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The five years leading up to retirement may be the most important — and most overlooked — window in your financial life.
At this stage, the focus should begin to shift from simply accumulating assets to making deliberate decisions about how those assets will generate income.
Missteps here — whether taking on too much risk, claiming benefits too early or overlooking tax strategy — can have lasting consequences that are difficult to reverse. If you’re five years from retiring, it’s time to refine the key parts of your retirement plan.
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This period represents the final high-income years in which to strengthen financial preparedness and reduce future uncertainty.
A sustainable retirement income strategy often requires balancing guaranteed income, growth potential, tax efficiency and flexibility.
Here are the key areas to focus on as you transition from accumulation to income.
Guaranteed income base
A strong retirement plan starts with covering essential expenses — housing, food, utilities and healthcare — with reliable income sources. These typically form the foundation of retirement cash flow.
Social Security. Timing matters. Delaying benefits until age 70 can increase monthly income and may provide additional protection for a surviving spouse if the higher earner delays claiming.
Claiming before full retirement age permanently reduces benefits by up to 30%. Continued work during early benefit years may also affect taxation and timing strategies.
Pensions. Retirees must often choose between a lump sum or a monthly annuity. A monthly annuity can provide lifetime income and help reduce longevity risk.
A lump sum may be more appropriate for those with shorter life expectancy assumptions, immediate liquidity needs, legacy goals or the ability to manage investments independently.
Income annuities. These products can convert a portion of savings into a predictable lifetime income. They may help reduce market volatility and longevity risk while offering tax-deferred growth. However, features, costs and guarantees vary widely, so contract details really matter.
Investment portfolio
Once essential income is covered, the remaining portfolio supports inflation, discretionary spending and long-term stability. Many retirees must replace about 70% of their pre-retirement income while funding potentially 20 to 30 years of retirement.
This makes risk management essential. Stress-testing your plan can be helpful: What happens if your portfolio declines 25% to 30% early in retirement? Would you need to adjust spending, or would your plan remain intact?
Common strategies include:
Dividend-paying stocks. These can provide ongoing income and potential inflation protection through dividend growth. However, dividends are not guaranteed and can change over time.
Bond ladders. A laddered bond strategy staggers maturities to provide predictable cash flow and reduce interest rate risk. It can also improve flexibility as bonds mature in different rate environments.
Total return approach. This method focuses on overall portfolio growth and systematic withdrawals rather than relying solely on income-producing assets. It can improve tax flexibility and portfolio efficiency, but requires disciplined withdrawal planning.
Withdrawal strategy
Turning savings into income is one of the most important shifts in retirement planning. Just as important is the order in which accounts are accessed.
A commonly used framework is taxable accounts first, tax-deferred accounts (such as 401(k)s and traditional IRAs) next, and tax-free accounts (such as Roth IRAs) last.
The three-bucket strategy divides assets into time-based segments to align liquidity with spending needs while reducing behavioral risk during market volatility.
- Short term (one to three years): Cash and cash equivalents for near-term spending and emergencies
- Medium term (three to 10 years): Bonds and fixed income for stability and moderate growth
- Long term (10-plus years): Equities for inflation protection and long-term appreciation
Sequence of returns risk management. Early retirement market declines combined with withdrawals can significantly impact portfolio longevity. Managing cash flow and reducing forced selling during downturns can help mitigate this risk.
Tax-efficient withdrawals. Strategic planning can reduce lifetime taxes. Roth conversions move taxable retirement assets into tax-free accounts, potentially reducing future required minimum distributions (RMDs).
Health savings accounts (HSAs) also offer tax advantages for qualified medical expenses in retirement. Non-qualified accounts have capital gains considerations.
Closing thoughts
Retirement income planning is ultimately about alignment — matching income sources, investment strategy and tax planning for long-term spending needs.
The final years before retirement are not just about refining numbers. They’re also about reducing uncertainty and stress-testing decisions before they become permanent.
A well-structured plan can help smooth the transition from earning income to living off accumulated assets while preserving flexibility as circumstances change.
Done thoughtfully, this stage of planning can help turn retirement from a series of financial unknowns into a more structured and confident next chapter.
Dan Dunkin contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
