Retirement Planning Checklist: What to Do 5 Years Before You Retire

Entering the Retirement "Red Zone"

If you are within five years of your planned retirement, congratulations! You are close to crossing the finish line of a multi-decade race.

However, this final five-year stretch is not the time to coast. Financial planners refer to this period as the retirement "red zone." Mistakes made during these five years—such as experiencing a massive stock market downturn right before you retire or claiming Social Security at the wrong age—can have a permanent impact on your lifetime financial security.

Use this systematic 5-year retirement planning checklist to review your finances, adjust your investment strategy, and ensure a seamless, confident transition into the next great chapter of your life.

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Year 5: Run Your Retirement Numbers

Five years out, your planning should shift from vague estimates to concrete mathematical calculations.

• Estimate Your Post-Retirement Living Expenses: Do not assume you will automatically spend 80% of what you spend now. Some costs will decrease (like commuting, work wardrobes, and savings contributions), but others will increase (like travel, hobbies, and healthcare). Write a detailed, realistic post-retirement monthly budget.
• Track Down All Income Sources: Compile a comprehensive list of all your retirement income engines:
  • Traditional 401(k) and IRA accounts
  • Roth 401(k) and IRA accounts
  • Expected pensions
  • Self-employment or part-time work income
  • Rental property income
• Perform a Retirement Gap Analysis: Subtract your expected guaranteed income (pensions, Social Security) from your estimated living expenses. The remaining balance is the "gap" that your investment portfolio must fill.

Year 4: Manage the Sequence of Returns Risk

When you are young and saving for retirement, a stock market crash is actually a buying opportunity. You have decades for the market to recover.

However, if the market crashes in the first year of your retirement—and you are forced to sell stocks at depressed prices to pay your bills—your portfolio may never recover. This is known as Sequence of Returns Risk.

• Shift to a Conservative Asset Allocation: Review your portfolio with a financial advisor. Ensure you are gradually reducing risk by shifting a portion of your equity investments into stable, income-generating assets like high-yield bonds, certificates of deposit (CDs), and Treasury bonds.
• Build a Cash Cushion: Aim to have 1 to 2 years of living expenses stored in liquid, low-risk accounts (like a high-yield savings account or money market fund) by the time you retire. This cash cushion ensures you can pay your bills during a market downturn without being forced to sell your stocks at a loss.

Year 3: Plan for Healthcare and Long-Term Care

Healthcare is often the single largest expense in retirement, yet it is frequently overlooked by pre-retirees.

• Coordinate with Medicare Eligibility: Remember that Medicare eligibility starts at age 65. If you retire early at 60, you must secure bridge health insurance (such as COBRA, a spouse's employer plan, or an Affordable Care Act exchange plan) to cover those 5 gap years.
• Understand Medicare Costs: Medicare is not fully free. You will owe premiums for Medicare Part B and Part D, and you will need to choose between a Medigap (Medicare Supplement) policy or a Medicare Advantage (Part C) plan.
• Establish a Long-Term Care Plan: Nursing homes and memory care are catastrophically expensive and are not covered by Medicare. Explore your options, including long-term care insurance, hybrid life insurance policies, or understanding the strict Medicaid asset and income rules.

Year 2: Optimize Your Social Security Strategy

Deciding when to claim Social Security is one of the most critical decisions of your retirement, representing hundreds of thousands of dollars in potential lifetime benefit differences.

• Check your Earnings History: Log into your 'my Social Security' account on the SSA website. Review your official earnings record for accuracy, as any missing or incorrect years can permanently lower your Social Security benefit calculation.
• Coordinate Claiming Ages with Your Spouse: If you are married, coordinate your claiming strategies. Often, the optimal path is for the lower-earning spouse to claim benefits early, while the higher-earning spouse delays claiming until age 70 to secure the maximum possible guaranteed monthly benefit and survivor benefits.
• Compare the Math: Weigh the long-term impact of claiming early at age 62 (which permanently reduces your monthly payment by up to 30%) against waiting until your Full Retirement Age (66 or 67) or delaying to age 70 (which increases your monthly payment by 8% per year of delay).

Year 1: Finalize the Details and Transition

During your final year of work, focus on the logistical details of your transition.

• Establish a Tax Withdrawal Strategy: Coordinate with a tax professional to plan which accounts you will withdraw from first (e.g., traditional tax-deferred accounts vs. Roth tax-free accounts) to minimize your post-retirement tax bill and avoid higher Medicare premium surcharges.
• Test-Drive Your Retirement Budget: For the last 6 months of your career, try living strictly on your estimated post-retirement budget. Save any excess salary. This "test drive" will prove whether your financial projections are realistic before you officially leave your job.
• Prepare Emotionally: Retirement is a major psychological shift. Plan how you will spend your time, maintain your social connections, and find purpose after your career ends.
• Conclusion: The five-year countdown to retirement is a powerful window of opportunity. By taking proactive steps to protect your portfolio, estimate your healthcare costs, and optimize your Social Security claiming strategy, you can cross the retirement finish line with total confidence, security, and peace of mind.