Retirement starts to feel much more real about five years out.

At that point, you may not know your exact retirement date, but you can usually see the runway. You may have a general idea of when you would like to stop working, how much you have saved, whether your home will be paid off, and what kind of lifestyle you want in retirement.

This is also when planning becomes more valuable.

Not because everything needs to be perfect. It won’t be. But because the decisions you make in the five years before retirement can have a meaningful impact on your taxes, investment strategy, retirement income, health insurance, and overall flexibility.

At Winding Trail Financial, we help retirees and people within a few years of retirement coordinate investments, taxes, Roth conversions, Social Security, and retirement income. This article is written for people who are roughly five years from retirement and want to make more thoughtful decisions before they stop working.

In many ways, the five years before retirement are like preparing for landing.

Earlier in your career, you are taking off and climbing altitude. You are saving, investing, raising kids, paying down debt, and building wealth. But as you get closer to retirement, the details matter more. You have better information about your income, expenses, tax bracket, portfolio, health insurance options, and timing.

Small adjustments during this window can make the transition smoother.

Here are several things to review five years before retirement.

1. Get clear on what retirement actually looks like

Before getting too deep into tax strategies or investment projections, start with the basic question:

What are you retiring to?

That may sound soft, but it drives almost every financial decision.

For example:

• Do you want to fully retire, or gradually reduce work?

• Will you stay in Colorado or relocate?

• Do you plan to travel more in the first few years?

• Will you help adult children or grandchildren financially?

• Do you want to buy a second home?

• Will you start a small business, consult, or do part-time work?

• Are you trying to retire as soon as possible, or are you more focused on flexibility?

The numbers matter, but the numbers should support the life you actually want.

A five-year retirement plan should not just answer, “Can I retire?” It should also help answer, “What kind of retirement am I planning for?”

2. Estimate your retirement spending

A lot of people are not sure what they will spend in retirement.

That is normal.

Some expenses may go down. Payroll taxes, retirement plan contributions, commuting costs, and work-related expenses may decrease. Other expenses may go up, especially travel, hobbies, healthcare, home projects, or helping family. With more time and flexibility, it's often easier to finally take care of some of those things that have been put on the back burner - the long overseas vacation, the knee surgery from years of skiing, finally getting that back patio finished to better host the family get togethers, etc.

The goal is not to create a perfect retirement budget. The goal is to build a realistic baseline.

A helpful way to start is to separate spending into three categories:

1. Core expenses
   Housing, groceries, utilities, insurance, property taxes, transportation, healthcare, and other recurring needs.

2. Lifestyle expenses
   Travel, dining out, hobbies, golf, skiing, family trips, charitable giving, and other flexible spending.

3. Large irregular expenses
   Cars, home repairs, weddings, family help, major vacations, and future medical costs.

This matters because different types of spending create different planning needs.

If your core expenses are fully covered by Social Security, pensions, and predictable withdrawals, you may have more flexibility with the rest of your portfolio. If your basic expenses depend heavily on portfolio withdrawals, your investment and cash reserve strategy may need to be more conservative.

At Winding Trail Financial, we can help you refine your budget. We can also help you answer the "how much can I spend" question to help arm you with that information as you back into your retirement budget.

3. Run a retirement income projection

Five years before retirement is a good time to start testing whether your assets can reasonably support your desired lifestyle.

This is where a retirement income projection can be helpful.

A good projection should consider:

• Investment accounts

• IRAs and retirement plans

• Roth IRAs

• Taxable brokerage accounts

• Social Security

• Pensions, if applicable

• Rental income

• Part-time work or consulting income

• Expected retirement spending

• Inflation

• Taxes

• Healthcare costs

• Large future expenses

• Required minimum distributions

The point is not to pretend the projection will be exactly right. It won’t be.

The value is in seeing whether you are broadly on track, where the pressure points are, and what decisions may improve the plan.

For example, a projection might show that you are in good shape overall, but that retiring before Medicare creates a health insurance gap. Or it might show that delaying Social Security gives you a stronger long-term plan. Or it might show that Roth conversions could make sense in the years between retirement and required minimum distributions.

The projection gives you a starting point for better decisions.

4. Review your investment allocation

The investment portfolio that helped you build wealth may not be the same portfolio you want when you begin drawing from it.

Five years before retirement is a good time to review how much risk you are taking.

This does not mean you should move everything to cash or bonds. Most retirees still need growth in their portfolio, especially if retirement could last 25 to 35 years (as long as many careers) or for those that have legacy goals.

But the risk changes as you approach retirement.

When you are still working and saving, market declines are uncomfortable, but they can also create opportunities. When you are retired and withdrawing from the portfolio, market declines can be more disruptive because you may be selling investments while they are down.

That is known as sequence of returns risk.

A few questions to consider:

• How much of your portfolio is in stocks?

• How much is in bonds or cash?

• How much do you expect to withdraw each year?

• Where will your first few years of withdrawals come from?

• Do you have enough liquidity to avoid selling stocks during a downturn?

• Is your portfolio coordinated with your tax plan?

The goal is not simply to reduce risk. The goal is to take the right amount of risk for the retirement income plan you actually need.

We want to build portfolios that you can live with for the long-haul.

5. Build a cash reserve strategy

Cash becomes more important as you approach retirement.

While working, your paycheck is your primary source of liquidity. Once you retire, your paycheck may be replaced by Social Security, pension income, portfolio withdrawals, or some combination of those.

Having a thoughtful cash reserve can make retirement feel more stable.

This may include:

• An emergency fund - you didn't think emergencies went away just because you stopped working, did you?

• Cash for near-term spending

• Money set aside for large known expenses

• A plan for where portfolio withdrawals will come from

• A strategy for refilling cash after strong market years

There is no perfect amount of cash for every retiree. Too little cash can create stress and force poor timing. Too much cash can drag down long-term returns.

A common planning approach is to keep enough cash and conservative investments to cover near-term needs, while allowing the rest of the portfolio to remain invested for longer-term growth.

6. Think carefully about Social Security timing

Social Security is one of the most important retirement income decisions many people make.

You can generally claim benefits as early as age 62, but your benefit is reduced if you claim before full retirement age. Waiting beyond full retirement age can increase your benefit until age 70.

That does not automatically mean everyone should wait until 70.

The right strategy depends on several factors, including:

• Your health

• Family longevity

• Whether you are married

• The age difference between spouses

• Your spouse’s benefit

• Whether one spouse had significantly higher earnings

• Your need for income early in retirement

• Your tax situation

• Whether you plan to keep working

For married couples, Social Security should usually be analyzed as a household decision, not just an individual decision. The survivor benefit can be especially important.

For those who retire before taking Social Security, we can help build an income plan to help bridge that gap between retirement date and Social Security income.

Five years before retirement is a good time to model different claiming strategies so you are not making the decision under pressure later.

7. Plan for health insurance before Medicare

If you retire before age 65, health insurance can be one of the biggest planning issues.

We've worked with folks in their 50s and 60s that planned on retiring early - before Medicare kicks in - and get a splash of cold water when they realize there's a large health insurance gap. This can be especially true if you have excellent coverage through a employer.

Some people have retiree health benefits. Many do not.

If you will need coverage before Medicare, you may need to consider:

• COBRA

• A spouse’s employer plan

• An Affordable Care Act marketplace plan

• Private insurance

• Health savings account funds

• Part-time work with benefits

This is also where tax planning can matter.

For example, if you are using an ACA marketplace plan before Medicare, your taxable income may affect premium tax credits. Roth conversions, IRA withdrawals, capital gains, and other income can all affect the calculation.

That does not mean you should avoid every taxable event. It simply means health insurance and taxes should be coordinated.

This is one of the areas where retirement planning gets very tactical.

8. Look for Roth conversion opportunities

The five years before and after retirement can be a valuable window for Roth conversion planning.

A Roth conversion means moving money from a pre-tax retirement account, such as a traditional IRA, into a Roth IRA. The converted amount is generally taxable in the year of conversion, but future qualified Roth IRA withdrawals can be tax-free.

Roth conversions may be worth considering if:

• You expect your tax rate to be higher later

• You retire before required minimum distributions begin

• You have several years of lower taxable income

• You want more tax flexibility in retirement

• You want to reduce future required minimum distributions

• You want to leave more tax-efficient assets to heirs

But Roth conversions are not automatically good.

They can increase current taxes. They can affect Medicare premiums later. They can affect ACA health insurance subsidies before Medicare. They can also create cash flow issues if you do not have funds available to pay the tax.

The other reality is that many folks are at the peak of their earning years (read: highest tax brackets) as they get close to retirement and creating more taxable income through a Roth conversion isn't the optimal decision.

The question is not, “Should I do Roth conversions?”

A better question is:

Are there specific years where converting some amount from pre-tax to Roth improves the overall plan?

That answer depends on the numbers.

For more information on Roth conversions, you can check out another post here.

9. Understand your future tax picture

Many retirees assume their taxes will automatically go down in retirement.

Sometimes they do. Sometimes they do not.

Your retirement tax picture may include:

• Social Security

• Pension income

• IRA withdrawals

• Roth IRA withdrawals

• Taxable brokerage income

• Capital gains

• Rental income

• Required minimum distributions

• Medicare IRMAA surcharges

• Charitable giving strategies

• State income taxes, depending on where you live

For some retirees, the early retirement years are relatively low-tax years. These can be great years to consider Roth conversions as noted above. Later, required minimum distributions, Social Security, pensions, and investment income may push taxable income higher.

That is why tax planning before retirement can be so valuable.

Five years out, you still have time to make adjustments. You may be able to change savings patterns, contribute more to Roth accounts, harvest gains strategically, do Roth conversions, bunch charitable gifts, or improve the mix of taxable, tax-deferred, and tax-free assets.

Tax planning is not just about this year’s tax return. It is about managing lifetime taxes.

10. Decide how your mortgage fits into the plan

Many people would like to retire debt-free.

That can be a great goal, especially if paying off the mortgage improves cash flow and peace of mind.

But it is not always the only good answer.

Before aggressively paying down a mortgage, consider:

• Your interest rate

• Your cash reserves

• Your investment opportunities

• Your tax situation

• Whether you will itemize deductions

• How much liquidity you want in retirement

• Whether paying off the mortgage would leave you house-rich but cash-poor

For some retirees, paying off the mortgage before retirement is a major emotional and financial win. For others, keeping a low-rate mortgage and preserving liquidity may be reasonable.

May people refinanced their mortgages when rates were historically low. In some of those situations, we look at the low mortgage rate along with decades of payments as a "rent" expense and build it into the plan.

The key is to make the mortgage decision as part of the overall retirement plan, not in isolation.

11. Review your estate plan and beneficiaries

Retirement planning is not only about your lifetime income. It is also about making sure your assets would transfer the way you intend.

Five years before retirement is a good time to review:

• Wills

• Powers of attorney

• Medical directives

• Trusts, if applicable

• Beneficiary designations

• Retirement account beneficiaries

• Life insurance beneficiaries

• Transfer-on-death designations

• Account titling

• Digital assets

Beneficiary designations are especially important because they often control who receives retirement accounts and life insurance, regardless of what your will says.

This is also a good time to consider whether your adult children are ready to serve in important roles, such as personal representative, trustee, or financial power of attorney.

Speaking of children, in the case they are adults, it's a good idea to at least install very basic estate planning documents for them as well.

You do not need to overcomplicate things, but you do want the plan to be current.

12. Start practicing retirement

This one is underrated.

If you are five years away from retirement, start testing parts of the retirement plan before you fully retire. Make small bets.

For example:

• Try living on your estimated retirement spending

• Build up the cash reserve you want after retirement

• Practice taking longer trips

• Spend more time on hobbies or community activities

• Think about how you want your weekly routine to look

• Discuss expectations with your spouse

• Consider whether part-time work or consulting appeals to you

Retirement is a financial transition, but it is also a lifestyle transition.

Some people are very ready to be done working. Others like the idea of retirement but struggle with the loss of structure, purpose, or professional identity.

The more you can test and refine your plan before retirement, the smoother the transition tends to be.

Additionally, for those who are trying to retire "from" something, easing into retirement while you're still working might give you the additional energy to stay on for a bit longer which can help improve your plans's overall probability of success.

The bigger issue: retirement decisions are connected

The challenge with retirement planning is that most decisions are connected.

For example:

• Your retirement date affects your income, health insurance, and portfolio withdrawals.

• Your Social Security decision affects your tax plan and survivor income.

• Roth conversions affect taxes, Medicare premiums, and future flexibility.

• Investment allocation affects withdrawal strategy and cash reserves.

• Mortgage decisions affect liquidity and retirement spending.

• Charitable giving affects taxes and estate planning.

That is why five years before retirement is such an important planning window.

You do not need to have every answer immediately. But you do want to start coordinating the major pieces before decisions become urgent.

Final thoughts

Five years before retirement is a great time to get organized.

You are close enough that the details matter, but far enough away that you still have time to make thoughtful adjustments.

At this stage, a good retirement plan should help you answer questions like:

• When can I realistically retire?

• How much can I spend?

• Where will my income come from?

• When should I claim Social Security?

• How should my investments be positioned?

• Should I consider Roth conversions?

• How will health insurance work?

• What tax issues should I plan for before retirement?

• What would make me feel more confident about the transition?

The goal is not to predict the future perfectly.

The goal is to make better decisions with the information you have today, then adjust as life changes.

Thanks for reading.

-Dwight

P.S. We are a fee-only financial advisor in Lafayette, Colorado helping people with tax-efficient retirement planning. If you are within five years of retirement and want help coordinating your investments, taxes, Social Security, Roth conversions, and retirement income, you can set up a time to talk.

FAQ

What should I do five years before retirement?

Five years before retirement, you should review your expected spending, retirement income sources, investment allocation, tax strategy, Social Security timing, health insurance options, and estate plan. This is also a good time to run retirement projections and identify any gaps while you still have time to adjust.

Is five years too early to meet with a financial advisor before retirement?

No. Five years before retirement is often an ideal time to start more detailed planning. You are close enough that the decisions are becoming concrete, but you still have time to adjust savings, investment risk, tax strategy, Roth conversions, debt payoff, and retirement timing. It may be worth considering at least a one-time financial plan to use as a readiness review.

Should I change my investments five years before retirement?

Maybe. The investment strategy that helped you accumulate wealth may need to be adjusted before you begin taking withdrawals. That does not necessarily mean becoming overly conservative, but it does mean reviewing sequence of returns risk, cash reserves, withdrawal needs, and how the portfolio supports your retirement income plan.

Should I pay off my mortgage before retirement?

Paying off your mortgage before retirement can reduce expenses and provide peace of mind, but it is not always the best choice. The right decision depends on your interest rate, cash reserves, tax situation, investment opportunities, and how important liquidity is to your plan.

Are Roth conversions a good idea before retirement?

Roth conversions can be valuable in the years before or after retirement, especially if your taxable income is temporarily lower. However, they are not automatically beneficial. A Roth conversion should be analyzed in the context of your tax bracket, future required minimum distributions, Medicare premiums, health insurance subsidies, and estate goals.

How much cash should I have before retiring?

There is no universal answer. Many retirees benefit from having enough cash and conservative investments to cover near-term spending needs, emergencies, and large known expenses. The right amount depends on your spending, income sources, withdrawal plan, investment allocation, and comfort level.

What is the biggest mistake people make before retirement?

One common mistake is treating retirement decisions separately. Social Security, taxes, investments, health insurance, Roth conversions, and withdrawal strategy all affect each other. A coordinated plan can help avoid decisions that look reasonable in isolation but create problems later. The other mistake is often more psychological which is answering the question of "how am I going to fill my days, weeks, months?"