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It's easy to think of retirement as beginning at a fixed point in time, but in actuality, we know it's a process that extends over a number of years. During this process (five years before leaving the office for the final time) you should begin to focus on what you want from your post-retirement life.

Once you get into this 5-year window, or the "retirement red zone," as I call it, you should start implementing certain pieces of your retirement plan to get a grasp on your readiness. This will allow sufficient time to stress test your retirement preparations and make any necessary corrections before you are completely independent of a paycheck.

I'll discuss five important factors that you need to start to thinking about five years before retirement. This is not a comprehensive list, but it's meant to guide your thought process during your own retirement planning.

1. Create a financial plan and master budgeting

This should be done as soon as possible. The financial plan is one of the most important things that you can do before you enter retirement. The value in creating a responsible plan is that it will track, from a financial standpoint, where you are, where you need to go, and if you're on track to get there. The first and most important question that the plan should address is, "Can I afford to retire?"

Creating a financial plan may sound a little daunting, but it's well worth it. I advise all of my clients to complete "the 24-month checkbook drill," or online banking drill now. Start by reviewing the total outflows number from your checking account statement over last 24 months. Then, divide that sum total by two. This number should give you a good snap shot of your annual expenses and help you identify expenditures that you'll need to cover in retirement.

Don't forget to include property taxes, homeowner association fees, cars, etc. You should look for areas where you can cut back and identify expenses that will disappear when you're no longer working. In retirement, you need to have budgeting locked down, because when you give up your paycheck, you need to make absolutely sure that you'll have the funds to cover the mandatory expenses.

It's also important to "stress test" this plan before you reach retirement. Once you've identified an annual budget, see if you can comfortably live within its structure. If you're unable to stick to that number, you may have to work a little longer and put away a little bit more, to ensure you can live comfortably and within your means during retirement.

2. Identify retirement income sources

What forms of income will you have in retirement? Although the Social Security Administration is facing some problems, most people will likely receive Social Security benefits. Whether those benefits continue to include an annual cost of living adjustment is another question. There are a number of different strategies that should be considered, particularly if you are a spouse, before filing for Social Security.

Make sure you have identified your retirement income sources (Municipal bond dividends, part-time wages, business income, interest, capital gains, individual retirement account and 401k distributions, rental income etc.) that you expect to receive during your retirement.  Since you're switching from an income accumulation phase to a distribution phase, it's critical to know your options for when and how to maximize withdrawals. As a general rule, it's advisable to make withdrawals from your least tax-efficient vehicles first, because your after-tax contributions will continue to grow.

3. Maximize your 401k

Don't leave money on the table. If your situation permits, make sure that you are leveraging your employer match contribution. Verify the amount with your employer, and take advantage of it, to fully fund your retirement. You can put up to $17,500 each year into your 401k, and if you're age 50 and older, you can contribute another $5,500, called a catch-up provision.

As you know, 401ks aren't the only places to save money for retirement. If you have an IRA or Roth IRA, you're only able to contribute $5,500 each year. If, again, you're age 50 plus, you have the option of a $1,000 catch-up provision. So even if you haven't done a lot of saving up to age 50, you could still put away $29,500 per year to help get you to your retirement goal.

Preretirement is also a good time to determine if you want to convert some or all of your traditional IRA money into a Roth account. The big question is, "How large of a tax bill do you want to pay?" Remember, you don't have to convert all of your IRA money at once. You can convert the money in increments, limiting your tax exposure for the years that you do choose to convert money. Because Roths are after-tax dollars, they have a significant advantage in that you don't have to take required minimum distributions from these accounts.

4. Get a handle on health care

Outside of maintaining your good personal health, you should be aware of your company's health care plan, how it works, if it can be continued into retirement, and if so, at what cost? This is particularly important if you plan to retire before age 65 and are not eligible for Medicare. Once you reach 65, most employer plans will require Medicare to be the primary insurer. In some plans, the company may pick up some percentage of secondary costs, but not always.

Retirees should also be aware that Medicare does not cover traditional long-term care costs, and it's important to have a strategy for managing these expenses when or if they are required. Your health care costs will most likely increase towards the end of your retirement, so it's wise to plan for those costs now.

5. Try to pay off debt before you retire

When preparing to retire, be mindful of the amount of debt you're carrying. The most common types of debt are credit cards and auto loans. It's also important to realize that the majority of credit card debt is incurred around the holiday season, so you need to be realistic about your spending habits. In extreme cases, people have cashed in their 401k's to pay off debt, or taken on a comparable debt load, in the form of a home equity loan. If you know that you have a penchant for overspending, then use the years leading up to retirement to practice budgeting.

Mortgages are also an area in which people tend to carry a lot of debt. In today's world, paying off your mortgage before retirement isn't absolutely vital, due to the fact that most mortgages today have very low interest rates. However, if you will sleep better knowing that your house is paid off, then by all means do it. I would caution people with variable rate mortgages, however, to think about locking into a low rate now, because interest rates will not stay at these historic rates for too much longer.

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