When Is the Best Time to Start Planning for Retirement?

Senior With a Grandchild

You’ve been working hard for years, and you’re getting closer to that date you’ve marked on your calendar with a gold star: the day you retire.

Retirement can be an exciting next step in your life when you dedicate your time to yourself, try out new hobbies and even do some traveling you’ve been putting off while you’ve focused on your career. But the retirement you’ve always dreamed of is only a possibility if you’ve accurately planned for it.

How confident do you feel about your retirement plans?

Chances are you’ve been contributing to your 401(k) and/or IRA accounts for years, saving your money when you can and putting thought into how you’ll spend your time when you aren’t commuting and working 40 or more hours a week. 

But if you’re within five years of your target retirement age, there are a couple of extra steps you should take in order to be better prepared for retired life. From experimenting with your expected budget to finally taking care of those one-time expenses you’ve been avoiding, doing these five things when you’re one, three and five years from retirement will set you up to enjoy the post-career life you’ve always wanted.

Five Years Out  

1. Determine Your Expected Retirement Budget

Take a long look at your savings and retirement accounts, and spend some time doing the math to determine how much monthly and annual income you’ll have to live on once you retire.

If your expected income is going to be considerably less than what you’re currently living off, start making some changes to your lifestyle now, so the transition to retirement income is easier for you and your family.

2. Test Drive Your Retirement Budget

Once you know how much money you expect to bring in during retirement, it’s a good idea to try living off that income for a month to see if it’s reasonable. If you still have loans or a mortgage you expect to pay off before retirement, you can discount those from your expenses.

Having a “practice run” of your retirement budget will allow you to determine if that budget is reasonable or if it’ll be too difficult to live within your means. Doing this early is important, because you still have time to save additional funds and make the necessary lifestyle adjustments that will help you live within your budget.

3. Adjust Your Investment Portfolio

While you’re working and have a steady income stream, it’s normal to have a more aggressive portfolio. But as you near retirement, it’s a good idea to make adjustments that will give you more of a dependable stream of investment income.

4. Think About Your Real Estate

Are you still paying off your mortgage? Do you dream of retiring to another state? Is your current house larger than you ideally want to take care of? Now is the time to consider these questions. 

Many people greatly enjoy the benefits of downsizing or moving to a retirement or senior living community after they retire, so they can spend more time on activities they love and less time taking care of a house. Having a conversation about what you want now will allow you to better financially plan for your future.

5. Increase Your Cash Reserves

Right now, you’re still actively making money in your career, and it’s likely that you’re making the highest salary you’ve ever brought home. Now is the time to utilize this to further build up your savings before you head into retirement. Making minor lifestyle adjustments now can allow you to contribute more to savings, which can put you in a better place to live your dream retirement life.

Three Years Out

1. Consider Your Auto Situation

Just like you thought about your property and whether to stay or move before retirement, think about your car and what you should do with it. Are you still paying off a car loan, and can you pay it down before you retire? Could you downsize to one car to cut back on gas, insurance and maintenance costs? Or will you likely need to purchase a new car sometime after you retire?

Thinking through these things can allow you to better prepare for retirement once it comes.

2. Pay Down as Much Debt as You Can

The more credit card and loan debt you can eliminate before you retire, the more of your retirement income can be spent paying necessary bills and helping you live the life you want.

3. Determine When You’ll Take Social Security

Some people will choose to draw Social Security as soon as they’re eligible, because they need the immediate income, but others will choose to wait to avoid penalties or take home a larger check each month. The earlier you take Social Security, the smaller your check will be. Talk with your spouse and financial advisor to determine which age will be the best option for you.

4. Figure Out Taxes on Retirement Income

You may have a 401(k) and/or IRA that will provide you with a stable income once you retire, but do you know how taxes will affect your take-home amount? You’ll likely owe taxes on a lot of that money when you claim it. Determine how much taxes will be taken out of your retirement withdrawals and how that will affect your overall income each month.

5. Make a Plan for Health Insurance

Can you carry over any benefits from your employer once you retire? How will you cover the costs of insurance? Make sure to talk to your employer about your options post-retirement, and make a plan that suits you and your family. Also, now is a good time to work through any elective visits or procedures you’ve been putting off, while you have a lower premium to visit your current doctors.

One Year Out

1. Update Your Will

Right now, your employer may offer prepaid or discounted options for getting your will and trust documents in order. Take advantage of those benefits while you have them to get your affairs in line.

2. Update Legal Documents and Access

Now is the time to make sure all legal documents are in order, and it’s also a good opportunity to let trusted loved ones know where they can find documents and passwords in case of an emergency. Planning for retirement is a good excuse to get organized.

3. Work Through One-Time Expenses

Have you been putting off home or car repairs or waiting to make some cosmetic updates around the house? Now is the time to do them. If the house needs a new hot water heater or a new coat of paint, it’s better to do it now while it’s less of an impact to your budget than wait until you’re living on a possibly more restricted retirement income.

4. Think About Work Options

It’s not uncommon for many people to continue working part-time after retirement, either because they need the income or they simply miss having a job to spend their time on. Talk with your family about some options for you both to continue working, should you need to.

5. Make a Plan For Your New Life

Although preparing for retirement can be difficult, this is a time in life you should be excited about. Start thinking through how you’ll spend your time once you’re no longer going into an office, and communicate to family and friends what you’re most looking forward to doing with your new free time.

Have you budgeted to take a nice vacation you’ve always dreamed of? Are you hoping to learn a new skill or practice a new hobby? Even though you won’t be working anymore, it’s still important to get outside your house and develop new friendships you can enjoy for years to come.

Rest Easy with a Little Preparation

Some of these steps are fairly simple conversations or adjustments, but they can have a big impact on the quality of your post-career life. Retirement is a huge milestone to hit, and doing the heavy-lifting before you take the leap to retirement can set you up to enjoy the retired life you’ve always wanted.







The facts provided are for informational purposes only. Please consult with a financial advisor related to strategies relevant to your situation.    

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