Why the 5 Years Before Retirement Are So Important

By Chris Duderstadt

May 18, 2023

Why the 5 Years Before Retirement Are So Important

Key Points – Why the 5 Years Before Retirement Are So Important

  • Understanding How Much You’re Saving and Where You’re Saving to
  • Understanding How Much You’re Spending and What You’re Spending
  • Planning for Retirement Isn’t Solely About Finances
  • Working with a CFP® Professional to Build a Forward-Looking Financial Plan
  • 12 Minutes to Read | 23 Minutes to Listen

Looking at What You Need to Consider 5 Years Before Retirement

Are you in your 50s and constantly have retirement on your mind? Or maybe you’re in your 30s or 40s and feel the same way. Either way, you need to build a financial plan to prepare for retirement. Our Retirement Plan Checklist covers a wide variety of important things at different stages of the retirement planning process that you need to keep in mind so that nothing catches you by surprise when you’re knocking on the door of retirement.

When you’re in your 50s or maybe early 60s, many of you will get to a point where you’re about five years from retirement. If that’s you, do you feel prepared for retirement? It’s a crucial stage of the retirement planning process. Dean Barber and Bud Kasper are going to help us with explaining why the five years before retirement are so important on America’s Wealth Management Show.

Why Do Dean and Bud Think the 5 Years Before Retirement Are So Important?

Earlier this week, Dean and Bud decided they were going to make their own lists of the top three things to do five years before retirement. Bud actually went above and beyond and listed five reasons, so let’s get to his list.

Bud’s Top Things to Do 5 Years Before Retirement

  1. Understanding your debt before you retire.
  2. Have you saved enough and where have you saved?
  3. What are you anticipating your tax bracket will be in retirement?
  4. Have you reviewed your health care costs?
  5. Are you working with a true professional?

Notice that Bud ended up listing questions for four of his top five things to do five years before retirement. Those are just a few of many questions that you need to ask yourself during the retirement planning process. You’ll find more of them (30 specifically) that are equally as important in our Retirement Plan Checklist. Make sure to download your copy below to see those questions and what all you need to consider when planning for retirement.

5 Years Before Retirement

Download: Retirement Plan Checklist

Now, let’s see how Dean’s list compares to Bud’s. Dean went a little bit bigger picture in his list of top things to do five years before retirement. But before he gets to his list, he wants people to be aware of something that will likely occur once they retire. There’s a honeymoon phase of retirement when people are really excited about achieving financial independence. But when that honeymoon phase starts fading, if you haven’t had a conversation with your significant other and don’t really have an idea of what you’re retiring to, retirement may not be everything you want it to be. That leads right into the first thing on Dean’s list.

Dean’s Top Things to Do 5 Years Before Retirement

  1. Dream with significant other about what you want retirement to look like. It’s important to spend time talking about that with your spouse so that you understand each other because there could be different things that each of you want. A lot of people will focus on the financial side of retirement, but the non-financial side of it is just as important. A good CFP® Professional will help you with the non-financial side of retirement.
  2. Get a real plan. Your 401(k) isn’t your retirement plan; neither is your IRA. The excel spreadsheet that some people use to calculate what they have with Social Security isn’t a real plan either. A real plan involves our Dean’s third thing on his list of things to do five years before retirement, which is…
  3. Hiring a Modern Wealth Management CFP® Professional. If you hire a Modern Wealth Management CFP® Professional, you’ll get a real plan that covers financial planning at a high level.

Dreaming with your significant other is an important first step, but your retirement won’t have the clarity and confidence that’s crucial to a successful retirement without Dean’s second and third points. A Modern Wealth Management CFP® Professional will put a real plan together using our Guided Retirement System. That plan will incorporate what you and your spouse want retirement to look like.

What You Can Learn from Working with a CFP® Professional

We encourage people to start planning for retirement 10-15 years before they want to retire, but that five-year mark is when you really need to buckle down and get serious about it. If you don’t do the necessary planning at that stage, you’re taking the risk of possibly having to go back to work at some point.

There’s a Big Difference between an Investment Portfolio and a Financial Plan

There have been so many times where people have met Dean or Bud for the first time and immediately want to them about their investments. That signals right away to Dean and Bud that that person doesn’t have a financial plan because a financial plan is so much more than your investments.

“It tells me that they haven’t had a discussion about the granular things that make a significant difference in retirement planning. What’s your tax bracket? How much debt do you have? Have you saved enough? Where have you saved to? Do you have your savings in taxable, tax-deferred, or tax-free accounts? And is there anything our team can do about that?” – Bud Kasper

Bud and one of our CPAs had a great meeting with a client couple this week to look at Roth conversions. They aren’t simple to do because there are different tax elements associated with them. They can impact your Medicare and Social Security. Those were things that the couple hadn’t realized. They were another example of a couple that had previously been focused on investments as well, so it further opened their eyes about other important things to consider before retirement.

“A good CFP® Professional won’t have a good discussion with you about investments until they’ve completed your plan. Until your plan is completed, you don’t know what you need your investments to do to give you the ability to do all the things you want to do in retirement.” – Dean Barber

Creating a Spending Plan for Retirement

As we alluded to at the beginning of the article, our Retirement Plan Checklist includes age-based and date-based timelines to help prepare people for retirement. We’re focusing on five years before retirement because of how important it is. That’s a time where it’s important to start thinking about a spending plan for retirement. Some people call it a budget instead, but that tends to have some negative connotations to it. Dean calls it a spending plan because you really need to think what you need and want to spend money on.

“You’ve got things that are necessities and then you have the things that can be fun to spend money on. I see so many times where that early conversation about what you want your future to look like and what it will cost and they won’t know what they’re spending a year or two out from retirement. How can you put together a plan if you don’t know what you’re spending?” – Dean Barber

Back to Bud’s No. 1 Point of Understanding Your Debt

That’s why Bud had understanding your debt at the top of his list of things to do five years before retirement. That way Bud can put a plan together to mitigate that debt and at least get it to a level where it’s controllable after you retire. Once you retire, your debt is going to need to be paid out of whatever you’ve been saving to or where you’re accessing money in retirement.

How Much Are You Spending Each Month?

The whole idea of a budget for most people who are in their 50s or early 60s can almost be a foreign concept because many of them will probably say that they haven’t budgeted for years or at least since their kids left the house. So, they just have extra money to do what they want to do. That’s great. That’s why we refer to it as a spending plan. But Dean has seen some people that hated their job so much that they’ve lied to themselves about what they can live on.

“There was a client couple that I met with that said they were just going to spend $5,000 a month. I asked them how they came up with that number. I looked at their tax return and they were netting $12,000 a month after taxes that they were spending. They had no money in their savings account in the bank and no money in any after-tax account—brokerage account, mutual funds, anything like that. The only money they had was in their 401(k). But they thought they could live on $5,000 a month when they were spending $12,000 net a month. They couldn’t believe that they were spending that much.” – Dean Barber

Factoring in Inflation into Your Spending Plan

Don’t wait to create a spending plan one or two years before retirement. It’s not just about how much you’re spending; it’s what you’re spending. The different things you’re spending money on will inflate at different rates. So, you need to start taking inflation into consideration at least five years before retirement.

We use about a 4% inflation rate when building a financial plan and can stress test for higher inflation. Let’s say that you want to spend $7,000 a month right after you retire. Well, with that 4% inflation rate, the $7,000 you’re spending per month needs to be 4% higher the next year. You need to track that to see if that’s the case. Get intentional about your spending.

We want to make sure and emphasize that not all things inflate the same. There are things like health care expenses and college funds that are going to inflate at higher rates. One of Bud’s clients has a better understanding of that after co-signing with her daughter on a student loan. The amount of repayment on it was substantial.

“My client was putting herself in a position where retirement wasn’t going to be in her future. It was just a sad commentary, but I know why she did it. She loves her daughter and knew that her daughter couldn’t bare the additional expense. She essentially confined herself from having a retirement she deserved from all the years that she worked. These are individual cases, but they happen. You need to consult with a CFP® Professional to get back on the right track and make lemonade out of lemons.” – Bud Kasper

Debt Is Not Your Friend, But Not All Debt Is Bad

So, that’s a good example of why Bud had understanding your debt before you retire as No. 1 on his list. However, there are examples of good debt to take into retirement. Having 0% interest for 60 months on a vehicle is OK as long as you have the money that you paid for the vehicle in the first place. Low interest mortgages are OK as well.

Health Care and Taxes Will Likely Be Your Two Biggest Expenses in Retirement

We want to transition from talking about debt to a couple of your biggest expenses in retirement. Your two biggest expenses in retirement will likely be health care costs and taxes. If you plan to retire before 65, you need to look at health insurance options since you’ll no longer have it through your employer and won’t be eligible for Medicare. Make sure you have a realistic understanding of what that will cost.

You’ll also need to understand what your Medicare premiums are going to be in retirement and what any supplemental health care—deductibles, out-of-pocket maximums, etc.—is going to cost. Like we mentioned earlier, that all needs to be built within your plan in a way so that you’re applying a different inflation rate to health care expenses than you would to normal expenses. The cost of health care is rising faster than normal living expenses.

Another important part of retirement planning that’s related to health care is having a Health Savings Account. It’s critical to understand how to use an HSA effectively and how it can pair with Roth accounts to create a low-tax situation.

Your Biggest Asset Going into Retirement

Along with going over one of your biggest expenses, we want you to fully understand what one of your biggest assets—your 401(k)—when you’re five years from retirement. However, a lot of people don’t pay attention to it. Some people might look at 401(k) statements once a year; others might look at them each quarter. The bottom line is that you need to understand what’s in your 401(k). And if it’s a target date fund, you need to understand what’s in it.

“Trust me on this. The custodian or plan administrators of your 401(k) plan don’t care who you are or what your money is in. They don’t know you. You need to educate yourself on what’s in your 401(k). If you’re not going to take the time to do it, you need to hire a professional to do it. You really need to start paying attention to it five years before retirement. What happens in those five years with your investments can make or break your ability to successfully retire.” – Dean Barber

You need to make sure that you have the flexibility to change your portfolio in difficult times like with what we’ve experienced over the past 12-15 months. There are some employers that have someone at the company to give employees advice, but it’s your responsibility to understand what’s in the 401(k) and the risks of the investments. After all, it’s your money.

Things to Consider 2-3 Years Before Retirement

We’ve covered several of the major things to consider five years before retirement. Now, let’s quickly cover a few things to consider two to three years before retirement. That’s when you take the spending plan that you’ve been working on and figure out where the money is going to come from now that you have an idea of what those things will cost. And in order what order should you spend on those things?

Should you take Social Security as soon as you retire? Or is there another Social Security claiming strategy that will allow you and your spouse to maximize the Social Security that you paid into your entire working lives?

What’s the tax liability going to be from distributions coming out of your IRA? Should you start considering Roth conversions? When should you spend from your taxable, tax-deferred, or tax-free accounts? What combination of those accounts should you spend from?

If you have a pension, do you take a single-life pension or take a joint pension with 100% survivor. The list goes on and on for things to consider two to three years before retirement. You need to start thinking about how to fund your spending plan.

“This is where the CPA works with the CFP® Professional to create the spending plan for you so that you pay as little tax as possible over your lifetime.” – Dean Barber

Bud Considers Himself to be a “Rothaholic”

Paying as little tax as possible over your lifetime is what tax planning is all about. Roth or traditional is a question that’s asked throughout your working years. Anyone who knows Bud knows how much he loves the benefits of the Roth.

“That’s why I’m a Rothaholic. If we can eliminate Uncle Sam, we’re doing a wonderful thing for people. Younger people have this Roth option earlier in their career have a great opportunity to get money out tax-free when they retire. That’s a planning point that needs to be emphasized.” – Bud Kasper

Where Are You Going to Live?

Two to three years from retirement is also a time to be asking yourself where you’re going to live in retirement. Are you going to live in the house where you’re living today for the rest of your life or do you plan on downsizing at some point? Do you think you’ll move somewhere where all your maintenance and services are all provided so that you can lock the door in the wintertime and go somewhere warm.

“If you’re going to stay in the same house, when’s the last time the roof was repaired? You might need to budget for that in the next 10-12 years. When was the last time your HVAC system was repaired? How old are the appliances in your house? When you’re working and these extraordinary expenses come up, you can handle them because you have the extra cash flow to do it. You need to take those things into consideration so they can get built into your plan as you head into retirement. Having those discussions two to three years out from retirement is critical?” – Dean Barber

There’s A Lot to Do in the Five Years Leading Up to Retirement

Hopefully you’ve realized that there are quite a few questions that have been asked throughout this article that you need to be asking yourself at least five years before retirement. And there are more important questions to ask yourself in our Retirement Plan Checklist.

Working with a Team of Professional That’s Working for You

You’ll notice that one of the things that was in common on Dean and Bud’s lists for things to do five years before retirement was to work with a CFP® Professional. We have several CFP® Professionals at Modern Wealth Management who are ready to walk you through those questions and help you build a plan that gets you to and through retirement. What’s more is that our CFP® Professionals work side by side with our in-house CPAs, estate specialists, insurance specialists, and investment management team.

As you’re asking yourself these questions, it’s critical to know that they’re all important to building your financial plan. This isn’t guesswork, so you need to be working with a team of professionals that is committed to giving you confidence, freedom, and time in retirement. If you have questions about what that might look like for you, let us know. You can schedule a 20-minute “ask anything” session or complimentary consultation with one of our CFP® Professionals by clicking here.

Building a Plan That’s Unique to You

Your financial plan takes you into the future to paint the picture of what you want your retirement to look like. We’re giving you the opportunity to see what that looks like today by giving you access to our industry-leading financial planning tool. You can use it at no cost or obligation to build a plan that’s unique to you by clicking the “Start Planning” button below.

5 Years Before Retirement


If you have any questions as you’re using our financial planning tool, remember to not hesitate in reaching out to us. We can meet with you in person, by phone, or virtually to begin planning your retirement.

Why the 5 Years Before Retirement Are So Important | Watch Guide

00:00 – Introduction
00:42 – Dean & Bud Rank the Most Important Items 5 Years from Retiring
06:22 – Time to Build a BUDGET
11:48 – Two Biggest Expenses in Retirement
13:19 – Pay Attention to Your 401(k) Allocation
15:57 – 2-3 Years from Retiring
17:54 – Non-Financial Plans
19:12 – Its Important that Both Spouses are Involved
20:47 – What We Learned in Today’s Show

Resources Mentioned in This Episode

Other America’s Wealth Management Show Episodes


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The views expressed represent the opinion of Modern Wealth Management, LLC, an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management, LLC does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.