One of my passions is guiding clients into a comfortable and secure retirement. I’ve seen firsthand how crucial the five years leading up to retirement (aka the “red zone”) can be in shaping a person’s retirement future.

Planning for retirement may seem overwhelming, especially if you aim to retire in the next five years.

But there’s good news: it’s not too late to take action!

Whether you’re working with a financial advisor or navigating your retirement path independently, taking that first step is crucial. To help, I’ve put together this guide to help you learn how to navigate the crucial five-year period without jeopardizing your retirement goal.

The Two R’s of Retirement

As you approach retirement age, your “long term” is no longer synonymous with Wall Street’s “long term.” At this point, it becomes even more important to remember the two R’s of retirement: Review and Risk.

Review

In the years leading up to retirement, it’s crucial that you review everything that could impact your income or budget. This includes reviewing your net worth, comparing your assets to your debts, understanding your income needs pre- and post-retirement, and considering how your health may affect your future income.

This might seem obvious to some. But many people, busy with life, often overlook this fundamental step. It can help to pause and review your current financial situation with a financial advisor. This simple step can help provide the clarity you need to move forward.

Risk

As you review your long-term financial situation, assessing the risk management within your retirement savings is essential.

Any investment mistakes made during the Retirement Red Zone can significantly impact your retirement security, income during retirement, and ability to retire on time. Assessing and mitigating your risk levels can help you avoid the pitfalls I’ve seen in 1999, 2007, and 2022, where a lack of risk aversion caused many 401(k)s to drop in value. This led many people to delay their retirement as they waited for their retirement investment accounts to recover.

Estimating Your Retirement Needs

How much money do you need to retire? The answer to this question is tricky because it’s different for everybody. I’ve previously provided a more in-depth overview of how to calculate your retirement needs. But here’s an additional, helpful piece of advice:

Don’t assume you can predict everything you need. Build a buffer into your retirement plan. Treat your retirement budget like a home remodel project. Expect it to take longer and potentially cost more than initially planned. Anticipate that your retirement expenses could fluctuate by as much as 20% in any given direction. 

To maintain a tight budget after you retire, it helps to eliminate potential variables that could spike your expenses in retirement. For instance, if you have an adjustable-rate mortgage that may reset after retirement, consider refinancing to a fixed rate before retiring.

Diversifying Retirement Income Streams

In retirement, your income will likely come from various sources, such as 401(k) plans, 403(b) plans, SIMPLE IRA, Roth 401(k), Social Security benefits, pensions, brokerage accounts, and personal savings. Market cycles can influence these income sources’ performance, making regular reviews essential. Spreading your investments across several of these options can help you reduce the risk of watching your entire retirement savings drop at once.

Simplify your strategy

As a rule of thumb, seek income sources backed by real assets, like real estate or quality companies that produce a product or service you understand and that also pay a dividend. Keeping it simple is critical. The KISS (Keep It Simple, Stupid!) method has worked for hundreds of years and will continue to serve you well in retirement.

Kick up the income!

Prepare for future withdrawals by repositioning your investable assets into higher income-producing investments at least a year before retirement. This allows income to accumulate before you start withdrawals, helping you manage risk and providing an emergency fund for unexpected expenses that can often crop up in the first year of retirement.

Dealing with Retirement Shortfalls

If you aren’t on track for your retirement goal, it’s crucial not to panic. You can often improve the situation by reducing expenses and increasing your savings rate. Reviewing your retirement savings and possibly adjusting to a more growth-focused approach can also help bridge the gap.

If you are still working, consider maximizing your retirement benefit contribution limits, taking advantage of employer contributions, and utilizing the tax-deferred or tax-free growth offered by retirement accounts like 401(k) plans and Roth 401(k)s.

Utilizing Tax Advantages

Strategic use of tax-advantaged retirement accounts is an integral part of retirement planning. In 401(k) plans, contributions are made pre-tax. This results in tax-deferred growth over time. Similarly, a Roth 401(k) offers tax-free growth and tax-free withdrawals in retirement, providing a significant source of retirement income.

If you’re self-employed or own a small business, versions of these retirement plans are available to you. So, you can still use tax-advantaged accounts as you prepare for retirement.

A financial advisor can help you navigate the complexities of these tax rules and ensure you are optimizing your retirement plan to help build your nest egg.

Setting Your Retirement Age

The age you retire can drastically impact your Social Security benefits. Your full retirement age can vary depending on the year you were born. For most people, it’s around 66-67 years of age. While you can begin claiming Social Security at 62, waiting for full retirement age can help you receive bigger Social Security checks.