How to retire in the next 5 years: An actionable guide for financial success

You can see retirement. It's so close, and you're ready to enjoy your next phase of life. Now, you need to craft a plan—one that plots out how to retire in the next five years with the income you need for the life you envision.

To craft that plan, it's time to think about your retirement income needs and investments side by side. Each informs the other, and by considering both, you can build a strategy to shore up your savings and arrange your finances so you can start your retirement with confidence.

Here are the steps to take when you're thinking about wrapping up your working life and considering how to retire in five years.

The first step is asking: How ready am I to retire?Realize that retirement readiness isn't only about having enough saved to step away from the workforce. Many factors besides money can affect how ready you feel to retire, such as whether you want to stop working, how healthy you are and expect to be, your family and loved ones' needs, and what will make you feel fulfilled.

You can find your intentions by digging in with some thoughtful questions. Consider your community at work and how you'll find community without it. If you have a spouse or partner, talk with them about the time you'll spend together and apart, including what you envision as an ideal retirement. Weigh whether you're ready to fully step away from work or if shifting to a part-time job or pursuing a late-breaking career is what you need to feel secure. Assess your current health as well as your anticipated life expectancy.

There are more retirement-readiness questions to ask yourself, and there are no right or wrong answers. Rather, your retirement readiness is multidimensional and includes things as diverse as your finances, your family and the emotional and social relationships that will sustain you beyond the workplace.

When you step away from full-time employment during retirement, you'll still have several ways to generate income. It's important as a pre-retiree to take stock of what you have saved and your ongoing retirement income sources:

• Retirement savings, including accounts like IRAs and 401(k)s
• Outside investments, like stocks, mutual funds, ETFs and bonds
• Social Security benefits
• Annuities
• Pensions
• Part-time jobs
• Additional income-generating assets like rental property or a business

Once you take stock of your current and potential avenues for income, it's time to run the numbers. You can plug those account balances and estimates into a retirement income planning calculator to see how things are shaping up.

Generally speaking, you should aim to have roughly eight to 10 times your current annual salary saved by age 60. If you're a bit shy of that goal, you could revisit your assets for additional income potential.

For instance, say you have a permanent life insurance policy but no longer need the full death benefit. In this case, you could tap the policy's cash value as an additional retirement income stream. Or perhaps you have a rental property with a value that's risen along with local real estate prices. You could sell the property and use the lump sum to invest in an annuity as a part of a tax-efficient retirement income plan.

Beyond inflation and income planning, your five-year retirement outlook should form around the retired life you envision. Consider budget adjustments, the home you live in, and those you love as you build a comprehensive retirement plan that provides for both.

Your dream retirement begins with a closer look at today's budget and how it will change in the years to come. Projecting your new income and expenses is important because you'll be shifting from earning money to using your retirement savings and you'll likely have different costs in your post-work lifestyle.

A budget planning worksheet can help you take a methodical look at your current spending and start considering how spending might shift as you head into retirement. Some questions to consider include:

• Day-to-day expenses. Do you expect them to stay the same or decrease? Consider line items like gas, tolls, parking and auto insurance that might change when your daily commute is no longer a factor.
• Housing expenses. How will retirement impact your monthly housing budget? Running the numbers can help you see what it would look like to pay off your mortgage or downsize.
• Current debt. Will you carry debt beyond a mortgage into retirement? Calculating any current debt and its average interest rate can help you compare budget-saving options like debt consolidation loans or early debt payoff to increase your spending power when you switch to a fixed income. Using debt payoff strategies like the debt avalanche or snowball methods could be useful.
• Health expenses. What costs do you have now and what new costs might you face down the road? Retiring usually means ending your employer-sponsored plan and getting your own health insurance in retirement. But most people aren't eligible for Medicare until age 65. Also consider that aging is often tied to higher medical expenses, and you may find that you eventually need long-term care.

When calculating your retirement income needs, it's wise to add in a cushion so you're covered in case of future changes, inflation and emergencies. Whether your electric bill goes up or your roof comes down, a bit extra in the bank can keep your retirement plans intact.

Try running calculations that add interest to your estimated retirement income and spending needs. You'll always be the best judge of what you need in the bank to feel confident about life's curveballs. Once you have a number, you can work with an advisor to adjust your current savings strategy and future income plan.

By reviewing your budget in the five years leading to retirement, you can craft a strategy that balances your life, values and priorities with your projected retirement income.

Should you pay off your mortgage before you retire?

It can be stressful to be on the hook for mortgage payments when you no longer have a paycheck. But a mortgage in retirement can also have its benefits.

Weigh the pros and cons of keeping your mortgage

As you plan how to retire in the next five years, look at the greatest risks to your life savings and prepare for them. Crafting a savvy strategy will protect your savings and provide for your future, no matter what life brings.

A long and healthy life is a blessing. But it's natural to worry that you'll run out of funds at some point. A 2023 study by the Transamerica Center for Retirement Studies found that 45% of workers aged 50+ were concerned about outliving their savings. But you can take steps today to allay this fear.

An experienced financial advisor can help you create a retirement income plan that uses all of your current and future income resources to their utmost advantage. With expert help, you can decide when to take Social Security, which retirement accounts to draw from first and build an income strategy that maximizes income and minimizes taxes.

A financial advisor also can help you stretch your savings through investments like annuities. These insurance contracts can offer guaranteed income streams plus additional features like spousal benefits that provide for loved ones and ensure their income, too.

A five-year retirement plan—or any financial strategy—has to factor in market volatility. Because markets rise and fall, it's important to look at your current investments and determine what changes need to be made to protect your savings as you plan to exit the workforce.

Today, you may hold a large amount of higher-volatility investments in your retirement portfolio. This includes stocks or stock-heavy mutual funds and ETFs. During the peak of your working years, you can afford to take risks to grow your wealth because you have time to recover from inevitable market dips.

As you near retirement, though, you don't have time to recoup losses. That's why, during the five years heading into retirement, it's important to work with an advisor to gradually reallocate your investments. By shifting some of your holdings to lower-volatility assets like bonds, certificates of deposit or balanced ETFs and mutual funds, you can protect your wealth and future income while still enjoying modest growth.

At any stage in life, it's important for your retirement investment strategy to align with your risk tolerance. Working with an advisor can help ensure your investments bring you peace of mind instead of keeping you up at night.

Rising prices from inflation can impact your future spending power, which can be especially worrying if you live on a fixed income. An advisor can help you choose investments that protect your savings and future purchasing power.

Advisors are particularly adept at helping clients safeguard their retirement savings from inflation risk. They can help you choose an asset allocation that includes stocks to generate growth, balanced by fixed-income investments like bonds and CDs to provide income even when the market takes a downturn. Thrivent advisors often recommend retirement portfolios that include 60% stocks for just this purpose.

New legislation frequently affects how much Americans pay on Tax Day. While some updated rules can benefit retirees, others create additional burdens. It's hard to predict future tax-related developments, so it's important to make some proactive plans to safeguard your savings in case taxes increase down the line.

To prevent taxes in your retirement years from taking too big a bite out of your savings, it's important to work with a professional to plan your retirement income strategy. They can help you decide which income streams you should tap first, along with how much and for how long.

For instance, if you have significant savings in a Roth IRA, you could use those assets first to delay taking Social Security. If your Roth can give you a steady income stream until age 70, you can delay taking Social Security until you receive the maximum benefit. This one decision could lower your taxes (because qualified withdrawals from Roth assets come out tax-free) and increase your future income.

The average couple will spend about $300,000 on health care during retirement. As you're closing in on the years before retirement, consider how you'll pay for care—both on a day-to-day basis and in the event you or a loved one requires a higher level of care.

First, read up on the differences between traditional Medicare and Medicare Advantage plans. Once you're eligible to sign up, the plan you choose will dictate where and how you seek care, including the providers you can use and how much you'll pay for premiums.

Next, think about how you'll pay for higher levels of care if you face significant health challenges. A long-term care policy can help protect your retirement savings by covering costly services, including care for Alzheimer's and dementia or licensed help for at-home medical care. Securing a policy early may also help keep premiums low—a benefit for those living on a fixed income.

No matter how close you are to retirement, continuing to put money in your retirement accounts is crucial. People aged 50 and older even have special incentives to do so since accounts like IRAs and 401(k) have catch-up contributions that can significantly boost savings.

As of 2024, those who are 50+ can contribute an extra $7,500 annually to a 401(k) plan for a total annual contribution of $30,500. Age-eligible IRA holders can contribute an additional $1,000 annually, for a total of $8,000.

Starting in 2025, older investors will get additional boosts. Thanks to the SECURE Act 2.0, those aged 60–63 can contribute the greater of $10,000 or 150% of the regular catch-up contribution amount to their qualified employer plan, such as a 401(k) or 403(b). IRA holders ages 50+ will enjoy a base contribution of $7,000, plus an extra $1,000 catch-up contribution.

Whether you're short on your savings goals or just want a bit more in the bank before retirement, these extra contributions can help quickly increase your nest egg.

Taxes can eat away at your retirement savings, so it's important to think about retirement and taxes together—today. During retirement, you could face taxes on part-time work income, brokerage account investments and withdrawals from your retirement accounts. Your Social Security benefits might be taxable as well.

If you're concerned about taxes reducing your retirement income, a Roth IRA conversion could be a consideration. With this strategy, you gradually convert taxable retirement assets—like those in a traditional IRA—to tax-free assets held in a Roth IRA.

You'll pay taxes on the amount you convert but won't be taxed again when you make qualified withdrawals. One potential drawback: When you convert money to a Roth IRA, you'll see an increase in your taxable income for that year, which could push you into a higher tax bracket.

Roth IRAs have another benefit as well: They don't have required minimum distributions (RMDs), the minimum amount you must withdraw from qualifying retirement plans like traditional 401(k)s and traditional IRAs once you reach a specific age. RMDs are taxed as ordinary income in the year that you take them. If you miss a withdrawal, you'll face a tax penalty on the amount you didn't withdraw, in addition to the income taxes you already owed on the required amount.

However, you might have some control over the timing and amount of your withdrawals, and the strategies around RMDs are worth discussing with a tax professional or financial advisor.

As you head into the last years before your retirement, you don't have to go it alone. Reach out to a Thrivent financial advisor to help chart your unique course for what lies ahead. By combining professional guidance with your goals, you can feel confident about achieving the retirement you envision.