What Should You Do During the Five Years Before Retirement?

Five years before retirement is not too early to make specific decisions—and it is not too late to make meaningful improvements. The goal is to replace a vague retirement date with a sequence of actions that connects your lifestyle, income, investments, taxes and protection needs.

Five years out: define the retirement you are funding

Choose a target range rather than one immovable date. Estimate recurring spending from bank and credit-card activity, then separate essential expenses from travel, gifts and other flexible goals. Add irregular costs such as vehicles, major home repairs and family support.

Inventory every account, pension option, insurance policy and debt. Confirm beneficiaries and obtain current Social Security estimates. At this stage, the objective is to reveal gaps while there is still time to adjust savings, spending or the retirement date.

Three to four years out: design the income transition

Create a year-by-year income map showing wages, Social Security, pensions, cash and investment withdrawals. Couples should model both lives and the income available after the first spouse dies. If one spouse will retire earlier, identify exactly how the household will replace that paycheck.

These years may also reveal future tax-planning opportunities. Compare projected income after retirement with later years when Social Security and required distributions are both present. A lower-income window may create room for planned IRA withdrawals or partial Roth conversions, subject to current tax rules and Medicare considerations.

Two years out: prepare investments and liquidity

Decide how much near-term spending should be held in cash or high-quality short-term assets. Review whether the portfolio’s risk reflects the withdrawals it will soon support. A household that needs little from investments can often tolerate different risk from one relying on the portfolio for most expenses.

Do not wait for the retirement party to diversify a concentrated position or organize scattered accounts. Tax costs, plan rules and market conditions can make a staged transition more practical than one large change.

One year out: practice the retirement plan

Test-drive the planned spending level while income is still coming in. Direct the difference to savings or debt reduction. Confirm healthcare coverage and costs for each spouse, especially when one will not yet be eligible for Medicare. Review unused vacation, deferred compensation, stock awards and other employer benefits before selecting the final employment date.

Five decisions that deserve an owner and a deadline

1. Retirement date: Include financial and personal conditions that would move it.
2. Social Security: Compare household and survivor outcomes, not only break-even age.
3. Withdrawal source: Identify which account funds each stage and how taxes will be handled.
4. Portfolio transition: Set the intended allocation and rebalancing rules before withdrawals begin.
5. Family preparedness: Update beneficiaries, powers of attorney and the location of important records with qualified professionals.

The practical takeaway

The five years before retirement are valuable because several important variables are still under your control: how long you work, how much you save, when benefits begin and how the portfolio is prepared. A written timeline turns those variables into coordinated action.

Rehearse the retirement budget while you still have a paycheck

For a few months, try living on the amount you expect to spend in retirement and direct the difference to savings. Include a monthly allowance for annual and irregular costs rather than treating home repairs, travel or a replacement vehicle as surprises. This experiment does not prove a plan will work, but it can reveal which assumptions need attention before you leave work.

Build a one-page decision calendar: your intended retirement month, the end of employer health coverage, pension election deadlines, proposed Social Security start dates and the next investment and tax review. Confirm actual deadlines with each provider; avoid relying on a generic retirement checklist for irreversible elections.

Important information: Social Security, tax and healthcare rules can change. Review current information through the Social Security Administration and consult qualified tax, legal and insurance professionals for advice about your circumstances. James and Karen are hypothetical and do not represent actual clients.