Pre-Retirement Preparedness: Planning 5-10 Years from Retirement

Presented by Lucas Group Financial Advisors |

As we look toward another new year, it's common for people to make resolutions and goals for the coming year. However, are these short-term resolutions, or will they help you make strides toward long-term goals? While short-term goals are still important, it can be helpful to review long-term targets and calculate what steps you can take this year to help achieve them. Making small changes each year can be more reasonable than making large changes later.

While this concept can be applied to many different goals (eating healthier, getting in shape, making home improvements, etc), it can be extremely helpful in retirement planning. For nearly everyone, retirement is the largest financial goal of their life, because the amount needed to sustain a 20-year retirement is larger than their home purchase, college, and other financial goals. While it's always best to start early (we're financial advisors, so of course we'll say that!), it becomes particularly important to start planning and calculating in the 5-10 years leading up to retirement. This allows a reasonable timeframe to make adjustments and set expectations - otherwise, waiting until your desired retirement date to crunch the numbers means you may have an unpleasant surprise.

Here are some common actions and areas to analyze 5-10 years prior to retirement:

Cut Down Debt and Maximize Savings

Debt is the last thing that you want hanging over your head in retirement, so it’s a good idea to pay it down now, before living on a fixed income. Focus on paying off high-interest loans and credit cards first and foremost, even if it means not maximizing your retirement plan contributions for the time being. Once your highest-interest debts are paid off, you can start contributing more to your retirement savings plans while paying down other low-interest debt. Determine whether you'll pay off all debt by retirement, or whether some debt will be part of your retirement budget. A financial advisor can help with the question of paying down debt or investing (this typically depends on the interest rate of your debt), but in general, entering retirement with as little debt as possible is desirable.

Then, wherever possible, maximize your 401(k), IRA, or other retirement plan contributions. Once you reach age 50, the IRS allows you to save more each year on a tax-advantaged basis. A financial or tax advisor can help review your options and recommend pre-tax or Roth savings, or a blend of both.

Review and Refine your Investment Allocation

Unfortunately, we all still remember the Great Recession and the large stock market losses of 2008. Chances are, you know someone who wanted to retire at that time, but had to keep working because their 401k declined and they had to wait for it to recover. This is why it is VERY IMPORTANT to review your investment portfolio in the decade leading up to retirement. While being an aggressive investor during your working years can lead to the greatest investment growth, this comes with a higher level of risk than retirees (and pre-retirees) should carry. 

After 2008, many 401ks and other retirement plans started offering Target Date Funds, in which the investment company reduces the risk in the portfolio as it nears the "Target Date" (which should be closely matched to your desired retirement date). This can be helpful for individuals who use a "set it and forget it" approach and wouldn't otherwise change their risk level as they near retirement. However, if you want to take a more active approach, a financial advisor can make personalized investment recommendations. Some funds should still be invested for growth (after all, you'll still need savings 10, 20, and maybe even 30 years into retirement), but some should be more stable for early retirement use. This way, the stock market doesn't get to dictate your retirement date.

Determine a Retirement Budget 

By this point in your life, you probably have a good idea of the level of income that makes you most comfortable. While your income might decrease in retirement, it’s important to start thinking about your lifestyle and expenses now, so you can properly plan for the funds that you’ll need to stay financially secure. 

Be specific about your budget. Will you have mortgage or rent payments to make? What will the cost of living look like in your location, or are you planning to move in retirement? Are there unnecessary expenses that you can cut, if need be? Homing in on these details will make it easier for you to set and reach retirement savings goals before you get there. 

We have a great budget worksheet that can help with this - send us a note if you'd like a copy.

Set (or Review) Specific Goals 

Even if you already have retirement savings goals that you’ve been working toward throughout your career, it’s a good idea to revisit them and reevaluate. Did you plan for all the expenses in your retirement budget or are there new and unexpected funds you’ll need? Have you factored inflation into your plans? Think about some of the things you may not have planned for early in your career, like medical expenses, the cost of home renovations, or additional goals like helping your grandkids with college costs.

Consider some of the life goals that you’d like to achieve in retirement. Are there destinations you’d like to visit or large purchases you’d like to make? These are things that should be built into your budget and set as specific savings goals. Over the next five to 10 years you can continue to build your retirement nest egg while also saving for the things that you haven’t been able to do while working a full-time job. 

Start to Consider the Tough Decisions

While some people are fortunate enough to face retirement with little/no lifestyle changes, many people find that they may need to make a concession or two. Broad-based planning can help with this, but start to consider questions such as:

  • Am I willing to downsize my home to reduce the monthly costs and/or upkeep?
  • Is it more important to retire at the desired retirement age, or am I willing to work longer to be more financially sound?
  • If I don't wish to work past a certain age, will I have to make changes to my current spending habits?

These are the kinds of questions that should be considered in advance, when there's still time to make changes. No one wants to reach their desired retirement age only to find out they can't afford to retire yet. That's where financial planning (and our software) can help, especially in the years leading up to retirement - we can present "what-if" scenarios to help determine how various decisions can impact your plan, and develop recommendations based on what will improve your outlook the most.

Establish a Legacy Plan 

Planning your budget and goals during pre-retirement also provides a good opportunity to start your legacy plan. This means planning how to distribute your property and assets to your loved ones after your death. Start by creating a list of your assets and where they’re kept—this can include things like investment accounts, real estate, and insurance policies. 

Once you have your list of assets, you should think about who you want to leave them to, or if there’s anything you want to donate to charity. Make sure that your accounts have beneficiary designations and they are up-to-date. Also, think about any preferences you have for medical care to record in an advance directive. Lastly, contact an expert, either a financial professional or an attorney, to walk you through the steps of setting up your legacy plan. 

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2023 Advisor Websites.