals and their tax implications to optimize financial stability in retirement. A trusted financial advisor can help with those tasks.”
A bucket approach can help you shift those portfolio assets around to reduce risk several years before retirement.
“Have some very secure money to spend for a couple of years — U.S. Treasury bills are great right now — in safe, secure investments,” Bishop noted. “Next, gradually increase income-oriented investments like dividend stocks to replenish your portfolio as you spend the safer (Treasury bill) money over time. Keep doing that, and you’ll have a disciplined and risk-averse investment strategy going into retirement.”
Consider Adding Annuities to Your Portfolio Arsenal
Perhaps retirees’ greatest fear is running out of money in retirement, an issue exacerbated by the fact that people are living longer.
“Here, annuities are an important part of a comprehensive retirement plan,” said Robert R. Johnson, chartered financial analyst and professor of finance at Heider College of Business in Omaha, Nebraska, in an email. “They can provide guaranteed income and peace of mind to the retiree and their family. Many retirees who have annuities are freed from worrying about the ups and downs of the stock market.”
For example, having an annuity to cover your basic living expenses once you’re on a fixed income is a terrific cornerstone of any retirement income plan, Johnson said.
“In particular, a longevity annuity is a stream of payments that starts when an individual reaches a certain age, say 80 or 85,” he noted. “If you have a longevity annuity, you have a secure source of income late in life at a reasonable cost. This also frees you up to spend money in retirement on things like travel or a vacation home.”
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Take a Holistic View and Include Your Estate Plan
As you approach retirement, it is important to conduct a comprehensive financial assessment, reviewing all resources like savings, investments, retirement accounts and other assets to effectively plan the next steps.
“Ensuring your estate plan is robust is also a must,” Hurban said. “This includes updating your will, reviewing or establishing trusts, and confirming that powers of attorney and health care directives are current.”
Factor in Lifestyle Goals and Health Care Needs
While the financial side of retirement is critical and requires careful planning, don’t ignore your lifestyle needs.
“Five years away from retirement is a great time to develop a life purpose statement that answers the question: What will get you out of bed in the morning?” said David Buck, author of “The Time-Optimized Life” in Ponte Vedra, Florida, in an email.
Consider these lifestyle goals and continuously update them as you age.
— Create a bucket list highlighting all the creative activities you want to do, even if they seem outlandish.
— Develop long-term goals, one to three years out, based on items from your bucket list.
— Set annual goals, which build on your long-term goals by adding in the details.
— Establish late-breaking or short-term goals that will get done in three to six months.
Near-retirees should also know how health care will be covered in their golden years.
“Figure out how to maximize your Medicare and Medigap or other retiree health benefits over the long haul, as many retirees live 30 years or longer in retirement,” Bishop said. “Everyone’s health care needs can be different, so make it a priority to learn about your options and make the best decisions for you.”
When setting lifestyle goals, it may be wise to take your health into account. “If someone is entering retirement with preexisting health conditions, they may want to front-load more physical activities into the early part of retirement not to have any regrets later on when they might not be healthy enough to accomplish,” Buck added.
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How to Retire in 5 Years originally appeared on usnews.com
Update 06/06/24: This story was published at an earlier date and has been updated with new information.
