Using Your Final Working Years to Prepare for the Transition Ahead
The five years before retirement can be an important period for turning a long-term goal into a more detailed financial strategy. Decisions about spending, savings, investments, taxes, healthcare, and Social Security begin to carry greater significance as your anticipated retirement date approaches.
Rather than viewing these decisions individually, this period offers an opportunity to see how they fit together and identify areas that may need additional attention before your paycheck stops.
Start Turning Retirement Goals Into Numbers
You may have spent years imagining what retirement could look like, but as the transition approaches, it becomes increasingly useful to translate that vision into estimated expenses.
Begin by thinking about the lifestyle you expect to maintain. Housing, groceries, transportation, utilities, insurance, and healthcare may form the foundation of your budget, while travel, hobbies, entertainment, charitable giving, and family support can add another layer.
It can also help to distinguish recurring expenses from occasional large purchases. A new vehicle, major home renovation, extended vacation, or financial gift to a family member may not appear in a typical monthly budget but could still affect your withdrawal strategy.
Your current spending provides a useful starting point, but retirement expenses may look different. Commuting and payroll taxes may decline, while travel or healthcare expenses could increase.
Developing a realistic spending estimate can give the rest of your retirement planning a clearer target.
Map Out Your Expected Income Sources
Once you have a clearer picture of potential expenses, consider where the money to meet them may come from.
Retirement income could include several sources:
- Social Security benefits
- Pension income, if applicable
- Traditional and Roth retirement accounts
- Taxable investment accounts
- Annuity income, if applicable
- Cash savings or other assets
- Part-time work or business income
Each source may begin at a different time and have different tax characteristics. Understanding when income becomes available can help identify potential gaps between your retirement date and the start of Social Security, pension payments, or required minimum distributions (RMDs.)
This exercise can also help you evaluate how much of your lifestyle may depend on portfolio withdrawals. Rather than focusing only on your total account balance, consider how your assets may translate into income across different stages of retirement.
SEE ALSO: Designing a Retirement Income Stream That Outlives You
Use the Five Years Before Retirement to Review Taxes
Retirement does not necessarily mean the end of tax planning. In some cases, the transition from employment to retirement can create new tax considerations.
During your final working years, you may still be contributing to workplace retirement plans while earning a salary. After retiring, your taxable income could shift as wages end and distributions from retirement accounts begin.
Later, Social Security benefits, pensions, investment income, and RMDs may overlap.
Looking several years ahead can help you understand how these income sources could affect your tax picture. Depending on your circumstances, discussions with your financial and tax professionals might include Roth conversions, the timing of retirement account withdrawals, charitable giving strategies, or realizing capital gains during particular tax years.
These strategies involve individual tax considerations, and a decision that makes sense in one year may not be appropriate in another. Planning before retirement can provide more time to evaluate potential options rather than making decisions after a tax issue has already emerged.
Review Social Security Before You Need to Claim
Social Security can play a significant role in retirement income, but choosing when to claim benefits involves more than selecting a particular age.
Your health, expected longevity, marital status, other income sources, employment plans, and broader financial circumstances can all be relevant. For married couples, one spouse’s claiming decision may also affect the household’s overall Social Security strategy.
The years immediately before retirement provide time to review your estimated benefits and consider how different claiming ages could interact with your other income sources.
Retirement and Social Security also do not have to begin simultaneously. Depending on your situation, you might retire before claiming benefits or continue working after becoming eligible.
Evaluating these possibilities within your larger income plan can provide more context for the decision.
Prepare for Healthcare Costs and Coverage Changes
Healthcare deserves particular attention before leaving an employer-sponsored plan.
If you expect to retire before becoming eligible for Medicare at age 65, consider how you might obtain coverage during the gap. Options and costs can vary significantly depending on your household circumstances.
If Medicare eligibility is approaching, familiarize yourself with enrollment periods, Medicare Parts A and B, prescription drug coverage, and the differences between Medicare Advantage and supplemental coverage.
Premiums are only part of the healthcare conversation. Deductibles, copayments, dental and vision expenses, prescription costs, and potential long-term care needs can also affect retirement spending.
Building these expenses into your projections may produce a more realistic picture of your anticipated income needs.
SEE ALSO: Don’t Let Healthcare Costs Derail Your Financial Security in Retirement
Revisit Your Investment and Withdrawal Approach
As retirement gets closer, the role of your investment portfolio begins to change. An account that has primarily been used for long-term accumulation may soon become a source of regular withdrawals.
That shift can make it useful to revisit your investment allocation, upcoming cash needs, and capacity for market volatility.
Consider how much you expect to withdraw during the first several years of retirement and which accounts those withdrawals may come from. Market conditions at the beginning of retirement can affect a portfolio differently when money is being withdrawn, making sequence-of-returns risk an important consideration.
This does not automatically mean moving investments into more conservative holdings. Retirement itself can last decades, so some assets may still have a long-term investment horizon.
The objective is to connect your portfolio to the job you expect it to perform.
Look at the Entire Transition Together
Retirement decisions rarely exist in isolation. Claiming Social Security may affect portfolio withdrawals. Retirement account distributions may affect taxes. Your retirement date may determine healthcare coverage. Spending choices can influence how much investment income you need.
That interconnectedness is why the five years before retirement can be such a valuable planning period. It gives you time to identify potential gaps, evaluate alternatives, and adjust your assumptions as your actual retirement date approaches.
If retirement is on your horizon, TriCapital Wealth Management can help you examine how your income, investments, taxes, Social Security, healthcare considerations, and lifestyle goals fit together. Contact TriCapital to schedule a conversation and use the five years before retirement to begin preparing for the financial transition from earning a paycheck to drawing income from the resources you have accumulated.
