The Top Areas to Focus On 5 Years Before You Retire

As you’re getting closer to approaching your retirement, the last five years before you retire take on incredible importance in your retirement planning. This period offers a unique window to take specific steps that can impact your retirement lifestyle and peace of mind.

During these precious years, you potentially have the highest earning potential of your career and should be taking full advantage of this. At the same time, your fixed expenses may be lower than in previous years if you’ve already paid off your mortgage or no longer have children to support.

According to the 2022 Retirement Confidence Survey by the Employee Benefit Research Institute, 36% of retirees say their retirement savings are not on track to provide enough income for their full retirement.

Here are the top areas to focus on during this period of time so that you can maximize your chance of success in hitting your retirement goals.

Area #1: Supercharge Your Retirement Savings

Getting closer to retirement means banking on the opportunity to divert as much as you can into retirement savings. This is where you’re able to leverage the power of compounding.

The first and best area to start with is to maximize your contributions to tax-advantaged retirement accounts like 401(k) plans and Roth 401(k) accounts. These employer-sponsored plans offer two major benefits in your pre-retirement years.

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Firstly, consider the ability to contribute larger amounts than other tax-advantaged accounts like IRAs.

In 2024, you can contribute up to $23,000 into a 401(k) or Roth 401(k) account. If you’re age 50 or older, you’re eligible for an additional $7,500 in catch-up contributions, raising your employee contribution limit to $30,500.

Secondly, many employers provide matching contributions, typically matching a percentage of what you contribute up to a certain level. This is essentially free money that can turbocharge your savings if you take full advantage of it.

Let’s say your employer matches 100% of contributions up to 6% of your salary. If you earn $200,000 per year, contributing $12,000 (6%) allows you to receive an additional $12,000 from your company’s match.

In this scenario, contributing $12,000 to your 401(k) would result in a total contribution of $24,000 including your employer match.

In addition to 401(k) or 403(b) plans, also look to max out contributions to other tax-deferred retirement accounts like a Roth IRA or traditional IRA. The 2024 contribution limits for these accounts are $7,000 if you’re under age 50 and $8,000 if you’re over age 50.

Let’s look at a hypothetical scenario.

You’re 55, earn $200,000 per year, and plan to retire at age 60. You just started work at a new employer and make the maximum contributions to your 401(k) plan at $30,000 per year, for the next five years.

Your employer provides a 100% match on up to 6% of your salary, which totals $12,000 per year. On top of this, you contribute $8,000 to a Roth IRA for the first time and continue to contribute this amount over the next five years.

You invest your contributions and achieve a 7% average annual return over the next five years.

Counting only these 401(k) and Roth IRA accounts, by age 60, you would increase your nest egg to $310,741.

Assuming that your portfolio continues to grow at a 7% rate of return over the next 20 years from age 60 onwards, the value of these accounts would increase to $1,037,722 by the time you’re 80, assuming you don’t take any withdrawals.​​

Area #2: Pay Down Debts

Along with maximizing your retirement savings, the five years before retirement are a good time to pay off high-interest debt, such as credit cards and personal loans.

Start by creating a debt repayment plan that prioritizes high interest debt and focuses on paying off the balances with the highest interest rates first. You can also consolidate your debt into a single, lower interest loan or balance transfer credit card.

For lower interest debts like your mortgage, assess whether it makes sense to pay it down. You’ll want to look at factors like the tax deductibility of your mortgage interest and your expected investment returns from your investment portfolio and retirement accounts.

One argument in favor of paying off your mortgage before retirement is that the less debt you have in retirement, the less money you need in your portfolio. 

For example, if your mortgage payment is $3,000 per month, that’s $36,000 per year. By paying off your mortgage before you retire, you free up that money for other things in retirement.

As per this example, if you have 10 years left on your mortgage when you retire, you’ll need to draw $360,000 from your retirement savings just to pay off your mortgage.

Another important factor to consider is human behavior. While the math may tell you that you’ll get a better return by investing instead of paying off your low interest rate mortgage, the reality is that most of us won’t follow through on that plan.

We’ll get distracted and spend this money on something else, like a new SUV, or splurge on extravagant vacations.

Area #3: Asset Allocation and Rebalancing Your Portfolio

As you get closer to retirement, don’t neglect to review your portfolio’s asset allocation. During your working years, your portfolio is likely to have a more aggressive investment mix favoring stocks over bonds and other lower risk investments.

As you move closer to retirement age, preserving capital and generating a steady income that can sustain your rate of withdrawal from your portfolio may likely come into focus. This typically means adjusting your asset allocation to decrease risk.

A simple rule of thumb is to hold a percentage of stocks equal to 110 minus your age. 

So at age 60, you might aim for 50% in stocks (110 – 60 = 50). The rest would be allocated to bonds, cash, real estate investments (such as REITs), and other assets.

Rebalancing your portfolio is another key component in maintaining an optimal asset allocation based on your life stage.

This basically involves reviewing your investments periodically and making adjustments to make sure they’re still aligned with your target asset allocation.

For instance, you can rebalance your portfolio by selling some of the assets that have grown beyond your target allocation and investing the proceeds in underweight asset classes. 

So if your target allocation for stocks is 60% and 40% bonds, but your tech stocks have pushed your current allocation to over 70% – you would sell some of these stocks and invest the proceeds in bonds or other underweight asset classes.

This rebalancing strategy also allows you to “lock in” a portion of your gains.

Area #4: Model Your Retirement Projections

You need to do a comprehensive review of your expected retirement finances and lifestyle expenses.

You’ll want to have a detailed picture of your income sources, living costs, taxes, and other cash flows so you can see that your savings will last through a lengthy retirement and support your retirement lifestyle.

Start by estimating your desired retirement lifestyle and all associated costs – housing, travel, healthcare, hobbies, and other areas you want to fund (such as financial support for children or grandchildren).

Compare this to your anticipated income streams like Social Security, pensions, investment and retirement account withdrawals, etc. You’ll also need to factor in taxes and include state taxes if you live in a state which taxes retirement income.

And lastly, don’t neglect to plan for a longer retirement period as our life expectancies increase.

Area #5: Maximize Your Employer’s Insurance Coverage

Healthcare costs can be a significant expense in retirement.

A 2022 analysis by Fidelity Investments estimated that a 65-year-old couple retiring in 2022 would need around $315,000 to cover healthcare costs in retirement.

Utilizing the years before retirement to maximize your employer’s insurance coverage is an area you should be taking advantage of.

While you’re still working, this period allows you to take care of any outstanding medical procedures using your existing insurance provided by your employer.

Addressing these health-related needs during this time, if possible, can lead to substantial cost savings compared to covering them during retirement.

Health Savings Accounts (HSAs)

HSAs allow people with high-deductible health plans (HDHPs) to contribute pre-tax funds to savings accounts to cover qualified medical costs.

They offer triple tax savings, where you can contribute pre-tax dollars, pay no taxes on earnings, and withdraw the money tax-free now or in retirement to pay for qualified medical expenses.

The 2024 individual limit is $4,150, and if you’re 55 and older, you can contribute an additional $1,000 as a catch-up contribution. $8,300 is the 2024 limit for family coverage.

Contributions are tax deductible and investment earnings accrue without taxes. The best feature is that account holders maintain access to funds indefinitely.

Withdrawals from an HSA used for non-qualified medical expenses are considered taxable income after age 65. Prior to age 65, non-medical withdrawals from an HSA are subject to both income taxes and an additional 20% penalty.

If you’re planning for an early retirement, you should consider Health Care Options for Early Retirees.

Area #6: Map Out Your Retirement Vision

The last area to prioritize in the five years before retirement may be the most important, which is clearly defining your vision for retirement.

All too often, people reach retirement without carefully considering what they truly want this next major life phase to look and feel like. Dedicate the time leading up to retirement to envision how you’ll actually be spending this time.

If you plan to relocate to another city or state, or even internationally, take it a step further and immerse yourself in that environment. Make visits to spend significant time there, meet and talk to the locals, and get a sense of the place’s vibe and culture.

Understand the cost of living, amenities, and lifestyle.

For example, if your dream is to retire to the beach town of Cabo San Lucas, Mexico, be sure to go in with your eyes wide open and have a clear understanding of the real costs for housing, healthcare, transportation, and the lifestyle there.

Get familiar with the expat community resources, healthcare system quality, residency procedures, and all the tax implications.

And it’s always a good idea to discuss your visions with your partner to make sure both your expectations are aligned.

Final Thoughts

The five years leading up to your retirement is a time to start mapping out and doing some deep planning. Use this time to plan effectively so you can set the stage to succeed in reaching your retirement goals and living the retirement lifestyle you imagined.

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