The Critical Window: The Five Years Before and After You Retire

Our generation is working hard to keep what we've worked so hard to get.

When it comes to retirement, our goal is to be able to retire with two important safety nets: an adequate fixed income and health insurance.

But we're also facing another harsh reality. After having worked full-time for decades, we're not only approaching one of the most important transitions in life – retirement – we have to do it in the midst of one of the most pronounced retirement income challenges in history. The recession has certainly muted any euphoria about the Golden Years. And since increased life expectancy will have more of us spending more years in retirement than the generations before us, we midlifers must focus on making whatever we've saved last longer.

So let's step back and take a look at moving forward.

THE CRITICAL WINDOW

These days a successful retirement plan is like a high wire act. Every step must be deliberate. Every decision will have ramifications but especially financial decisions that are made five years before you retire and the first five years after retirement.

One to five years before retirement is the time to clarify your retirement vision. First, ask and honestly answer: Am I ready to retire? If so, this is the window of time in which to prepare and adjust and gradually begin making life-altering changes. This is the time to realistically determine what you want your life to be like in retirement and how much it will cost.

Determining how much income you will actually need is a must. If you haven't ever created a budget before – do it now. Simply write down everything you spend for one month – what it's for and the amount. At the end of the month, highlight and total your mandatory expenses (like rent, mortgage, insurance, and food). Then total whatever items are left. These are discretionary expenses (such as eating out, vacations and entertainment). A record of your monthly expenses will show you where your money is going and how much can be saved or re-directed to cover other financial needs.

Where you want to live in retirement is a major physical and fiscal consideration. If you plan to move to some place new, this is the critical window of opportunity to start spending more time there – now, to see if it's the "right fit" – for your finances, quality of life and your loved ones.

REVENUE STREAMS

It's important to know and crunch the numbers on your other sources of retirement income. If you've participated in any employer sponsored retirement plans, check with the Human Resources departments of your current and previous employers to understand your options for receiving benefits. You can start receiving Social Security benefits as early as 62; just remember that, if you do, the amount you receive will be less than your full retirement benefit. But even if you start getting Social Security benefits early, you are still eligible to begin receiving Medicare at age 65.

The one to five year critical window before your retirement target date is also the time to:

• update your net worth statement that lists your assets and liabilities
• start getting rid of debt (payoff the most expensive debt first)
• rein in expenses
• reduce credit card balances
• increase savings
• minimize risks
• consider moving some money to more conservative investments
• find a (fee-only) certified financial planner

RIGHT-SiZING

Despite our early dreams, hopes, and plans, fewer midlifers expect to be able to spend their retirement on travel and leisure activities. The bulk of us are just looking forward to and hoping to be able to live comfortably, manage to pay our bills, and afford increasing healthcare costs. That's why it's important to understand that if you can't see a way to retirement any time soon, give yourself the benefit of a "right-sizing" assessment right now. Multiple cars, memberships in clubs, a large home, loaning money to family and friends represent the financial strain and drain of maintaining a long held lifestyle. Eliminating them can put you on track for a delayed but nonetheless achievable retirement.

The first five years after retirement – the single most important financial focus is preservation of your nest egg – so look for ways to produce extra cash flow. A source of supplemental income not only will help replenish your savings while still allowing you to enjoy the freedom of retirement but also fills the emotional void that sometimes comes from no longer working day to day.

Valerie Coleman Morris is the author of "Mind Over Money Matters: It's Your Money So Take It Personally", which will be published later this year.