Panic is Good
Probably not something you hear all that often, but a dose of fear and adrenaline five years from the “big R” can get you moving, and course-correct before it’s too late. So, being panicked and changing little, not so great, using that fear to motivate and ensure you are on the right path, great. This is in part because the last five years are critical in terms of long-term retirement planning. This period is often called ‘the fragile decade’ due to the disproportionate weight your investments make in this time. The good thing is, five to ten years is still five to ten years… it’s a shorter period of time than say, your entire working life, but it’s not a frantic weekend either. You have time to do your research and not rush.
Step One: Where Are You Now?
This step can be the hardest, because, if you have been avoiding some tough truths about your finances, this is the time to face them. You need to look at how much you’ve saved, what your estimated Social Security payout will be, and any other investments or pensions, to understand how much you will really have to live off in retirement. This can be a scary moment if the numbers you have versus the numbers you need/want are not where they should be. Five to ten years out is a good time to attack any outstanding debt. This is also a time to take advantage of maxing out contributions to any workplace match savings programs. The good thing is, with a few years to go, you have time to change how you’re investing and catch up.
Step Two: Get Help
Once you have some hard numbers, the next step is to seek professional help to get you on track. Putting together a team of advisors including your accountant, estate attorney and trusted financial advisor can make a world of difference in gaining clarity and setting out a strategy that you can feel confident in. While there are resources to help you get organized in advance of calling upon your financial team, it is important to consider that your situation is unique to you and many online resources and data aggregators can fall short of providing you with a personalized game plan.
Step Three: Look Way Ahead
We all want to think of retirement as a time to work on our golf game, do some traveling, learn a new skill, etc. but what about the later years? Often choices made later in life are much more about health and mobility. In fact, 25% of Medicare spending happens in the last year of life.[i] As of 2016, average costs of nursing homes come in at $3628 monthly for an individual in an assistant living home and $7698 for a private room in a nursing home.[ii] It may be hard to think about right now, but the more time and thought allotted to your long-term care and wishes can help you age on your terms. Talk to your spouse and family about your options. Perhaps downsizing to a smaller more manageable home can help stay home longer and have more funds. You also may consider assisted living communities, senior communities, or the various options that are available. This is also a good time to make sure your estate planning is up to date, as well as giving power of attorney.
Step Four: Tax Savings
As you get closer to retirement, knowing how your taxes will change is key. If you have a lot of investments in traditional IRAs for example, you may be in for a tax surprise when they reach maturity. Unlocking certain savings may also bump you up a tax bracket. The year you stop working though, your taxable income may drop. On top of that, whether you start collecting Social Security, or decide to delay (delaying will up the amount paid out, so it’s often advised to delay as long as you can to maximize benefits). While you are in the low taxable income period, there are ways to make your money work for you, like rolling IRAs into Roth during that window. Converting it will remove getting hit with the federal taxes when you draw on it later. A traditional IRA also forces you to make withdrawals by 70 ½ whereas a Roth offers more flexibility taking it out, tax-free. There is some nuance to converting so this is another area where some professional guidance may be helpful.
You’ve worked and saved and prepared. Crunching the numbers five-years out may cause a little panic, but if you follow the four steps above, you can establish a game plan. You may have to be more disciplined in the next few years to make your marks, but the end result, a comfortable and well-thought-out retirement, is invaluable.