Want to Retire in 5 Years? What You Must Know

In terms of retirement planning, the final five years before retirement may be among the most crucial, as it is during this time that you must assess whether you can afford to stop working. The decision will be largely influenced by the amount and quality of preparation you have completed to date.

If you are financially prepared, you may need to do nothing more than continue with your retirement plan. If you are unprepared, you could be looking at a retirement that lasts longer than five years or requires you to alter your retirement lifestyle.

Consider an action plan you may use to gauge your level of preparedness once the five-year period begins.

Table of Contents

How much money do you require?

Failure to conduct a good retirement-needs analysis is one reason why so many individuals struggle financially in retirement. At its most fundamental level, a retirement-needs study could involve increasing your current income by a suggested percentage, such as 75% or 80%. This is based on the premise that your spending will decrease after you retire, which is typically not the case.

To obtain a more accurate estimation of how much money you’ll need for retirement, your study should take a comprehensive approach. This requires taking into account all areas of your money, such as variables that could affect your cash flow and expenses.

Here are some questions to consider.

How long do you expect to be retired?

With five years until your desired retirement date, the primary purpose is to evaluate if you can retire comfortably by then. To make this decision, you must first examine your expected lifespan.

Without clairvoyance, there is no way to be certain. On the basis of your overall health and family history, however, you can make a decent approximation. For instance, if your family members normally survive into their 80s and you’re in good health, you might anticipate that you’ll be around at that age as well.

Do you need to insure your assets against long illnesses?

While contemplating life expectancy, you should also evaluate whether your family has a history of expensive, long-term illnesses. If so, you should prioritize the inclusion of retirement asset insurance in your research. You may wish to explore long-term care (LTC) insurance to pay for nursing home care or comparable services if you require them in the future.

Using your retirement savings to cover bills could quickly deplete your nest egg. This is especially true if your assets are substantial enough that you are unlikely to qualify for Medicaid-funded nursing home care, but you are not so wealthy that your assets can readily cover any eventuality. Consider, if you are married, what would happen if one partner grew ill and drained the savings intended to assist the other partner following the death of a spouse.

What will your expenses be during retirement?

The projection of your retirement spending can be one of the simpler aspects of your needs analysis. Making a list of the products or experiences you anticipate spending money on and estimating how much they will cost is sufficient.

Using your current budget as a starting point is one option. Then, eliminate or reduce the expenses that will no longer apply (such as the gasoline you use to get to work) and add or increase the expenses that will be new during retirement (such as higher home utility bills or more leisure travel).

How Much Income Will You Have?

Next, total the guaranteed income you will receive in retirement. This comprises:

Your monthly income from Social Security. Using a calculator on the Social Security Administration’s website, you can estimate your Social Security benefits.
Pension income from current or previous employers.
Amounts received on a recurring basis from an annuity you own.
Real or intellectual property that you want to sell or get continuing payments from to support your retirement. This may be rental properties, royalties, or real estate.
Once you reach the minimum distribution age (now 72), obtain an estimate of how much you will be forced to withdraw and add this amount to your guaranteed income for that period.

Also, make a list of any other funds and assets you could use in retirement:

The funds in your retirement savings accounts, such as IRAs and 401(k)s.
IRAs and other types of inherited retirement savings. With the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, distribution regulations for inherited retirement accounts changed. (Previously, certain non-spouse beneficiaries were permitted to receive inheritance payments over their lifetimes. Under the SECURE Act, these beneficiaries have ten years following the account holder’s demise to obtain full distributions.
Funds in additional savings or investment accounts.
If you have a Health Savings Account (HSA), that account.
The worth of your home or other property.
Other valuable assets, such as works of art.

Doing the Retirement Math

Once you’ve determined your predicted spending and regular income, the next step is to calculate how much additional money you’ll need to withdraw from your retirement savings and other assets.

This calculation is illustrated below based on the following assumptions:

This individual intends to retire in five years.
75% of their pre-retirement income will be allocated to their annual retirement expenses.
They anticipate twenty years of retirement.
Their present annual income is $250,000, and they may anticipate a 5% annual wage increase.
Their projected annual Social Security income is $24,528.
Their present retirement savings balance is $1.5 million, and they anticipate an annual growth rate of 8%.

Even though our hypothetical pre-retiree has a higher-than-average salary and retirement savings, the computation indicates that they are on track to replace just around 64% of their pre-retirement income, which is significantly less than the 75% replacement rate they had hoped to achieve. In order to retire in five years, they will be required to make certain adjustments.

Your specific facts and circumstances may likely result in different outcomes. For example, do you have more or less cash on hand? Will you receive more or less Social Security benefits? Will your revenue from additional sources increase or decrease? Is the duration of your anticipated retirement greater or shorter than you anticipated? All of these variables may affect the bottom line.

Are You on the Right Path?

If your retirement-needs analysis reveals that you are on track, then congratulations! You should continue to add the recommended amounts, or more if possible, to your savings and rebalance your portfolio as needed so that it is appropriate for your retirement horizon.

If your needs analysis reveals that you are not financially prepared for retirement in five years, consider the following:

Could you modify your retirement lifestyle to dramatically cut your annual expenses?
Would you be able to increase your retirement account contributions sufficiently over the next five years to generate a sufficient retirement income?
In retirement, are you able to work part-time and generate additional income?
If there is little you can do to reduce your expenses or increase your income, delaying retirement for a few years maybe your best option. The longer you work, the more time you will have to save money and the fewer years you will need to rely on your retirement savings.