If you are five years away from retirement, do not hesitate to plan. Five years may seem like a long time, but it goes by quickly. Research shows that people who start planning five years in advance have a happier retirement.
Increasing Cash Reserves
It may take time and procedures to apply for retirement benefits and Social Security, and to set up withdrawals from retirement accounts and 401(k) plans. There may be delays, and you might not receive your first retirement check on time, so you should be prepared for any potential delays.
Keep extra amounts of cash in safe investments like savings, checking, and money market accounts. The amount saved should be three to six months’ worth of living expenses.
Estimating the Amount You’ll Need for Retirement
To decide if you have enough for retirement, you should make an accurate estimate of how much you spend and the income you will receive monthly. This is the most essential step in retirement planning.
Record your current income and monthly expenses. Also, keep track of variable costs like hobbies, home improvements, and car repairs.
Next, log the monthly income you will receive from retirement benefits and Social Security, as well as withdrawals from retirement accounts or 401(k) plans. Does this figure come close to your current income? If not, you have four options: spend less in retirement, save more now, work for a few additional years, or earn a higher return on your investments.
You can also consider working part-time or turning a hobby into a business after retirement, which can be an additional source of income in retirement.
Another important step in this process is to determine the duration you feel you will need to fund your retirement, considering the impact of inflation over those years. If you are not comfortable making these calculations on your own, seek out a qualified financial advisor for help. Retirement is something you do once, so seeking professional assistance is wise.
Evaluating Tax Implications
If you believe you may be in a lower tax bracket in a few years, you should ensure to take full advantage of tax-deductible contributions now. Are you considering moving? If you are married, up to $500,000 ($250,000 if single) of capital gains from selling your home may be tax-free, according to current tax regulations.
Do you have company stocks that need to be diversified? Plan for the tax amount you will pay in the year you sell the stocks, or consider spreading the sale over several calendar years.
Retirees often misestimate the amount of taxes they will pay in retirement. Simple planning in this area can help avoid major issues later on.
Diversifying Your Investments
Watching your portfolio rise and then fall is never fun. Ultimately, as long as you have enough money, it doesn’t matter how you got it.
However, this is different when you are retired. When you are making regular withdrawals from your portfolio, the fluctuations have a greater impact. Experts in retirement planning refer to it as “sequence risk.” Increased market volatility can raise the chance that your money will run out before your life expectancy.
Spend some time figuring out the appropriate mix of investments that will yield the return you need at a risk level that is acceptable to you. The risk and return characteristics of your portfolio will affect the amount of income you receive and how long it lasts.
Learning on Your Own
While seeking professional guidance is advisable, the truth is that no one will care about your money as much as you do. Take the time to learn about retirement planning and investing.
You’ll
You want to understand the investment approach that impacts the distribution phase in retirement, as it is completely different from the accumulation phase. Approach your planning with an open mind and with the goal of ensuring the safety of your income. This will lead you to make more suitable choices than just focusing on getting the highest rate of return.
Some final suggestions: attend investment classes at a local community college, take online investment courses, read books, and use the internet to learn. You have spent a lot of your life earning that money. Now it’s time to learn how it can work for you.
Frequently Asked Questions (FAQs)
How should I invest my money five years before retirement?
In many target-date funds, your asset allocation will shift toward more conservative investments as retirement approaches. This will create a more stable portfolio in case of significant stock market fluctuations. However, you may also want to invest a portion of your portfolio in stocks or mutual funds that contain equities to grow your assets. Talk to a financial advisor to find the right investment distribution for you.
How much should I have saved for retirement?
The amount you need to save for retirement depends on several factors, including your health, lifestyle, travel plans, housing situation, and the age at which you plan to retire. The amount will vary for each person. You can talk to a financial advisor or use a retirement calculator to determine how much you should save and whether you are on the right track.
Source: https://www.thebalancemoney.com/steps-to-take-within-5-years-of-retirement-2388846
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