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The last five years before you retire may be some of the most critical years in terms of retirement planning because you must determine within that period whether you can truly afford to retire. The determination will hinge heavily on the amount of preparation you have done to date, and the results of such preparation. If you are financially prepared, then you may just need to maintain your program and continue on to your retirement goal. If you are not financially prepared, then you may be looking at more than five years of a modification to your planned retirement lifestyle. Let's take a look at an action plan you can use to determine your level of readiness as you start the five-year stretch. (To learn more, read A Pre-Retirement Checkup.)
Assessing Your Readiness
Incomplete retirement-needs analysis is the primary reason why many people who are approaching retirement are not financially ready for post-work life. Retirement-needs analysis frequently takes the simple approach of including current income, current income tax rate and projected income tax rate during retirement, and assumes that an average of 70-80% of an individual's pre-retirement income will be sufficient. With five years to go, you cannot afford to make that mistake.
To get a realistic determination of how much you will need for your retirement, your retirement-needs analysis must take a holistic approach. This means your analysis must take into consideration all aspects of your finances, including items that could affect your cash flow and/or expenditures. (For related reading, check out Life After Retirement.)How long will you spend in retirement?
With five years left until your planned retirement date, the key objective is to determine if you can in fact retire by then, based on your needs assessment. To make this determination, you must first determine how long you plan to stay in retirement. Unless you are clairvoyant, there is no way to be sure of this period. However, you can make a reasonable estimate based on your general level of health and family history. For instance, if your family members typically live until they reach the age of 80 and you are in good health, then you may want to assume that you will live until that age and factor that into your analysis.Do you need to insure your assets against illnesses?
Besides life expectancy, you should also take your family's health history into consideration. Historically speaking, has your family been prone to long-term illnesses? If so, insuring your retirement assets should be high on your list of items that are included in your analysis. For instance, you may want to purchase long-term care (LTC) insurance to pay for any long-term illness you may experience. Lack of adequate insurance to cover expenses incurred as a result of a long-term illness could mean having to use your retirement savings to pay for such expenses, which could wipe out your nest egg in no time. (For more insight, see A New Approach To Long-Term Care Insurance and Taking The Surprise Out Of Long-Term Care.)What will your expenses be during retirement?
Determining your projected expenses during retirement can be one of the easier part of your needs analysis tasks. This is as simple as making a list of the items/events that will cost you money and determining how much they will cost. One good way to do this is to use your current budget as the starting point, and eliminate/lower the expenses that will no longer apply (such as the amount you allot for the gasoline you use to commute to and from work) and add/increase the items that will be new expenses during retirement (such as costs relating to living in a long-term care facility). (To learn more about tracking your finances, see The Beauty Of Budgeting.)Establish Your Predetermined Income
Figure out the income you will receive that is already guaranteed. This includes pension income from your current and former employers, if any, and your Social Security income. You can get an estimate of your Social Security income by using the calculators at the Social Security Administration website. Your possible sources of income should also take any property that you plan to liquidate to help finance your retirement into consideration. This should include real estate, royalties and rental properties.
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