Chances are, you've thought about retirement quite a bit over the years, whether you've fantasized about how you'll spend your time or fretted about your 401(k) balance. If you're like most people, though, you may be a little fuzzy about what your retirement will really look like.
At some point, you'll need to bring your retirement into sharper focus. Ideally, that's about 5 (or more) years before you hope to retire, when retirement is close enough to know what you want it to look like, and yet far enough away that there’s still time to hone your strategy to help meet those goals or alter your plans.
"There are still lots of big decisions to think about 5 years out," says Rita Assaf, VP, Retirement Products at Fidelity. Assaf advises clearly defining how you want to spend your time, money, and energy during the next chapter in your life—and trying to enjoy the process.
Begin by asking yourself these 5 key questions:
1. What are your expectations?
"It seems like a simple question," says Assaf. "But we know that more than half of couples have no idea how much they expect to receive in monthly retirement income, and most either don't know or are unsure of what their Social Security payments may be in retirement."
This lack of planning and understanding may affect more than just your happiness in retirement; it could also affect when and how you'll be able to retire. Five years before you plan to retire may be a good time to refine your retirement planning estimates and reprioritize your goals. "You need to do as accurate and realistic a projection as you can," says Assaf.
Where do you plan to live? If you plan to move, make sure you also consider how that will impact your cost of living, including the cost of health care and your access to it. If you have your eyes on moving to another state, be sure you understand any differences in taxes (e.g., state, income, estate, local, sales, and property taxes) as well as differences in the cost of living. If you plan to stay put, you'll want to consider how your home equity factors into your plans.
What do you want to do? The early stages of retirement can be an expensive time. Many people overestimate how much they'll be able to work in retirement, and underestimate how much they'll spend. Take a hard, realistic look at both fronts.
How much is needed for health care costs in retirement?
On average, according to the 2024 Fidelity Retiree Health Care Cost Estimate, a 65-year-old individual may need $165,000 in after-tax savings to cover health care expenses.
If you've relied on your employer to pick up most of your health care tab, retirement could be a rude awakening. Although Medicare kicks in at age 65, the cost associated with Part B can vary and you may need to buy supplemental insurance or, at the very least, budget for higher out-of-pocket health care expenses than you had while you were working.
Learn more about health insurance in retirement2. Will you have enough?
This is the most important question that many preretirees need to answer. According to the 2023 Fidelity Investments Retirement Savings Assessment (RSA),1 the median baby boomer is on track to meet 87% of estimated retirement expenses: enough to cover the basics, but not sufficient to cover all estimated discretionary expenses.
With 5 years to go, you'll want to run some real numbers, either with help from a professional or our Fidelity Planning & Guidance Center. If the numbers aren't encouraging, you may need to rethink your plans, step up your savings, or both. The good news: If you're age 50 or older, you may be able to make up for a savings shortfall with additional catch-up contributions to your 401(k) or IRA. If you are age 55 or older, you can also make an additional $1,000 catch-up contribution annually to a health savings account.
Read Viewpoints on Fidelity.com: How much do I need to retire?
"Consider an annual savings goal of at least 15% or more (including any employer match), including 401(k) and other workplace plans, IRAs, and other savings," says Steven Feinschreiber, senior vice president at Fidelity. "But that's only a rough guideline, and assumes continuous savings for 40 years of work and an age-appropriate asset mix."
For baby boomers who are nearing retirement, saving more and adjusting their asset mix has less impact for the simple reason that they have less time for those changes to impact accumulated wealth—though it may still help. For them, postponing retirement is generally the most effective step. Delaying retirement from 65—the average age people planned to retire, according to the RSA study—to their full Social Security retirement age (between 66 and 67, depending on their birth year) may be the best way for most preretirees to boost their retirement savings and increase their retirement income levels. If you delay claiming, you’ll have more time to build your retirement nest egg and a shorter retirement to fund.
3. Are you invested properly?
As you round the bend toward retirement, it's a good idea to review whether you are taking on an appropriate level of investment risk based on your time frame, financial situation, and risk tolerance. But remember that this does not mean the answer is always to become more conservative. The consequences of being too conservative can be just as worrisome when you account for inflation and the possibility that you could outlive your savings. That is why it is important to think about an appropriate asset allocation.
An ideal investment mix will depend on a number of factors, including your age, time horizon, financial situation, and risk tolerance. "Retirement is often the time to take some risks off the table," notes Assaf, "but some people are tempted to become too conservative. But don't forget that your goal is for your retirement savings to last for a retirement time horizon that could be as long as 30 years. This usually means some longer-term growth potential is needed in the portfolio." A financial professional can help you review your investing goals to get the appropriately diversified asset mix to help you meet your needs.
Read Viewpoints on Fidelity.com: The guide to diversification
4. Where will your retirement income come from?
While you think about shoring up your retirement nest egg, you also need to begin thinking about how you'll convert some of these savings into retirement income. For many people, it's helpful to start by grouping potential sources of income into 2 basic buckets: predictable income from sources such as Social Security, pensions, and annuities, and variable income from a job, retirement savings, and other sources such as rental real estate.
Next, do a budget to estimate your retirement expenses and determine your essential and discretionary income needs. Look at your predictable income and match that with your essential expenses; if there is a gap, you may want to consider an annuity. After that gap is met, look at your discretionary spending budget, which you can fund from your savings and other sources of variable income. If you plan to work a bit during retirement, that may provide a conservative boost to your retirement income. But be cautious here—survey data shows that many people are not able to work as long as they wanted. Finally, before you rush out to file for your Social Security benefits at age 62, consider the big picture: you'll receive a reduced monthly benefit if you claim before your full retirement age and an 8% increase in benefits per year if you claim after your full retirement age.
Read Viewpoints on Fidelity.com: Should you take Social Security at 62?
At the same time, you can think about shifting some of your investments into income-producing assets, such as bonds or dividend-paying stocks. A guaranteed income annuity is another option to consider if you're interested in converting your assets to income. Generally, the older you are when you buy an annuity, the higher the monthly payout, but there may be advantages to purchasing an annuity before you reach retirement age. But these potential moves should still be done within the context of maintaining an appropriate overall asset mix across stocks, bonds, and cash. Remember, your retirement income will likely need to last for 30 years or more, which typically requires some exposure to stocks.
Read Viewpoints on Fidelity.com: Create income that can last a lifetime
5. How does your home factor into your retirement?
Your home is likely one of your most valuables assets. If either downsizing or relocating is in your plans, you may want to start plotting the move now. If moving isn't in the cards, you may still want to think through whether it makes sense to pay down your mortgage faster—thereby saving on interest payments and improving cash flow in retirement.
Read Viewpoints on Fidelity.com: Should you move in retirement?
Alternatively, consider how to use some of your home equity to help finance your retirement. If tapping home equity is only a temporary solution to bridge the gap until you start to draw down your retirement assets or start receiving guaranteed income payments, consider applying for a home equity line of credit while you're still employed and more likely to qualify for the best rates. If home equity factors into your long-term planning, you could also consider a reverse mortgage. But proceed with care and be sure you understand all the associated costs and requirements. Before considering any of these ideas, make sure you consult a tax professional or attorney.
Get started
Between your investment portfolio, your home, and your lifestyle plans, there's a lot to cover between now and your retirement. Moreover, you'll likely revisit these topics several times over the next several years, as you well should. The point isn't to have all the answers right away, but to start preparing for the big decisions you'll soon face.