Pre-retirement checkup: What you should do in the 5 years before you retire

For people who turned 60 this year, retirement is beginning to come into sight. The question is, are they actually ready for it?

"Your age isn't what you should be relying on to determine when you should retire," says Walter Updegrave, an author and journalist who runs the site Real Deal Retirement, which links to a number of calculators that let you run potential retirement scenarios. "You need to do a pre-retirement checkup."

Ideally, five (or six) years before retirement isn't the first time you've evaluated your retirement planning, but it certainly is a prime time to do it again.

"The five-year reality check is a really good idea," says Mari Adam, a financial advisor in Boca Raton, Florida. "It's an opportunity to test what you think you want to do against reality to see if you're right."

Looking at savings, Social Security claiming strategies and other financial issues is a key part of your checkup. But you also want to consider lifestyle issues such as when you'll want to stop working full time and how you plan to spend your time instead. "Retirement's a big transition, going from the structure of the workplace," Updegrave says.

A nest egg is also a big consideration, especially for those who won't receive a monthly pension. According to the Pension Rights Center, only 31 percent of Americans over 65 have pension income, and that number is falling. That means most people will have savings and Social Security as their only sources of income, unless they continue working.

"You need to do a pre-retirement checkup. How much income can (your savings) guarantee, and is that enough, combined with Social Security, to enable me to live an acceptable lifestyle?" Updegrave says. "You don't want to pull the trigger too early and discover you don't have enough."

Exactly how much you'll need to retire depends on your situation. Part of a pre-retirement checkup is determining which numbers are right for you.

"You may find that the intelligent option is to delay your requirement two or three or four years," says Rodger Alan Friedman, a chartered retirement planning counselor in Bethesda, Maryland, and author of "Fire your Retirement Planner: You!" "If you're not saving anything, you have, in effect, made a decision that you will be poor and in need during your retirement years."

Meeting with a financial planner is a good first step. You want a planner who will advise you for an hourly fee, not someone who is paid commission on investments he sells you. At this point, you want someone to help you evaluate your entire financial picture rather than sell you products.

"You can do it on your own, but most people don't," Adam says. "The real reason for using a professional is they make you look at it. The sooner you know, the more you can do about it."

You will want the advisor to look at your portfolio allocation, assets and projected retirement income to assess whether you can afford your desired retirement. Saving as much as you can in the next five years won't hurt, but you may need to revamp your investment strategy as well.

"It is so important that you get this equation right that you'd be foolish to turn it over to an amateur," Friedman says.

RELATED: Huge mistakes that can sabotage your retirement:

8 mistakes that can sabotage your retirement
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8 mistakes that can sabotage your retirement

Mistake 1: Failing to plan for medical expenses

Medicare kicks in at age 65, but that’s not the end of your medical expenses. Fidelity Benefits Consulting estimates a 65-year-old couple who retired in 2014 will need $220,000 of their own money for medical expenses over the course of retirement. Such costs include deductibles for Medicare Part A and Part B (in-patient and out-patient insurance), and premiums and out-of-pocket costs for Medicare Part D prescription drug coverage.

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Take action:

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Mistake 2: Underestimating costs

Retirement costs can be surprising — surprisingly high, that is. You may find that to manage costs, you need to earn some extra income — not the end of the world, but possibly not what you had in mind. If you do take this path, check the Social Security Administration’s rules for working while receiving Social Security benefits.

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Take action: The good news is, in the emerging economy, it should be easier to find money-making opportunities that fit a retirement lifestyle: There are lots of jobs you can do from home, and lots of ways to earn a little money on the side. If you’re lucky, it may be something you love to do as a hobby — say gardening, tending pets, caring for children or working as a handyman. If you’re in the market for a new job, brush up your resume and skills. Check out “7 Tips to Find a Job in Retirement.”

Mistake 3: Celebrating retiring with a big purchase

No doubt you’ve got a wish list for retirement. But hold off on making major purchases at first. Instead, give retirement a spin and see what you’re spending each month.

Track expenses — every single one. A year’s tracking gives the best picture because it includes one-time and seasonal expenses.

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Take action: It doesn’t matter what tracking system you use. Just find one you like and keep it up. Keep receipts, watch bank and credit card accounts online on a weekly basis, and update your tracking regularly. Here are a few approaches:

  • Try free online budget programs. Money Talks News partner PowerWallet lets you track expenses automatically for free. It and other free money management services like Mint and BudgetTracker make money by recommending financial products and supplying coupons.
  • Pay for a program such as Quicken.
  • Do it yourself. Track expenditures manually and offline on a spreadsheet.

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Mistake 4: Helping out adult kids

Many parents set themselves up for a crisis in retirement by supporting adult children financially. A study by Merrill Lynch says 60 percent of people 50 and older are assisting adult relatives financially.

If you are a parent who gives money to an adult child, remember the following: Adult children still have time to pay off college loans and save for retirement. Their parents — in other words, you — are running out of time to save for the golden years ahead.

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Take action:

  • Make a concrete plan with goals and deadlines for gradually withdrawing financial help from your kids.
  • Discuss the changes with your kids and help them learn to budget.
  • Model financial restraint and responsibility for your kids.

For more tips, read “Still Supporting Your Adult Kids? 5 Steps for Cutting Them Off.”

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Mistake 5: Claiming Social Security too soon

Waiting to claim Social Security benefits is one of the best investments around. If your full retirement age is somewhere between 66 and 67, your benefit check could grow by 32 percent if you wait until age 70 to collect, Social Security spokesman Michael Webb said in an email. If your full retirement age is 67, waiting until 70 yields a maximum possible increase of 24 percent.

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On the other hand, about half of retirees take Social Security at the earliest possible moment — when they’re 62. U.S. News & World Report says:

Social Security benefits are reduced for workers who sign up at age 62, and the amount of the reduction has recently increased from 20 percent for people born in 1937 or earlier to 25 percent for baby boomers born between 1943 and 1954. … The reduction in benefits for people claiming at age 62 will further increase to 30 percent for everyone born in 1960 or later under current law.

This Social Security Administration table shows the reduction for taking early Social Security benefits depending on the year you were born.

Take action:

  • Go to’s My Account to see your estimated benefits. If you’ve paid into the Social Security system, you can create an account and pull up a statement showing what you’ll earn by claiming benefits at various ages.
  • Keep your current job if you can and delay retirement. Or get a part-time job that helps you hang on longer before claiming benefits.
  • Hire a Certified Financial Planner to review your retirement plan, income and expenses with you.

For more tips on boosting your benefits, head to our Social Security Solutions Center Page, and read “13 Ways to Get More Social Security.”

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Mistake 6: Forgetting about the tax man

The IRS won’t disappear from your life when you retire.

For instance, traditional tax-deferred retirement plans like 401(k)s and IRAs require you to withdraw a minimum amount each year beginning in the year you turn 70½. If you don’t, you could be hit with a big penalty.

You can read more about required distributions at this page of the IRS website.

​Good planning, especially before retirement, can help manage the tax bite. One strategy, Money Talks News founder Stacy Johnson says, is to roll a portion of retirement savings into a Roth retirement plan, which has no minimum distribution requirements. Roth plans require taxes to be paid before money goes in. You withdraw the funds tax-free later. The strategies you use will depend on your income now and what you expect it to be after retirement.

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Take action: Make a plan — or get expert help making one — that takes taxable retirement income into account.

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Mistake 7: Ignoring estate planning

Get your affairs in order before you’re ill or old so you’ll have control over where your money and possessions go. It’s a kindness to your heirs, too, because they won’t be saddled with the work.

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Take action:

  • Make or update your will and, if appropriate, make a revocable living trust.
  • Sign a durable power of attorney naming someone you trust to make your legal and financial decisions if you cannot.
  • Assign health care power of attorney to someone to make your medical decisions if you’re unable.

Mistake 8: Investing too conservatively

As retirement grows nearer, it seems prudent to invest more conservatively. But you could live another 20 or 30 years. Savings held too conservatively shrink because of inflation. A portion of your funds needs to grow.

“Never taking risk means taking a different risk,” Stacy Johnson says.

Take action: Learn about investing so you can be confident in taking measured risks to earn gains, even as you grow older. It’s not difficult to put up the basic rules for sane investing — how spread risk among diverse holdings, how to use index funds as a low-maintenance investment strategy, how avoid paying excessive fees and how to adjust your exposure to risk so that it decreases as you get closer to withdrawing the money.

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Here are eight things to do in the five years before retirement:

Evaluate Social Security claiming scenarios. While you are eligible to collect Social Security starting at age 62, you'll receive 7 to 8 percent more for every year you wait until age 70. If you're divorced or widowed, you may be able to claim on the record of an ex-spouse, and couples may find it advantageous to stagger their claims. "It's a good thing to do in advance," Updegrave says. "Don't ask the Social Security office. It's not their job, and they're not financial planners."

Evaluate your savings. You should plan to take no more than 4 percent a year from your retirement savings. That means that $500,000 in savings will equal about $20,000 in annual income, or roughly $1,667 a month. "A lot of people look at the money amount they have saved, and it's big," Adam says. "When you translate that into an annual flow, it's not as big as you think."

Track your expenses. People often don't know how much they spend on daily life, and they assume that they will live on less in retirement. But you may actually spend more early in retirement, especially if you plan to travel. Write down every cent you spend in a month and evaluate the results. "Spend some time with the data," Friedman says. "Gain a better understanding." If you find places you can save now and increase your retirement savings, that's even better. If you want to look at your expenses over a longer term, put your financial information into Quicken, YNAB, Mint or a similar program to track your spending.

Get serious about relocation plans. If you plan to move when you retire, find out how much you'll actually net for your house and how much it will cost to move to your new location. Spend as much time as you can in your new city. "Do a little bit of advance research before you just assume that you're going to move somewhere and life's going to be great there," Updegrave says.

Understand tax ramifications. Any money drawn out of tax-advantaged retirement accounts such as 401(k) or IRAs will be taxed at your regular rate. Once you've quit working and paid off your mortgage you might have fewer deductions. For people who are not earning much in the years before retirement, converting some of those accounts to Roth IRAs, which are not taxed on withdrawal, could be smart.

Test out your plans. If you're envisioning a retirement filled with art lessons, quilting, golf, volunteer work or choral singing, try those activities now to see how much you like them. "The key is to do this stuff in advance and not wait until you retire," Updegrave says.

Set yourself up for part-time work. Many people chose to continue working after they retire from a full-time job, either part time or as a consultant. Start making connections and building those businesses now. You can add any extra money you earn to your retirement savings.

Borrow for expensive home repairs while working. If your house needs a new roof or you want to modify your home to age in place, it's easier to refinance or get a home equity line of credit while you have a full-time job.

Copyright 2016 U.S. News & World Report

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