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How to Prepare for Retirement 10, 5 and 2 Years Out: Slow and Steady May Win the Race


A relaxed-looking woman walking on the beach with her dog

Steps to Prepare for Retirement in Ten Years


Envisioning your retirement within the next ten years means you're so close to the finish line. Like any race, preparation and planning are key! Thinking ahead, especially when you’re ten years out, can help you plan for a comfortable and enjoyable lifestyle in your golden years. Examining your income sources and expenses well in advance of this milestone allows you to make the necessary adjustments and take proactive measures today.

Here is a breakdown of steps you can take to prepare for retirement ten, five and one to two years out.


Retirement is a time to celebrate your achievements, enjoy the fruits of your labor, and embrace the freedom to be yourself, unapologetically.

Steps to Take Ten Years Before Retirement—The Qualifier


  • Set retirement goals: Determine the lifestyle you want to maintain during retirement and think about what your day-to-day might look like. Do you see yourself stopping work completely, or do you think you would enjoy taking on a part-time job doing something you’ve always wanted to do? Do you want to take on home projects, travel more and explore a hobby?

  • Develop a retirement budget: In addition to taking a close look at what you’re spending today, make sure to do a deep dive into estimating the expenses you'll have. Make sure to include fun money for things like hobbies, activities, sports and travel (or even home improvement) that would be important to you to do with all the extra free time you’ll have!

  • Evaluate your financial situation: Take stock of your current finances, including savings, investments and retirement accounts. Understand your net worth and evaluate your savings and investment portfolio to determine if you're on track to meet your retirement goals.

  • Pay off debts: Minimize your debt burden by paying off high-interest debts, such as credit cards or loans. Being debt-free before retirement provides more financial flexibility.

  • Maximize retirement contributions: Contribute the maximum allowable amount to retirement accounts like 401(k)s, IRAs, or other employer-sponsored plans. Take advantage of any employer matching contributions to grow your retirement savings faster. And don't forget about catch-up contributions: when you're over 50, you're allowed to contribute even more.

  • Diversify your investments: Review and diversify your investment portfolio to minimize risk. Consider a mix of stocks, bonds, mutual funds and other investment options that align with your risk tolerance and long-term goals.

  • Explore your healthcare options: Start researching healthcare plans and understand how Medicare and supplemental insurance works to to get an idea about what you might expect for your medical expenses during retirement.

  • Educate yourself: Learn about the various investment strategies, tax implications and healthcare costs of retirement. Consider seeking professional advice from a financial advisor who can help you explore these areas in details and uncover considerations you may not have thought about.


A diverse couple on a cruise ship enjoying their retirement


Retirement is the time to live out your dreams, pursue your passions, and create your own happiness.




5 Years Before Retirement—Pace Yourself


  • Explore retirement lifestyle options to get clarity around the numbers: Based on the retirement lifestyle you desire, perform more in-depth research on your goals such as where you want to live and other big purchases like an RV, vacation home or extended travel to determine the costs. From there you can determine when to fund these types of purchases and which source of funding makes the most sense based on factors like taxes, interest and investment earnings.

  • Review and adjust your retirement savings: With these more refined numbers in mind, you can revisit your savings plan to see if you're on track. If possible and you’re not already doing it, maximize contributions to retirement accounts, including catch-up contributions if you're 50 years or older. In 2023, you can save an additional $1,000 in traditional and Roth IRAs and $7,500 in 401(k)s.

  • Estimate your retirement income: Calculate your expected retirement income from various sources. These may include the following:

    • Social Security: Social Security benefits are provided by the government and are the most significant source of retirement income for many individuals. You can estimate your Social Security benefits by creating an account on the Social Security Administration's website or by using their benefit calculators. These tools take into account your earnings history and projected retirement age based on your birthdate. Your statement will show you your benefit if you take it as early as at age 62, at your full retirement age, or if you delay up to age 70.

    • Employer-Sponsored Retirement Plans and Individual Retirement Savings: If you have a workplace retirement plan, such as a 401(k) or a 403(b) or an individual retirement account or Roth IRA, estimate the potential income from the plan by reviewing your account statements, projecting future contributions and considering potential investment growth. Keep in mind that eventually you will have to take required minimum distributions (RMDs) from these accounts later in your retirement years.

    • Company pensions: If you have a pension plan, contact your employer's human resources department for information on how to estimate your future pension benefits. It’s important to understand the survivor benefit payment options available if you have a spouse or dependent that will need to rely on your benefit if you’re gone.

    • Personal Savings and Property Investments: If you have non-retirement savings and investments, such as taxable brokerage accounts, real estate, or other assets, they can contribute to your retirement income. Estimate the income from these sources by assessing the current value, potential growth, and any expected distributions or rental income.

Retirement is the perfect time to turn the page and write the next chapter of your life story.

1-2 Years Before Retirement—The Breakaway


  • Assess your investment portfolio: Continue to review your investment portfolio and consider adjusting your asset allocation to reduce risk and preserve capital as you approach retirement while still having a plan to grow your money over the long-term to account for the cost of inflation. Think about which accounts you will use for your early retirement years and adjust your allocations accordingly. Some financial advisors like me recommend a bucket approach to retirement allocations.

    • Short-term bucket (cash and liquid assets): This bucket holds enough cash and highly liquid assets to cover your near-term expenses, typically for the next one to three years. The goal is to have enough readily available funds to cover living expenses without needing to sell investments during market downturns.

    • Mid-term bucket (bonds and conservative investments): The mid-term bucket is designed to cover expenses for the next several years, beyond the short term. It often contains a mix of bonds and other conservative investments. These assets can provide some income while offering a conservative degree of growth potential.

    • Long-term bucket (stocks and growth investments): The long-term bucket has a longer time horizon, so is focused on growth and inflation protection. It typically contains a mix of stocks and growth-oriented investments. As this bucket potentially grows, you can use it to periodically refill your short- and mid-term buckets.

  • Evaluate your Social Security options: Understand the options regarding the timing for claiming your monthly Social Security benefits.

    • Your Full Retirement Age (FRA): This is the age at when you're able to receive your full Social Security retirement benefit. It's determined by your birth year and ranges from age 65 to 67. Claiming benefits at your FRA will result in receiving your full benefit each month without a reduction for claiming it early.

    • Delayed Retirement Credits: On the other hand, you can delay taking your benefit past your FRA and increase your benefit by about 8 percent per year up until age 70. This strategy can give a boost to your lifetime income if you've got other sources of retirement income to rely on in the meantime, like a working spouse, a part-time job, rental or pension income or investment assets.

  • Finalize your retirement income strategy: Consider how you'll withdraw funds from the various sources you have available to meet your retirement needs. It’s important to understand the tax implications for different timing and withdrawal strategies so you can avoid overpaying Uncle Sam.

  • Finalize your retirement budget: Update your retirement budget based on the most up-to-date information. Be diligent about including everything you need and want to spend money on. And don’t forget to research and factor in the costs for new expenses such as healthcare coverage, home projects, travel and any new hobbies or interests.

  • Practice living without income from yours and/or your spouse’s salary: Planning how you’ll replace your salary in retirement and actually doing it feel very different! Instead of waiting until your last day on the job, practice living on what you’ll have coming in during retirement while you're still working.

    • Since you’ll have a good estimate on income from sources like Social Security, leave only that amount in your checking and move the rest of your paycheck to a separate account to get a realistic idea of whether your retirement income will cover your expenses, and what adjustments you made might need to make.


Preparing for Retirement is a Slow and Steady Race


A woman's road race to signify the slow and steady road to retirement

It's important to continuously monitor your financial situation, adapt your plans as needed, and reassess your goals periodically to ensure a comfortable and fulfilling retirement.


Meeting with a financial planner can help you stay accountable and on track. Retirement planning is a long-term, ongoing process, and it helps to have a professional in your corner. This will be a huge transition in your life, but you've worked this hard and deserve it!


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For more information and to dive deeper into preparing for your retirement, check out my countdown to retirement handout below!


Life Story Financial's one-year countdown to retirement checklist


 

Disclosures

No investment strategy assures success or protects against loss. Investing involves risk, including the loss of principal. The information in this post is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision.



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