If you’re within five years of retirement, you’re in the red zone. Small actions such as a portfolio rebalance or updating your financial plan can have outsized benefits because of how close you are to going from saving to spending.
My firm works with retirees and those within five years of retirement, so my goal in this column is to give you some financial guidance that’s especially important in this period, but also the bits of wisdom I hear from retired clients who, in hindsight, would have done some things differently.
Here are the financial actions:
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1. Know your expenses
I hesitated to list this first because I think there’s a significant risk you’ll click that “x” on the browser, but hear me out.
Don’t spend hours creating a budget. Spend 10 minutes and look at total debits across your bank account(s) over a two-year period. Divide that number by 24. There you have it. You now know how much you spend.
You cannot know whether or not you are on track to retire in five years or less without knowing this figure. Most people I speak with want to be able to maintain their current level of spending in retirement.
I have learned that many retirees spend more money with seven Saturdays than they do with one, but knowing what you spend now is a good starting point.
2. Have a health care plan
Many line items shift when you retire. You spend less on clothes and more on travel. What’s less obvious is what will happen to your health care expenses. If you’re an employee, the expense exercise above didn’t capture your current health care costs as they were deducted before you were paid.
How much, and in which direction, your health insurance premiums will shift depends on several factors. The earlier you retire, the more you should budget as a bridge between retirement and Medicare age (65).
If you’re self-employed and retiring/selling your business at 65, Medicare will likely be much cheaper than what you paid as an owner.
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If you have been a diligent saver and accumulated a large balance sheet, Medicare Parts B and D will be expensive based on your gross income. Dividends, interest, capital gains, required minimum distributions (RMDs) and Social Security are all part of the equation of what you will pay.
Financial plans are never completely accurate, as they are projecting unprojectable numbers for 30-plus years. But they are directionally correct, and they can identify financial blind spots that can be addressed before you retire.
Is your tax rate going to spike early in retirement because of withdrawals for home projects? A financial plan can help you get in front of that.
Need to save 5% more to be able to spend what you are spending today? A financial plan can tell you that. You can access a free version of the software we use online.
On to the items you may not hear about from your financial planner:
3. Do the home repairs now
You’ve put off the kitchen reno, the bathroom update and the desperately needed fresh coat of paint. Who has time to meet with contractors?
One reason retirees spend so much in the early years of retirement is because they address years’ worth of deferred maintenance and home improvements once they have the time to focus on it.
The problem is that it places a strain on your savings and increases sequence risk. In English, it increases the risk that you will have to tap your portfolio while markets are down. Retired in the first quarter of 2025? You’re living this.
Another argument in favor of doing the projects now is that the work will mostly take place while you’re at work. You do not want to be spending those eight new hours at home with drills drilling and hammers hammering.
4. Travel now
The dream of that Italy trip in the month following retirement is appealing. The cost is probably less so. Big expenses sting less when they are replenished by a paycheck when you get home.
When I talk to retirees in their late 70s, typically their biggest regrets are in the form of the things they didn’t do or the places they didn’t see.
Don’t fall into the trap of waiting to live your life until after you retire. Think of unused paid time off like a golf score — the lower the better.
5. Create a model week
Ever heard someone say “it’s good to be home” after what appears to be a dream vacation? How is that possible?
Part of it is the comfort of home, but the other part is the structure and routine. When you retire, you lose three very important things: identity, relationships and structure.
One exercise I favor with the golf guys on the verge of retirement is asking them to compare their current week with their ideal week. You can do this, too.
Draw out each day with three sections: morning, afternoon and evening. Fill those boxes with what you currently do.
Next, fill out the boxes with what you would ideally do. What becomes evident is that golf, even for the biggest enthusiasts, cannot fill every box. The more blank spaces, the more time you want to commit to this exercise.