Preparing for retirement is something most adults will do their entire working lives, but ensuring a successful post-retirement life has many different phases.

The last five years before you retire are particularly important, as you’ll start putting your lifelong plans into motion.

Why the Last Five Years Before You Retire Are Critical 

No matter the age you plan to retire, the five years immediately preceding that date are of the utmost importance. This is for a few reasons, including:

• You’ll have a better idea of your future cost of living. Estimating your annual budget 40 years before retirement is much different than in the years immediately before you retire, due to inflation and the rising cost of living. Right before you retire, you’ll have a better idea of what amount of money you’ll need to achieve the retirement you want, including an ideal monthly income.
• You can start planning withdrawals from your retirement accounts. Depending on the type of retirement account, you might be subject to different restrictions or benefits based on the age you make withdrawals. For instance, you can get more from Social Security if you start taking payments at a later age. Knowing exactly what year you plan to retire means you can start making a plan for your future income that takes advantage of these rules.
• You know if you have any catching up to do to meet your goals. In the last five years before you retire, you might consider adjusting your investment portfolio or trying to bring in some extra income. Right before you retire, you’ll have a better idea of how your savings match up with your goals and exactly what you’ll need to meet them.

Steps to Take Five Years Before Retirement

In the five years before you retire, experts recommend shoring up your plans, including solidifying your income streams, making a final budget, and planning for health care.

Build Your Retirement Budget

Budgeting is important in the leadup to retirement. “One of the most important things to do prior to retirement is to estimate your planned expenses,” Andrew Herron, founding partner of Stone Pine Financial Partners, says.

In the five years before retirement, you’ll have the best idea of your future needs. Start to consider anything that might change when you retire. Do you plan to move? Will your commuting costs be the same?

“These numbers might look fairly similar to your current expenses, however, there are likely a number of things that will change. Oftentimes retirees’ commuting costs go down, perhaps a mortgage has been paid off recently and budgets for personal items like new clothing become less important,” Herron says. “At the same time, other expenses such as travel and health care expenses could increase.”

He adds that this is a critical first step, as it will guide how you’ll allocate your different income streams – including investment portfolio withdrawals, Social Security, or pension payments.

Plan Your Income Streams

Once you have an idea of your retirement expenses, ensure you have the income to cover them. Consider all the different income streams you might have available and how much you’ll get from each.

Additionally, some accounts have restrictions on the withdrawals you can make based on your retirement age, so you’ll need to do the math for each account you plan to tap.

“The age at which you retire will have an impact on where you make your withdrawals first,” Catherine Irby Arnold, Washington state market leader at U.S. Bank Private Wealth Management, says.

For example, if you’re over 59½, you can take withdrawals from your IRA without penalty. “However, that doesn’t mean you should,” she says.

“Typically we advise people to use their non-retirement accounts first, then take your retirement dollars that are subject to tax second. Draw on tax-free accounts like your Roth last,” she adds.

If you wait until age 70 to claim Social Security benefits, your payments will be significantly higher and can make a big difference in your monthly income, she says.

The last few years before you retire are the best time to make a plan because you’ll know your exact retirement age and current inflation rates.

“When developing your withdrawal strategy, it is important to take into account taxes, inflation, and volatility of the market,” Michael Hammelburger, CEO and financial advisor for The Bottom Line Group, says.

Adjust Investments

Risk tolerance for investments will change a lot in the years leading up to your retirement, and the last five years are critical to ensuring you have the funds you expect.

“As you get closer to retirement, you should probably give some thought to modifying your investment strategy to lower your risk exposure and boost your level of financial security,” Hammelburger says.

This may include rebalancing your investment portfolio toward more conservative assets such as bonds or other fixed-income securities, he says, adding that you should discuss your investment plan with a financial professional.

Solidify Your Health Care Plan

Health care can get more expensive as you get older, but you’ll have access to Medicare once you reach age 65.

Make a plan for how you plan to pay medical costs in retirement before you lose access to your employer health plan.

“Start with your current expenses then think about certain items and categories that may be more or less in retirement,” Herron says.

Also consider if Medicare will provide the coverage you need or if you should purchase supplemental coverage.

“If you are retiring at 65 or later, you will likely be going onto Medicare … It makes sense to use a Medicare insurance broker who can go through the various plans and see what makes the most sense for your situation from both a medical standpoint as well as from a cost standpoint,” Herron says. “For those that are retiring prior to 65, you will have a little more homework to do.”

What Can You Do if You Aren’t on Track for Your Retirement Date? 

If you find that you’re not on track for retirement, “it’s not a time to despair, but rather you need to focus on the few variables that will make an actionable difference,” Herron says.

Once you’ve gone through the steps above, you’ll probably have a good idea if your income streams will be enough to cover your expenses. In some cases, you might not be on track.

Still, that doesn’t mean retiring in five years isn’t an option. You’ll just need to consider whether you can make up the difference with additional income in the next few years or if you need to adjust your timing. The good news is planning in advance of your retirement age allows you to research all your options for catching up.

“You can work longer. You can work part time. You can take one of the many ‘shared economy’ positions out there today,” Arnold says.

“Additionally, you can look at spending less. Are you willing to move to another part of the country to leave more cheaply? Would you be willing to move out of the U.S.? Sometimes living internationally is much cheaper. Your retirement savings might last a lot longer in another country,” she adds

No matter what makes the most sense for you, knowledge is power in retirement planning.