Episode #17-What to Do 3-5 Years Before Retirement

Wealth Decisions Podcast Transcript for Episode #17-What to Do 3-5 Years Before Retirement

Listen to this episode on Apple Podcasts or Spotify

Welcome to The Wealth Decisions Podcast, where each week I take 15 minutes or less to discuss crucial wealth decisions and mindset hacks to help you live a richer life.

I'm your host, Brian Muller, and I've been in the financial services industry for over 25 years, and I'm also a certified life and health coach.

And I have a passion for helping people make better decisions around their money and their life.

So for the sake of time, let's dive right into it.

In today's episode, I'm going to be talking about what to do three to five years before retirement.

I think it was Prudential that coined this as the retirement red zone.

This episode is for anyone that is looking to retire in the next three to five years, but it's also really valuable information to prepare you for the things you'll have to think about while you're saving and investing toward that period of time.

As football fans know, the red zone is the area of the field where the offense is within 20 yards of scoring a touchdown.

And in retirement, that red zone is the concept that means the period of time where retirement is really close in the near future.

The period is considered red due to the heightened financial and emotional risks that can arise at this time.

Factors such as market volatility, unexpected expenses, and maybe changing life circumstances can have a profound impact on one's readiness to retire in three to five years.

You know, during this period of time, the decisions and actions taken can significantly impact the success and the quality of your retirement.

So in this episode, we're going to talk about some of the obstacles, some of the common mistakes, and six steps to make sure that you're ready to retire in three to five years.

You know, some of the obstacles in our way in planning for retiring in three to five years is that, you know, traditional pension plans are almost non-existent.

So you're not going to have that extra guaranteed source of income.

It's been talked about for years that the future of Social Security is uncertain.

Inflation obviously is very, very high right now.

So that needs to be factored in to your financial plan.

You know, you've spent a lifetime building up your retirement savings.

And now that you're about to retire, you need a solid investment strategy and financial plan that ensures you can retire and stay comfortably retired.

Some of the common mistakes that people make in this period of time, three to five years away from retirement, number one, they underestimate their retirement expenses.

Many people fail to really accurately calculate how much money they're going to need and especially factoring in health care costs.

The second most common mistake is thinking that you can withdraw a higher percentage from your retirement portfolio than 4 or 5%.

Some retirees mistakenly assume they can withdraw 10% of their portfolio annually based upon average stock market returns.

But in reality, a safer withdrawal rate is typically 4 to 5% or less to account for market volatility and to make sure your money lasts longer than you do.

The third most common mistake is not looking at your taxes.

Many forget to consider the tax implications of their retirement withdrawals and potentially leaving them with less money than they thought after taxes.

The fourth common mistake is taking on too much investment risk.

Some investors become overly aggressive in the attempt to maximize growth in those last three to five years, but that can be dangerous so close to retirement.

You can't afford to make mistakes and you don't want to have to postpone your retirement because you had a number in mind that you wanted your portfolio to get to and you were taking on too much risk.

The fifth common mistake I see is being too conservative.

Some become overly fearful and invest their money too conservatively or they put a bunch in cash because they're worried about the market and they pull out of the market at inopportune times.

And the sixth common mistake is failing to adjust your investment strategy.

A lot of folks will maintain their pre-retirement investment approach.

They'll have the same mix of investments they had when they were accumulating their wealth.

But investing in retirement is much different.

You're having to take an income from your investment portfolio to live the retirement life that you want, and you need to have a more balanced approach to be able to take the desired income you need to live a comfortable retirement.

And the seventh common mistake is not planning for longevity.

We don't know our end date.

We have an idea based upon maybe our genetics, but there's a huge increase in life expectancy, and that's going to continue to improve.

And I think a lot of folks underestimate how long their savings needs to last, and that could potentially lead to a shortage of funds later in retirement.

So those are just some of the common mistakes that people might make when planning to retire in three to five years.

So let's just talk a little bit about six steps to prepare for retirement.

If you're three to five years away from retirement, step one is to make sure that you have the right investment mix.

Don't get too greedy.

Forget about the number in your head that you want to reach by the time you retire because you can't afford to make a mistake and be too aggressive with your investments at this crucial period of time.

No one wants to have to postpone their retirement.

It's really crucial to review and optimize your investment portfolio to align with your risk tolerance and this retirement timeline that you have.

And that's going to involve rebalancing your portfolio, reducing exposure to volatile type investments, and maybe even exploring some strategies to protect your retirement assets from market downturns.

Obviously, market downturns can have a significant effect on your portfolio, especially if it happens within two to three years of your retiring.

And this has happened many times before, but it's just important you still want to grow your assets, but you also want to manage risk and continue to figure out a way to generate a lifetime of income for your nest egg.

Step two is to evaluate your financial situation.

Take a deep dive into your savings and your investments and your budget, any retirement accounts that you have, and make sure you're on track and consider consulting a financial advisor to help you fine tune your investment portfolio and create a comprehensive financial plan.

Being in this retirement red zone means that you have some opportunities to maximize retirement contributions, especially through the use of some of these catch up provisions that allow you to contribute more to your retirement accounts.

And what I talked about last week in the Wealth Decisions Plan, the Backdoor Roth Strategy, Roth Conversion Strategies and the Mega Roth IRA Strategy.

You're going to want to make sure that you also have minimal debt.

If you have credit card debt, get rid of some of that credit card debt.

Use a card for the travel features, but only if you can pay that amount off when you're using those cards for travel.

You're also going to want to look at a plan to pay off your mortgage.

I don't think it's necessary to have your mortgage paid off by the time you retire, but it does give you some peace of mind knowing that you have one of your most important assets paid off and you don't have that expense anymore during retirement.

Step three is to determine when you're going to take Social Security, whether you're going to take it early at age 62 or full retirement age or postpone it till age 70.

A financial advisor can sit down with you and create a Social Security Optimization Plan and show you what strategy would be most beneficial for your financial plan.

Step four is to evaluate your health care costs.

As you approach retirement, it's essential to review your health insurance.

Will the company you work for allow you to continue their health care if you retire early?

Understand the options available to you.

If you're retiring before 65, before Medicare kicks in, you're going to have some additional health care costs that you're going to have to pay.

And those can be pretty significant.

Private health insurance is pretty expensive, but you can find good plans out there today by consulting someone that specializes in looking at health care options before Medicare.

Step five is to establish a true budget.

As you get closer and closer to retirement, it's a really good time to reassess your lifestyle and make maybe any necessary adjustments.

Have a financial advisor run a financial plan that shows different spending levels and how it would impact your retirement and your legacy.

And that can really help you fine tune your budget to ensure that your money lasts through a long retirement.

You know, it may sound like simplistic advice, but budgeting can either push a retirement plan to success or drive it to failure.

So you need to look at your needs, your wants, your wishes, factoring in the travel expenses that you're going to have for a period of time when you first retire, factoring in your health care costs, factoring in some of your legacy goals and charitable giving and things that you might want to do, like helping the grandkids or kids with college.

All those things need to be factored in to your financial plan using a true budget.

And then you can run what if scenarios to show you kind of what your wiggle room is within your budget to make sure your plan continues to work long term.

And step number six is to determine your withdrawal strategy.

Where are you going to withdraw money from?

And what is the percentage of your portfolio you're going to need to take to meet your desired lifestyle?

You know, what accounts are you going to withdraw money from first?

That all depends on when you retire, how early you retire.

But there are some typical rules to follow.

It's not right for everyone, but a lot of people suggest you take from your tax-deferred investments first, your taxable investments second, and your Roth IRAs last.

But determining the right accounts to take from first is where a financial advisor can help.

For instance, if you retire after age 65 and maybe you start taking Social Security at that age, you're going to have Social Security income that's going to be partially taxed potentially.

If you have a pension plan on top of that, that is all going to be taxable.

So a financial advisor will look at the different income sources you have and develop a withdrawal strategy on what accounts to take from to make sure that you maybe stay in the same tax bracket.

So you'd potentially take some money from your IRAs, some from a taxable account, and maybe a small amount from your Roth IRAs to supplement your income for a period of time.

But developing a withdrawal strategy is crucial to make sure that your money lasts and you create a tax-efficient income throughout your retirement.

And that's an ongoing process.

So having a financial advisor help you with all those ongoing needs is going to be crucial to make sure that you can retire when you want to retire and stay comfortably retired.

Everyone has different retirement goals.

Some individuals, they might want to retire early.

Some individuals might semi-retire.

Some individuals might retire at 65.

Some individuals might want to achieve financial freedom even earlier than age 55 or age 50.

You might want to travel the world or leave a legacy or give back or pursue hobbies or help the grandkids or kids with college.

So if you're going to retire within the next three to five years, it's essential to avoid some of the common mistakes and to have a plan to ensure that you can retire on your terms and stay comfortably retired so that you can live that richer life for you and your family.

So that's it for today's episode, episode number 17, What to Do Three to Five Years Before Retirement.

Listen to this episode on Apple Podcasts or Spotify


-Brian D. Muller, AAMS® Founder, Wealth Advisor

Momentous Wealth Advisors in a fee-only fiduciary advisory firm

Disclaimer: This material is for informational purposes only and should not be construed as investment advice. Past performance is not indicative of future results. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.

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