The five years before retirement are a good time to turn a savings goal into an income plan. That often involves estimating what retirement will actually cost, making the most of contributions while you’re still earning, deciding when to claim Social Security, planning for health insurance before Medicare, and positioning your investments and taxes for the shift from saving to spending.
Retirement planning often centers on a single number: how much you need to save. As retirement gets closer, the questions become more practical. Where will each month’s income come from? Which accounts should you draw from first? How will you pay for health care before you’re eligible for Medicare? Working through them five years out, rather than five months out, leaves time to adjust.
Estimate What Retirement Will Actually Cost
Start with your current spending, then adjust it for the life you expect to live. Some expenses, like commuting and retirement contributions, may go away. Others, like travel, hobbies, health care, or support for children and grandchildren, may increase.
It also helps to plan for how spending changes over time. Many retirees spend more in the early, active years and less later on, although health care and long-term care costs can rise with age. A realistic budget is the foundation for every other decision on this list.
Make the Most of Your Remaining Earning Years
For many people, the years just before retirement are also their highest-earning years, which makes them a valuable window for saving. For 2026 (the IRS adjusts these limits annually and typically announces the following year’s limits in the fall):
● Workplace plans. Up to $24,500 in employee contributions to a 401(k), 403(b), or most 457 plans, plus an $8,000 catch-up contribution for those 50 and older.
● Ages 60 to 63. If you turn 60, 61, 62, or 63 during the year and your plan allows it, you may contribute a higher catch-up of $11,250, for a total of up to $35,750 in employee contributions.
● IRAs. Up to $7,500, plus a $1,100 catch-up contribution for those 50 and older.
Starting in 2026, employees whose prior-year FICA wages from their employer exceeded $150,000 generally must make any workplace-plan catch-up contributions on a Roth (after-tax) basis. If that applies to you, it’s worth understanding how it affects your tax picture. (irs.gov)
If you hold company stock, deferred compensation, or other equity awards, these years are also a good time to map out how and when those will be paid out or sold, since timing can affect both your taxes and how concentrated your portfolio is.
Map Out Your Retirement Income
A paycheck arrives on a predictable schedule. In retirement, you create that schedule yourself. Key decisions include:
● When to claim Social Security. You can begin benefits as early as age 62, but your monthly benefit is permanently reduced if you claim before full retirement age, which is 67 for anyone born in 1960 or later. Waiting past full retirement age increases your benefit until age 70. For married couples, the timing can also affect survivor benefits. (ssa.gov)
● Pension elections. If you have a pension, you may need to choose between a lump sum and lifetime payments, and between single-life and joint-and-survivor options. These choices are often irreversible.
● Withdrawal order. The sequence in which you draw from taxable, tax-deferred, and Roth accounts can make a meaningful difference in the taxes you pay over retirement.
● A cash reserve. Many retirees hold a portion of their near-term spending needs in cash or short-term investments, which can reduce the need to sell investments during a market downturn.
Plan for Health Care Before Medicare
Medicare eligibility generally begins at age 65. If you retire earlier, you’ll need a plan to cover the gap, whether through COBRA, a spouse’s employer plan, retiree coverage, or the individual marketplace. Health insurance can be a significant cost for early retirees.
Timing matters for Medicare as well. Your initial enrollment period begins three months before the month you turn 65, and missing it without other qualifying coverage can lead to lasting late-enrollment penalties. Higher-income retirees should also know that Medicare Part B and Part D premiums are based on income reported two years earlier, so income at 63 can affect premiums at 65. (medicare.gov)
If you’re covered by a qualifying high-deductible health plan, a health savings account (HSA) can be a useful way to set aside tax-advantaged money for medical expenses in retirement. Contributions must stop once you enroll in Medicare, and if you enroll after 65, contributions made in the six months before enrollment may be affected, since Medicare Part A coverage can be applied retroactively for up to six months.
Look Ahead at Taxes
The years between retiring and starting Social Security or required minimum distributions can be an unusually low-income period. For some people, that creates an opportunity to convert part of a traditional IRA or 401(k) to a Roth account, or to realize investment gains at lower tax rates. Roth conversions are generally taxable in the year of conversion, so the upfront tax cost should be weighed carefully with a tax professional.
Required minimum distributions currently begin at age 73, rising to 75 for those born in 1960 or later. Planning for them in advance can help avoid large taxable distributions later in retirement. (irs.gov)
Illinois residents have an added consideration: Illinois generally does not tax Social Security benefits or distributions from qualified retirement plans and IRAs. Where you live in retirement, and when you move, can affect your overall tax picture. (tax.illinois.gov)
Revisit Your Investments and Estate Plan
As retirement approaches, your portfolio’s job shifts from building savings to supporting withdrawals. A significant market decline just before or soon after you retire can have an outsized effect, because withdrawals made during a downturn can lock in losses. Reviewing your asset allocation with that in mind, rather than making a sudden change on your retirement date, can make the transition smoother.
This is also a natural time to review beneficiary designations, powers of attorney, and your will or trust, particularly if your documents were drafted years ago or your family situation has changed.
Frequently Asked Questions
Is it too late to catch up on retirement savings in my late 50s?
Not necessarily. Catch-up contributions are designed for this stage of life, and the higher limit for ages 60 to 63 adds more room. Working a little longer or delaying Social Security, even by a year or two, can also change the picture.
Should I move my investments to cash before I retire?
Moving everything to cash carries its own risks, including the risk that your savings won’t keep pace with inflation over a retirement that could last decades. Many retirees hold some cash for near-term needs while keeping longer-term money invested according to their goals and risk tolerance.
When should I start taking Social Security?
It depends on your health, other income sources, marital status, and whether you’re still working. Claiming earlier provides income sooner but at a permanently reduced amount; delaying increases your monthly benefit up to age 70.
Does Illinois tax retirement income?
Illinois generally does not tax Social Security benefits or distributions from qualified retirement plans and IRAs. Other income, such as investment income, is generally still taxable. (tax.illinois.gov)
This article is provided for informational and educational purposes only and should not be construed as individualized investment, legal, or tax advice. Consult qualified professionals regarding your specific circumstances.