5 Things to Do Now to Retire in 3 to 5 Years

Checklist to Retire in 3 to 5 Years

1. Set a retirement date but also formulate a backup plan
2. Get big-ticket expenditures out of the way
3. Take advantage of catch-up contributions
4. Build out safer assets in taxable accounts
5. Get some professional financial/tax advice

Valentina Djeljosevic: Hi, I’m Valentina Djeljosevic. Welcome to the third episode in a new miniseries for Morningstar called Your Retirement Countdown. In this four-part series, we’re sitting down with Christine Benz, Morningstar’s director of personal finance and retirement planning. We’re talking about the key things you need to do to retire comfortably based on how far away your retirement start date is, whether it’s 25 years away, 10 years away, or just one year away. In today’s episode, we’ll focus on what to do if your retirement is about five years away. And don’t worry about taking notes because we’ll give you a checklist at the end. Hi, Christine. Nice to see you.

Christine Benz: Hi, Valentina. Great to see you.

Djeljosevic: All right. We’re going to start with a retirement date. So at this three- to five-year timeline, why is it important to set that date, but also to be flexible and have a backup plan?

Benz: Yeah, it’s a wonderful time to set a specific date. You might even set one of these countdown clocks that count you down to your end …

Djeljosevic: Advent calendar, no?

Figure Out Your Work Goals

Benz: But I’ve known many retirees who’ve gotten a lot of energy from looking at that countdown clock. And so you’re setting that date and you’re also thinking about a bucket list for work. What do you want to get done in these years remaining until retirement? Maybe it’s mentoring young colleagues or getting some new initiative off the ground—whatever the case might be. It’s time to think about that checklist for what are the things that I really want to get done in order for me to reflect on my career and feel that it was a successful one. But as you said, Valentina, it is helpful, useful to not put too much precision on this because when we look at the data, what we see is that there’s a little bit of a disconnect between when people think they will retire and when they actually do retire.

And often people retire earlier than they expected. So you need to build in a little bit of wiggle room into your plan. Start thinking about, well, OK, if I retire sooner, either for happier reasons or maybe I’m laid off or something like that, where will I go for cash in those early years of retirement? Do I have adequate liquidity in that account? Start thinking through the realistic possibility of needing to tap your funds, where you will go. If you have no idea, this is a good spot to get some financial advice. And I know we’re going to talk a little bit about finding a financial advisor, but if you’re flying blind about which accounts to tap in retirement, that’s a great spot to get some tax advice.

Djeljosevic: Yeah. I like this idea of having a plan A and a plan B.

Benz: Exactly.

Djeljosevic: Maybe you’ll need a plan C, but at least have the first two.

Benz: Exactly.

Look at Some Preemptive Spending

Djeljosevic: When it comes to big-ticket expenses, why is it a good idea to tackle some of those while you’re still working and earning that income? And what kind of spending are we talking about?

Benz: Right. I’ve become such a huge evangelist of this. And one of the reasons is when we talk to retirees, especially those who have been good savers, what we hear from them is that they often struggle to actually spend in retirement. What made you a good saver makes you sometimes a really tough spender—that you have difficulty parting with money. It’s not easy to see your portfolio value decline. This is a great life stage to start looking at some preemptive spending. So maybe it’s taking that big-ticket trip with your family while you’re still working, or maybe it’s that you need a new car and you buy it with cash instead of getting financing on that car, or you look forward to big home repairs that you might have to make. Start thinking about those things. Retirement spending just for your household spending is hard enough, so don’t compound it by adding big-ticket spending into those early years of retirement. Try to get ahead of them if you can.

Djeljosevic: I like that idea. And then if you’ve, let’s say, renovated your home, then you’re retired, and you’re like, “I’m going to spend so much time in this beautiful home.”

Benz: Exactly. That’s very much the thought process.

Get the Compounding From Catch-up Contributions

Djeljosevic: Yeah, I love that idea. Another key point is to take advantage of catch-up contributions. What’s the benefit of those contributions for somebody who’s going to start spending from their portfolio in, like, three to five years?

Benz: Well, it’s a good question, but the point is that you’re going to be withdrawing from your portfolio in retirement in dribs and drabs. You’re not taking the whole thing out on day one. So even these later-in-life contributions that you might make have the opportunity to compound. They may be the ones that you don’t take out until much later in your retirement, so maybe 25 or 30 years down the line. So you still actually have a fairly long runway for additional compounding, which is why it’s so valuable to look at those catch-up contributions that you’re eligible to make. Once you pass age 50, you can make them to your company retirement plan. You can make them to an IRA.

And for people who are post-age 60, between the ages of 60 and 63, they have a special opportunity, actually. Starting in 2025, they can make what are called “super catch-up contributions.” Don’t ask me why it’s that specific age band, but if you are between the ages of 60 and 63 right now, you can make these additional higher catch-up contributions. They cease the year in which you turn 63, but you can take advantage of those extra opportunities to turbocharge your retirement savings. If you’re making HSA contributions with an eye toward using those assets in retirement, you can start making additional contributions to that health savings account once you’re past age 55.

Allocate to Taxable Nonretirement Accounts

Djeljosevic: There’s a lot of numbers to remember, a lot of limits. I’d like to talk a little bit about allocating to safer investments, especially in taxable nonretirement accounts. How can people calibrate a reasonable mix of stocks and bonds around this five-year mark?

Benz: I referenced that the taxable accounts, the more liquid accounts, are really useful to pull from in those early years of retirement. The reason is that you’re not getting such a great tax benefit from them. So they’re not giving you that tax-sheltered compounding; if you’re getting income distributions or capital gains distributions, you’re having to pay taxes on them in the year in which you receive them. So this is your great first source of funds for retirement spending, which is why for most people to start building up the liquid assets in those accounts is a great strategy at this life stage. You might start steering the contributions to that taxable brokerage account on autopilot in the years leading up to retirement. It’s a great source of funds to use for those early retirement expenses.

Consider a Financial Planner. Even DIYers Need One

Djeljosevic: We’ve talked a lot about age limits and catch-up contributions, and those have limits, too. Your last item on the to-do list is get some professional guidance. I want to know why that’s important at this stage, and also, do you have any tips for finding a good advisor?

Benz: Yeah, that last question is my most commonly asked question, hands down. The reason it’s valuable to get some advice at this life stage is because you’re needing to get your arms around so many complicated issues. What does your spending rate look like? What’s your Social Security filing strategy? What’s your spouse’s Social Security filing strategy? So many complicated dimensions of this retirement problem. Even if you are a dedicated DIYer, you’re someone who gets a lot of information from Morningstar or other resources, it’s great to just have another set of eyes on the assumptions that you’re making. And chances are if you’re working with a good financial planner, he or she will find some blind spots, some things that you hadn’t been attending to, and that planner may also be able to give you some guidance on the tax dimension of retirement spending because that is one of the best places for an advisor to add value.

In terms of how to find such a person, I would say look for three key things. I’m on team financial planning—that you want someone who is really thinking holistically about your retirement plan. Here I would be looking for a certified financial planner, which means that they’ve been through a course of study on a broad base of financial planning topics. Look for those CFP marks. Look for someone who is fee-only, meaning that they are going to make recommendations to you not based on commissions but based on the merits of the investment products themselves. And finally, look for someone who’s a fiduciary, so, someone who can answer the question of, “Are you a fiduciary?” with a crisp “yes” or “no.” Hopefully, “yes.” You’re looking for those three things, so CFP, fee-only, and fiduciary, and also look for red flags as you go through this process of interviewing planners.

One red flag right out of the box is if they won’t even have a conversation with you without putting you on the clock, that would be something that I would move on from that planner. You should be able to have at least a free consultation, where you kind of talk about whether your needs align with what they’re offering. If they’re very product-centric, that’s another red flag. If they’re moving in with the product sale, looking for someone who’s fee-only should rule out that type of advisor, but you’d want to be careful there. And then I would also be a little bit careful about someone who is saying that changes to the investment mix will solve all of your problems or that we will do it all with the investment portfolio. If they’re focusing disproportionately on the investment portfolio, to me, that’s a red flag that they might not be looking at your retirement plan as holistically as you’d want them to do.

Djeljosevic: Right. And if you’re a DIYer and they confirm that you’ve done everything right, then you can go into your retirement with an even greater level of confidence and enjoy it, right?

Benz: Well, that’s such a great point, Valentina, because I think there are a lot of people who do all of the right things and what they need is just that other set of eyes on their plan. So one point I like to make is that you’re not all in or all out with this financial advisor. You don’t have to pay him or her in perpetuity. That it might be that that periodic check-in is plenty for you. People should be aware that there’s more than one way to pay for financial advice. It’s not necessarily that annual fee that you’ll have to pay, that for some of these very dedicated DIYers, the Boglehead-type investors, that good periodic check is going to serve them very well and be cost-effective as well.

Djeljosevic: That’s great advice. Thank you so much for being here, Christine.

Benz: Thank you, Valentina.

Djeljosevic: OK, here’s your recap. You’re retiring in about three to five years. Here’s five things you need to do. Set a retirement date, but also have a backup plan. Get big-ticket spending out of the way. Take advantage of catch-up contributions. Build out safer assets in taxable accounts, and get some professional financial or tax advice. And now for more of Christine’s retirement insights, check out her free weekly newsletter, Improving Your Finances. You’ll find a sign-up link below. Thanks for watching.

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