What to Do If You Want to Retire in 5 Years

If you’re planning to retire in five years, now is the time to ensure your financial house is in order. Of course, the steps you’ll need to follow to retire in five years will vary based on your age, how much you have saved already, your projected expenses in retirement and other factors. Whether retirement is just five years away or decades down the road, getting there often requires years of saving and planning. That’s where the expertise of a financial advisor can help. 

Have you ever considered how long you might live and how that could impact your retirement savings? Accurately estimating life expectancy is a critical component of effective retirement planning. After all, underestimating how long you’ll live when planning for retirement can expose you to longevity risk – the risk of running out of money.

On the other hand, overestimating life expectancy can result in unnecessarily delaying retirement or sacrificing quality of life in retirement. Finding the right balance and making informed decisions based on a realistic assessment of life expectancy is crucial for ensuring a secure and comfortable retirement.

For example, if you’re 70 years old when you retire, chances are that your plan will need to cover you for the next 20 to 25 years, depending on your health and lifestyle. But if you’re looking to retire early – say, around age 45 – you’ll need to plan for a much longer retirement and have much more saved up.

Reputable online life expectancy calculators, such as those provided by the Social Security Administration or the Blueprint Income, can provide personalized estimates based on factors like age, gender, health status and lifestyle habits. While these tools can serve as a helpful starting point, it’s important to remember that they provide estimates and not definitive answers.

As you approach retirement, the importance of saving becomes more critical than ever. The years leading up to retirement offer a unique opportunity to boost your savings and ensure a more comfortable and secure future. By focusing on maximizing your retirement contributions and taking advantage of catch-up contributions, you can make a significant impact on your retirement outlook.

Even small increases in savings can have a significant impact on an individual’s retirement outlook. For example, if an individual saves an additional $500 per month for the five years leading up to retirement, they would accumulate an extra $30,000, not including potential investment returns. This extra savings can provide a valuable cushion during retirement, helping to cover unexpected expenses or allowing for additional discretionary spending.

Take a moment to assess your current savings habits: Are there areas where you can cut back on expenses to allocate more money towards retirement savings? Can you automate your savings to ensure you’re consistently setting aside money each month?

One of the most effective ways to maximize savings in the years leading up to retirement is to take full advantage of retirement accounts, such as 401(k)s and IRAs. 

401(k)s are employer-sponsored retirement plans that allow employees to save and invest a portion of their paycheck before taxes are taken out. Many employers offer matching contributions, which can significantly boost your savings. In 2024, the contribution limit for 401(k)s is $23,000.

IRAs, or individual retirement accounts, are personal savings plans that also offer tax advantages. There are two main types of IRAs: traditional and Roth. With a traditional IRA, contributions may be tax-deductible and taxes are paid upon withdrawal in retirement. Roth IRAs on the other hand, are funded with money that’s already been taxed. In return, you benefit from tax-free growth and tax-free qualified withdrawals in retirement. In 2024, the contribution limit for IRAs is $7,000.

To maximize your retirement account contributions, follow these steps:

1. Contribute enough to your 401(k) to take full advantage of any employer match.
2. Aim to max out your 401(k) contributions if possible.
3. If you have additional funds to save, consider opening and contributing to an IRA (which may not be tax-deductible but will still offer tax-deferred growth).
4. Automate your contributions to ensure you’re consistently saving each month.
5. Increase your contributions each year, especially if you receive a raise or bonus.

For individuals ages 50 or older, there is an additional opportunity to boost retirement savings through catch-up contributions. 

In 2024, the catch-up contribution limit for 401(k)s is $7,500, and the catch-up limit for IRAs is $1,000. This means that if you’re 50 or older, you can contribute a total of $30,500 to your 401(k) and $8,000 to your IRA.

For example, imagine a 50-year-old named Sarah who wants to retire in five years. By maxing out her 401(k) and making catch-up contributions, Sarah could save $152,500 over the next five years (assuming contribution limits stay the same), not including potential investment returns. That money could significantly improve Sarah’s financial outlook heading into retirement.

If retirement is just five years away, you should have a general sense of how much money you’ll have saved by then. By combining your savings estimate with your expected Social Security benefit and other sources of retirement income, you can calculate how much total income you can expect on an annual basis when you stop working. 

To arrive at that estimate, you’ll want to account for the various streams of income that you expect to have in retirement. They may include:

• Social Security: Social Security benefits are a primary income source for many retirees. Your benefits depend on your earnings history and the age at which you start claiming them. Delaying benefits until age 70 can result in higher monthly payments, while claiming as early as 62 will reduce your monthly payments over your lifetime by as much as 30%.
• Retirement account withdrawals: Withdrawals from 401(k)s, IRAs and other retirement accounts will likely constitute a significant portion of your retirement income. The 4% rule is a common and simple withdrawal strategy that suggests withdrawing 4% of your savings in your first year of retirement and then adjusting your withdrawals in subsequent years for inflation. 
• Pension payments: If you have a pension, it may provide a steady income stream during retirement. The amount, which typically is not indexed for inflation, depends on your years of service and salary history.
• Annuity payments: Annuities can provide guaranteed income for life or a specified period, helping to ensure you don’t outlive your savings. 
• Rental income: If you own rental properties, the income generated can supplement your retirement funds.
• Other savings: Personal savings and other investments can be tapped into as needed, providing flexibility in your retirement income plan.

Making retirement a reality in as few as five years will also require you to have a firm understanding of how much you expect to spend in your golden years. This number will vary based on where you live, your desired lifestyle and your pre-retirement spending levels. 

For example, some experts recommend replacing between 70% and 90% of your pre-retirement income to maintain your current standard of living. 

Housing, utilities, groceries, and leisure activities will make up a significant portion of your budget. However, retirees may also face increased healthcare expenses, as they are more likely to experience health issues and require medical care. It is essential for individuals to carefully consider how their spending habits may shift in retirement and plan accordingly to ensure they have sufficient funds to cover their needs.

The healthcare consideration is especially important for people who retire before Medicare eligibility kicks in at age 65. For example, retiring at age 50 means you’ll have to secure private health insurance for 15 years or pay out of pocket. Either way, you’ll need to factor these costs into your spending plan. 

Finally, don’t forget to prepare for inflation, as it can undercut your purchasing power and reduce the value of your fixed income over time. One way to do this is by diversifying your income sources with investments that have the potential to outpace inflation. These can include equities, inflation-adjusted annuities and real estate.

To show the importance and process of creating a retirement plan, let’s consider a 60-year-old man who plans to retire in five years at the age of 66. While the Social Security Administration’s life expectancy calculator indicates that a 60-year-old man, on average, can expect to live to age 83, this individual rounds up and assumes a life expectancy of 85. 

With an annual income of $74,400 and estimated expenses of $70,000, John will have a surplus of $4,400 each year, providing a small cushion for unexpected costs or additional savings growth. 

Retiring in five years may be an achievable goal with careful planning and disciplined saving. By understanding your life expectancy, maximizing savings, estimating your income, projecting expenses and creating a detailed plan, you can potentially enjoy a financially secure and fulfilling retirement.

• Required minimum distributions (RMDs) play an important role in a lot of people’s plans for retirement. This mandatory withdrawals from pre-tax retirement accounts start at age 73 (or 75 for people who turn 74 after 2032) and failing to take them can result in penalties. SmartAsset’s RMD calculator can help you estimate how much your first RMD will be and when you’ll need to take it.
• Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Photo credit: ©iStock.com/skynesher, ©iStock.com/olm26250, ©iStock.com/Pekic