The 5 years before retirement are critical for Americans — get it wrong and you can kiss your big plans goodbye. Here's why

While it’s always a good idea to start planning for retirement as early in your career as possible, the five years before retirement are often considered the most critical. By getting a handle on where you stand today, you’ll have a better understanding of what that means for your financial wellbeing in retirement.

But get it wrong, and it could tarnish your golden years.

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In addition to developing a budget for retirement, it’s a good time to revisit your retirement plans and goals — after all, things change. When you were younger, maybe you dreamt of traveling the world, but now you’re more interested in living abroad. Or, you might want to move to another city or state to be closer to your children or grandchildren.

Here’s how you can plan ahead in the lead up to your retirement.

Develop a retirement income and budgeting plan

Once you revisit your plans and goals, you can figure out if you’re retirement ready. By developing a budget — essentially, the income you’ll need each month to turn those plans and goals into reality — you can figure out if you’re on track with your retirement savings.

First off, it’s important to understand your retirement expenses. For example, will your mortgage be paid off before you retire, or will you still have payments, and for how long? Do you have expensive hobbies, like golfing? Do you plan to travel? Are you thinking about moving to a retirement destination and is the cost of living higher than your current location? Are you helping your grandkids pay for college?

You’ll also need to figure out how much you’ll bring in during retirement, including your Social Security benefit, pension, retirement savings and any other sources of income, such as an annuity. Are you planning to work part-time in retirement, at least for a few years? From there, you can use a retirement planning tool or sit down with your financial adviser to figure out if there’s a gap between your retirement expenses and your expected income.

You could boost your retirement income by waiting to claim your Social Security benefit. For each year you delay collection after your full retirement age (which is 67, for anyone born after 1960), you’ll get a permanent bump of 8% annually until age 70.

Also consider your planned retirement withdrawal rate. A common guideline is the controversial 4% rule, in which you withdraw 4% of your assets in the first year of retirement, then increase or decrease that distribution annually based on inflation. It’s best to consult with your financial adviser, since every scenario will be different—from the length of your planned retirement to your investment risk tolerance.

Read more: Suze Orman says Americans are poorer than they think — but having a dream retirement is so much easier when you know these 3 simple money moves

Get your financial ducks in order

If you’re not on track with your finances, there’s still time to adjust your investments.

That might mean bumping up your savings rate (and cutting back on some of your current expenses). Or it might mean looking for supplemental income, such as working overtime or finding a side hustle.

You might even consider working part-time during your retirement years to help your savings stretch further. And you may want to consider altering your lifestyle to match your retirement income, such as downsizing your home or moving to a city or state with a lower cost of living.

This is also a good time to sit down with your financial adviser to make sure your asset allocation suits your retirement timeline. For example, you might want to consider making adjustments that will lower your risk.

Certain tax planning strategies could also help. If you’re 50+ and haven’t maxed out your employer-sponsored retirement plans, you could take advantage of catch-up contributions. In 2024, the catch-up contribution limit for 401(k), 403(b) and most 457 plans is $7,500. That means you can contribute up to a combined $30,500.

If you contribute money to tax-deferred plans, you can sock away more money now, let it grow tax-free, and pay taxes when you withdraw it — which will work to your benefit if you expect to be in a lower tax bracket during retirement.

Plan for health care expenses

One of your biggest expenses in retirement could be healthcare. If you retire before 65 (when Medicare, the federal health insurance program, becomes available), then you’ll need to make sure you’re covered by private insurance, employer benefits or a spouse’s plan.

Those expenses won’t disappear when you become eligible for Medicare. A 65-year-old “can expect to spend an average of $157,500 in healthcare and medical expenses throughout retirement,” according to Fidelitys’ annual Retiree Health Care Cost Estimate for 2023. And that’s with Medicare coverage.

Do your research ahead of time: Learn how the program works, what it covers, what it doesn’t cover and when you need to sign up. For example, if you miss the enrollment period, you’ll have to pay a penalty. You may want to consider setting up an emergency fund to cover any unexpected medical costs in retirement, though you could also consider taking out a long-term care insurance policy or tapping into your home equity.

Your expenses — and your budget — won’t necessarily stay the same throughout your retirement, which could span 30+ years. A financial adviser can help you figure out the best way to reach your goals, with a bit of flexibility built in.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.