What financial decisions matter most in the five years right before retirement? In the final years before retirement, the priorities shift from accumulation to protecting what you've built and figuring out exactly how the money will actually be drawn down, which means paying closer attention to sequence-of-returns risk, deciding on a Social Security claiming age, and running a real trial budget on your projected retirement income. This is also the window to firm up a healthcare coverage plan if retiring before Medicare eligibility.

Article Summary

  • A market downturn in the years just before or right after retirement can do disproportionate damage compared to the same downturn happening decades earlier, a dynamic known as sequence-of-returns risk.
  • Social Security claiming age is one of the few retirement decisions with a knowable, structural trade-off built directly into the benefit formula, and it deserves a deliberate decision rather than a default choice.
  • Running an actual trial retirement budget for several months before officially retiring reveals gaps between a theoretical plan and real monthly spending that a spreadsheet alone can't show.

"Risk comes from not knowing what you're doing."

Warren Buffett

There's a specific kind of financial planning that only becomes relevant once retirement stops being a distant idea and starts being a date on a calendar. The questions change. It's no longer just "are we saving enough," it's "exactly how will this pile of savings turn into a monthly paycheck, and what happens to the plan if the market drops the year I stop working." The five years before retirement are when those specific, practical questions need real answers, not general reassurance.

Sequence-of-Returns Risk: Why Timing the Downturn Matters

A market decline that happens early in retirement, or right before it, can do more lasting damage than the same size decline happening earlier in a career, because retirees are simultaneously drawing money out of a portfolio that's also losing value, which locks in losses that would otherwise have had time to recover. Two people with identical average investment returns over a 30-year retirement can end up with very different outcomes purely based on the order those returns happened in, which is the essence of sequence-of-returns risk.

One common way people manage this in the years right before and after retiring is by keeping a cash or short-term bond buffer, sometimes covering a year or two of planned withdrawals, so a downturn doesn't force selling depressed investments to cover living expenses. Others adjust their withdrawal amount based on market performance in a given year rather than withdrawing a fixed amount regardless of conditions. There's no single correct approach, but ignoring this risk entirely and assuming average historical returns will show up smoothly, year after year, is one of the more common and costly retirement planning mistakes.

Choosing a Social Security Claiming Age

Social Security benefits are structured so that claiming before full retirement age permanently reduces the monthly benefit, while delaying past full retirement age, up to age 70, permanently increases it. This is one of the most consequential and most overlooked decisions in the years before retirement, since the difference between claiming early and claiming late can meaningfully change lifetime benefit income, particularly for whichever spouse has the higher benefit in a married couple.

The right claiming age depends on individual health, family longevity history, other available income sources, and whether there's a working spouse who can delay claiming. There's no universal right answer, but it's a decision worth actively working through with real numbers from the Social Security Administration's own benefit estimator rather than defaulting to the earliest eligible age simply because it's available, or automatically waiting until 70 without considering personal health and cash flow needs in the meantime.

Bridging the Healthcare Gap

Medicare eligibility generally begins at 65, which creates a real coverage gap for anyone planning to retire earlier than that. Bridging this gap typically means budgeting for COBRA continuation coverage from a former employer, a marketplace health insurance plan, or a spouse's employer coverage if available, and these options can carry meaningfully different costs that deserve a real comparison well before the retirement date, not after leaving the job.

Even after reaching Medicare eligibility, it's worth understanding that traditional Medicare doesn't cover everything, and many retirees carry supplemental coverage or a Medicare Advantage plan to manage out-of-pocket costs like deductibles, coinsurance, and prescription costs. Building a realistic healthcare cost estimate into the retirement budget, rather than assuming Medicare alone will handle it, avoids one of the more common gaps between a retirement plan on paper and actual retirement spending.

Running a Real Trial Budget Before You Retire

One of the most practically useful exercises in the final years before retirement is running an actual trial retirement budget: living for several months on the projected retirement income figure, even while still employed, and directing any surplus salary into savings rather than spending it. This surfaces gaps that a spreadsheet projection can't — a category that's consistently underestimated, a lifestyle expense that turns out to matter more than assumed, or reassurance that the numbers genuinely work in practice, not just in theory.

Pair the trial budget with a written plan for exactly how income will flow in retirement: which accounts get drawn down first, in what order, and how required minimum distributions and tax brackets factor into that sequencing. Retirement income planning is meaningfully different from accumulation-phase saving, and treating the transition as its own distinct planning project, rather than an extension of the saving habits from prior decades, tends to produce a smoother actual retirement.