You've been working and saving for retirement your entire adult life and then it just kind of sneaks up on you. All of a sudden, retirement is just a few years away. That reality brings a lot of anticipation and excitement, but it also might come with some trepidation. Are you ready for retirement?
If you have reached that stage in your life and are planning to retire in the next five years, here are three things you should do right now.
1. Make sure you are on track
If you have a financial advisor, now would be the time to inform them of your plans to retire and assess where you stand with your savings based on your anticipated needs in retirement. If you don't work with an advisor, there are various guidelines you can follow to determine if you are on track to meet your retirement goals.
One of them says that by age 55, you should have 4.5 to 8 times your current annual salary saved for retirement, and by age 60 it should be 5.5 to 11 times. Those give you a pretty wide span, but even if you go from the low end of the range, you'd have a hefty nest egg. So, if you are 55 and earn $75,000 per year, according to this rule, you should have roughly 5 times that -- or $375,000. On the high end, you'd have $600,000.
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If you are not in this range at age 55, you may want to delay retirement, boost your savings by contributing more to your retirement plan, or consider working part-time in retirement.
2. Reallocate and reassess your portfolio
Assuming you have assets in a 401(k) plan, perhaps an individual retirement account (IRA), and your own portfolio of stocks and/or exchange-traded funds (ETFs), the five-year mark is a great time to review all of them.
If you are in the retirement savings range established above, you are on the right track, so the last thing you want is to get blown off course by a recession or bear market. Last year, the markets were down 20% to 30% (or more, in the case of some individual stocks), so if you had an aggressive asset allocation, you lost a lot of value.
When you have a longer runway to retirement, that's not a big problem because markets bounce back, and you have time to recoup those losses. But when you are five years away from retirement, you don't want a volatile market to drastically reduce your savings when you'll begin making withdrawals in just a few years.
That's not to say you want to have 100% of your portfolio in bonds and safe investments, because you'll still need long-term growth, even in retirement. But an asset allocation that's more conservative and resistant to 20% to 30% swings would serve you well. Does that mean you should have 50% bonds and fixed income and 50% stocks? Maybe, but that depends on your risk tolerance and how much you have saved.
3. Develop a savings withdrawal and Social Security strategy
With retirement just five years away, you should start thinking about when you'll take Social Security and when you'll start taking withdrawals from your retirement savings. You can start getting Social Security checks at age 62, but they will be smaller if you take them before your full retirement age, which is 67 for people born in 1960 or later. If you claim benefits before that, the monthly payout will be gradually less, but you'll get the benefits for a longer time frame.
Most employer-sponsored plans allow you to start taking withdrawals at age 59 1/2 without penalty, so you should factor that into your strategy as well. If you plan to retire at 62, you can start taking Social Security and reduce the amount you withdraw from your retirement savings, giving it more time to grow and compound. Or, if you are in the high end of the retirement savings range, maybe you start tapping into your savings at 62 and save Social Security until 67.
You may also have funds in a stock or ETF portfolio to consider. Your financial advisor or significant other can help you arrive at the right strategy based on your retirement goals.
All in all, this framework should enable you to be better prepared when retirement is right around the corner.
