The 5-Year Retirement Runway: What to Do Before You Actually Retire

If you're within five years of retirement and you have over 1 million invested, now is the time to build your retirement runway. I work with people

retirement runway. I work with people all the time who come to me right before they think they're going to retire. And

sometimes we find a problem. It's not

necessarily a problem that means they can't retire, but just something that would have been a whole lot easier to figure out if we had found it 3, four, or even 5 years earlier. So today I'm

going to give you one checkpoint for each of the final 5 years before retirement and we're going to follow the same couple throughout these checkpoints so you can see how it applies to their

situation. So let's start 5 years out.

situation. So let's start 5 years out.

So this is Dan and Sarah. They're both

57 years old. They want to retire at 62.

That's in 5 years with $2 million invested. Today they have about 1.5

invested. Today they have about 1.5 million and they're saving 50,000 a year. So the first thing I want to know

year. So the first thing I want to know is this. what return do they actually

is this. what return do they actually need to earn over these next five years to get there to be on track? And what we find is that it's 3%. That's it. So,

this matters for Dan and Sarah because if they were sitting in, let's say, 90% stocks, I would ask, are they taking a whole lot of investment risk to earn a return they don't actually need? And

this gets more important in your final working years because the math of your portfolio has changed. When you're

younger, your portfolio is smaller. your

contributions are doing a lot of the work. But when you get to this point,

work. But when you get to this point, when your portfolio is at its largest at 1.5 or two million or three million invested, what the market does to that

existing money already invested can matter a lot more than one more year of contributions. What that means for

contributions. What that means for somebody about to retire is that a bad market right before retirement can create a huge problem. And the most important problem it can create is

moving your retirement date or delaying it. So Michael Kites who is a prominent

it. So Michael Kites who is a prominent retirement researcher calls this risk the retirement date risk and he illustrates it with two hypothetical investors. So these two investors have

investors. So these two investors have the same goal. They both want to retire at age 65 with $1 million. What we see with these two investors is they end up

with the same long-term average return over their careers, but they experience the returns in the opposite order. So,

one gets the bad returns early on when they're first starting their careers and just starting to work, and then the good returns show up right before retirement.

The other gets the good returns early and the bad returns right before retirement. So, the first one who ends

retirement. So, the first one who ends with good returns reaches the $1 million goal at age 62. The second one who ends with bad returns does not get to that

exact same number until age 70.

Remember, they had the same average return. The only thing that changed was

return. The only thing that changed was the order in which these returns showed up. So, that ended up creating a very

up. So, that ended up creating a very different retirement date for these two investors. So, your instinct might be,

investors. So, your instinct might be, okay, I'm 5 years from retirement. It's

time to sell my stocks, buy bonds, get more and cash, get more conservative.

Not necessarily, because there is a trade-off we have to discuss here. If

Dan and Sarah say, needed seven or 8% a year to reach their goal, getting more conservative creates a completely different problem. But in their case,

different problem. But in their case, they only need about 3%. So that is what gives us more room to take risk off the table and to protect their retirement

date. Now, one way to actually achieve

date. Now, one way to actually achieve this is through what's called a decreasing equity glide path. It sounds

complicated. It's really not. All it

means is you are starting to gradually reduce your stocks, your equities as you get closer to retirement. And again, as always, the goal is never to eliminate risk. We can't do that. It's to make

risk. We can't do that. It's to make that retirement date less dependent on what the stock market happens to do in those final working years. And that's

really what the question is 5 years out.

How much growth do you actually need?

and how much uncertainty around your retirement date are you willing to accept if you have no problem working additional years so the markets are terrible you can actually afford to continue to be more aggressive but if

you are somebody that wants a a very narrow range for what your retirement date might be and you want to avoid that worst case scenario of the retirement date getting pushed way out then you

have to look at starting to take risk off the table 5 years out is the best time to look at this because if you're at this point you might be taking way more risk than you need and you might be risking your retirement date if that is

more important to you. So now we have the time to create a plan to reduce that. If you find that your required

that. If you find that your required return is actually higher than you realize. Okay, great. Now we know that

realize. Okay, great. Now we know that too and now we have the time to change the goal. Maybe increase contributions

the goal. Maybe increase contributions or change our investing strategy, but you have to know it now. And so you're not surprised right before retirement.

For Dan and Sarah, that 3% we know they're on track. We know the return they need and we have a plan for slowly reducing investment risk as they get closer to their retirement age of 62.

Now in the next year we have to address how you're actually going to get paid once you get to retirement. So now we're four years out. Dan and Sarah are 58 now. They have four years to go. And at

now. They have four years to go. And at

this checkpoint, I want to answer a really simple question. When your

employer stops paying you, where's your money going to come from? So Dan and Sarah have paychecks that are going to stop at age 62. They want to spend about 9,000 a month. Medicare is not going to

start for them for another 3 years, right? That age that's age 65. And

right? That age that's age 65. And

they're both planning to delay social security all the way to age 70 to maximize their benefits. So now this is what we do. We are going to create a cash flow map so we can see the gaps. So

anything they need to spend that isn't covered by income, we know that has to come from the portfolio. For Dan and Sarah who are on track for $2 million, they need to figure out how to turn that

2 million into a paycheck. So right now, what they have is most of their money is sitting inside traditional 401ks. So if

almost all of their retirement spending is coming from those accounts, all of those withdrawals are creating taxable income. Now, we layer that onto that

income. Now, we layer that onto that same timeline. So again, their wages

same timeline. So again, their wages disappear at 62. Social Security doesn't begin until 70. But then we're also looking at these required distributions

that are going to begin at age 75. And

these first years of retirement, 62 to 70, could give them a lot more control over taxable income. That's what we're looking for. But there's another issue

looking for. But there's another issue here, a bigger issue in my opinion. Ages

62 to 65 are also the years before Medicare. So all you really need to know

Medicare. So all you really need to know about this to understand in this example is what they pay for marketplace health insurance is affected by their household income. So every dollar they need to

income. So every dollar they need to live on is coming out of traditional 401ks if you remember cuz that's where all their money is. Those withdrawals

aren't only affecting their tax bill, they're also affecting the cost that they pay for health insurance. So now

where the money comes from, what gets reported on their tax return just became a lot more important. So, four years out, this is what we're mapping. When

does the paycheck stop? What does the portfolio have to cover? Those are the gaps. When does Medicare begin if you

gaps. When does Medicare begin if you are retiring before age 65? When are you going to turn on Social Security? Put

that on the map. And where are the years when having more control over your income could be really useful for Dan and Sarah? We found them. Those are the

and Sarah? We found them. Those are the years right after they retire, right before Medicare. This is where we need

before Medicare. This is where we need the most flexibility. You might be tempted to try to figure out exactly what your tax bill is at this point. I

wouldn't do that. There's too many things that are going to change, but you should do a rough outline like what we've done for Dan and Sarah here because again, we're looking for the gaps and we're looking for opportunity.

And what matters right now is that we still have four years of paychecks coming in cuz now we've identified the problem. We have time to fix it. So Dan

problem. We have time to fix it. So Dan

and Sarah, their problem is pretty clear. They have plenty of money, but

clear. They have plenty of money, but almost all of it is sitting in the same type of account. So year three is going to be about changing that. Okay, we're

three years out with Dan and Sarah. So

they're 59 years old now. They're still

on track for that 2 million. And now

we're going to start fixing the problem we just found. This is where I want you to stop thinking about your portfolio as just one big round number. Two people

can both have $2 million and have very different retirement flexibility. And

the difference in that comes down to the types of accounts that they own. So Dan

and Sarah are like a lot of retirees where they want more control over how their retirement income shows up in the early years. Now we're dealing with the

early years. Now we're dealing with the issue also a lot of retirees deal with which is most of their money is in one bucket in traditional 401ks. And this is where I may tell somebody something that

sounds a little backwards at this point.

You may not need to keep maximizing the exact same retirement account that you've been maximizing. I'm not telling you to stop saving. I'm saying what we're going to switch is that we stop

maximizing blindly and we're going to actually start right sizing the accounts. So currently Dan and Sarah are

accounts. So currently Dan and Sarah are putting 50,000 a year into their 401ks.

So maybe they keep contributing enough to get the full employer match in this new plan. But once that match is

new plan. But once that match is fulfilled, some of those additional savings start to go into other types of accounts, specifically brokerage accounts and maybe Roth IAS as well if

we can get money in there. Yes, they're

going to give up some tax deduction today, but now we're building something the plan is really missing. Accessible

money with different tax characteristics. So maybe they need to

characteristics. So maybe they need to start building out more cash. That's

important too for early retirement.

Maybe we look at Roth IRA, Roth 401k.

Depends on the plan. But the point is simple. You've already at this point

simple. You've already at this point spent decades accumulating money. Now we

have to make sure that the right kinds of money for the your retirement strategy that you want to execute. The

advantage is three to five years out, you still have this money coming in. And

so you and for Dan and Sarah and maybe for you, it's significant savings, right? It's we're not trailing off and

right? It's we're not trailing off and only saving a few thousand a year. It's

50,000. So that can make a huge difference to the first few years of retirement. So in Dan and Sarah's

retirement. So in Dan and Sarah's example, we are looking at what's going to give them optimal tax strategy and how can we access and which accounts can we access in the years that we need them

without working worrying about early withdrawal penalties or unnecessary and high tax for them. A brokerage account is really attractive. Cash is

attractive, too, but we're a little early for that. We're going to get there later. And so Dan and Sarah are still

later. And so Dan and Sarah are still going to put money in the 401k, but they're also going to start adding money to their brokerage account. So far, we know their retirement date works.

They're on track. We know what they're how they're going to replace their paycheck. We've identified the gaps in

paycheck. We've identified the gaps in the cash flow, and we know where the money is going to come from. So, on

paper, things are starting to come together and look really good. But

there's one thing the spreadsheet cannot tell us. Whether Dan and Sarah actually

tell us. Whether Dan and Sarah actually are ready to live this way. Two years

out, we are going to do a retirement dress rehearsal. This is what I noticed

dress rehearsal. This is what I noticed a lot of people don't do, and I think they should. Dan and Sarah at this point

they should. Dan and Sarah at this point are both going to be 60 years old now.

Um, the plan says they can comfortably spend 9,000 a month in retirement. Okay,

great. The the finances, the numbers look good, but now we have to ask this question. Had they actually tried living

question. Had they actually tried living on 9,000 a month? Because financial

planning software can tell me that 9,000 works mathematically for them. that we

can track that off, but it doesn't tell me whether that 9,000 feels fine. So

maybe they try and think, "Wow, this is way tighter than I expected." Or maybe they realize, "Well, we don't even need 9,000. We have several thousand left

9,000. We have several thousand left over after paying this." So that's useful, too. Either way, let's find out

useful, too. Either way, let's find out before your paycheck disappears. So

let's say Dan and Sarah currently have 15,000 a month to work with. That's

what's coming in. Again, their target retirement uh spending number is $9,000 a month.

So, take that extra 6,000 and automatically move it out of sight, say into savings. We only want 9,000 getting

into savings. We only want 9,000 getting deposited into the checking account. So,

they don't have anything extra to work with because that's what's going to happen in retirement. So, that is their retirement paycheck. So, then we have

retirement paycheck. So, then we have that happening and we ask these questions. Are we able to pay the bills?

questions. Are we able to pay the bills?

Are we able to travel the way that we expected? Are there any expenses showing

expected? Are there any expenses showing up that we forgot about? Do we feel good about this? Do we feel comfortable?

about this? Do we feel comfortable?

Great. Now we're learning something real and we're actually stress testing it. So

that's a key part of this stress rehearsal. But there is another part.

rehearsal. But there is another part.

And this other part is not for everybody. It's optional. For example,

everybody. It's optional. For example,

if you're burnt out and counting the days until you're done working, you probably don't need to test this next part. But I get a lot of people who just

part. But I get a lot of people who just aren't sure if they are emotionally ready to leave or if they're going to leave and then regret it. Sometimes

people say, "I just don't know what I'm actually retiring to." And if that's you, you might still be ready, but we can test it to know for sure. Now, what

you're going to do is take time off work, whatever time you're allotted. If

you can do more than a typical 1 to two weeks, that's great. But what we do is don't turn it into a vacation. Vacation

is a terrible retirement simulation.

You're going to be somewhere new. You've

got plans. It's temporary. It's not

where you're living daytoday. Instead,

what you should do is spend some normal time at home. Wake up on a Tuesday. You

have no meetings, no deadlines. What do

you do with your day? What can you imagine doing with your day when nobody needs anything from you? And then just play that week or two weeks out exactly how you would in retirement. This is a

good chance too to say, "Hey, I enjoy it for the most part, but there's a handful of things missing. Maybe my social life isn't where it I want it to be, or maybe I'm missing some challenging aspects of the day, or maybe I'm looking for

something with more purpose." Again,

doesn't mean you don't retire. It just

means you're going into retirement with the realization that those are things you're going to have to figure out, and so that it's not disappointing when you get there. But in this, we're testing

get there. But in this, we're testing two main things. Does the money work?

Are we have we budgeted correctly? And

if you're unsure about leaving work, does the lifestyle work? At two years out, we have enough time to know if that budget isn't going to work and we can adjust the plan accordingly. And if you realize you're not ready to leave work

yet, that's useful information, too, at this point. Now, we're one year out, and

this point. Now, we're one year out, and I have one final question. If their

paycheck stop next month, would the retirement system be ready? Would it

actually run? So, at this point, one year out, Dan and Sarah are 61. They

have 12 months to go. That's it. And up

until now, we've been doing a lot of planning. We've done mapping, testing,

planning. We've done mapping, testing, including the lifestyle test. Now is the time to actually put the system in place. So before they retire, I want

place. So before they retire, I want them to be able to say this. On the

first of next month, this amount hits our checking account. Taxes are going to be handled this way. Our health

insurance starts here, and this is what we're picking. That type of detail,

we're picking. That type of detail, that's what really matters. So most

people get to this point with the big questions answered, right? Can I afford to retire? Yes, that's something we've

to retire? Yes, that's something we've we've already tested and looked at. But

then there are all these little question marks underneath it. So, where does the monthly money actually come from? How

are taxes going to get paid? What do we do for health insurance? And when do we do that? What happens with my 401k from

do that? What happens with my 401k from the employer I just left? None of these things by itself are probably going to make or break or stress you out for retirement. But all of them together

retirement. But all of them together sitting unanswered is what makes someone say, "I think I'm ready and I don't want the question mark when you get to retirement." So in the final year for

retirement." So in the final year for most people there are four key things to get ready. First, cash. I mentioned this

get ready. First, cash. I mentioned this before, but Dan and Dan and Sarah want roughly a year of spending available in their cash reserve. Find a lot of retirees are comfortable with that level

of cash. So we're going to spend this

of cash. So we're going to spend this final year building that up. Second is

healthcare. They're retiring at age 62.

So, we choose the health insurance plan.

We know the cost and we know when they need to enroll, meaning we know when they're going to lose their employer provided health insurance. Third, the

retirement paycheck and taxes. We

already know where the money is coming from. Now, we decide exactly how much

from. Now, we decide exactly how much moves into the checking each month and how taxes are going to get paid. So, for

Dan and Sarah, this is how it works.

This is the detail. January 1st comes around, $9,000 moves into their checking account. We've set that up

account. We've set that up automatically. That is their first

automatically. That is their first retirement paycheck. Fourth, we clean up

retirement paycheck. Fourth, we clean up the all the administrative stuff, the accounts, rollovers if appropriate, um employer benefits that they might lose and need to replace, pension elections

if they have them, anything that needs paperwork, we are going to handle now.

So for Dan and Sarah, when they hit that January 1st retirement date and that $9,000 hits their checking account, they feel fully confident that they can spend how they want to spend, that their

budget is not going to be too tight.

They know they've set up the gaps in the tax planning opportunities appropriately, so they hit the ground running and retirement, and that's what leads them to a great first year of

retirement. So those five things, those

retirement. So those five things, those are the checkpoints for their runaway.

And while things can and do change, this system gives you the confidence to go into retirement with a solid plan. If

you're within a few years of retirement and want to build out your own retirement runway, this is exactly the type of planning we do with clients at Campwell. You can use the link below to

Campwell. You can use the link below to schedule a call with my team. We'll see

if we're a good fit in working together.