Here's Why the 5 Years Before Retirement Are So Important

the last five years of your working career are the most important as you prepare for retirement in today's video I'm going to show you why and I'm going to show you five things you can do to make the most of these years hey everybody I'm James canole founder root financial and I'm here to teach you I get the most out of life with your money so why is it that your last five years of your working career are so much more important to prepare for retirement well there's many reasons but in today's video I'm going to highlight the five most important aspects that you need to focus on to make the most of your retirement Planning number one the first reason is compound interest really starts to pay off now we're all told about the power of compound interest but here's the thing about it it doesn't really start to pay off until you get much closer to retirement let's use Warren Buffett for example as of today Warren Buffett's worth about a hundred and ten billion dollars a staggering amount of money however Warren Buffett didn't first become a billionaire until the age of 56 meaning for Warren Buffett well over 99 percent of his net worth was grown after the age of 56. now you and I are never going to have 110 billion dollars nor do we need to worry about having 110 billion dollars but the principal remains of so much of Warren's net worth happened after the age of 56 the same thing applies to us so much of the power of compounding happens in those last few years before you retire a very common example is your portfolio value could very well double in the last five years of your working career how is that the case well let's look at this let's assume you're 60 years old and you want to retire at the age of 65 on 1.5 million dollars and today you have 750 000 I mean it took you your entire working career to grow from zero to 750 000 how on Earth are you going to get that 750 to 1.5 million effectively doubling and adding another 750 000. well let's assume that you have two spouses and you're both maxing out your 401K which is thirty thousand dollars per year for this year and let's assume that you both get a match of four thousand dollars from your employer if you get an eight percent growth rate from age 60 to age 65 you will have grown your portfolio from 750 000 to 1.5 million meaning it took you maybe 40 years to grow that first 750 000 and it only takes you five years to grow by another 750 000. the reason for that is twofold one is compounding as we're mentioning but also your latter years that's when you have the most flexibility to actually save a whole lot for retirement before that you're saving for college you're saving for a home you're saving for all these different things then all of a sudden you're in your Peak earning years maybe kids are out of the house mortgage is in line you have all this excess income it becomes a lot easier to save because you're not having to do everything that you once did so if we can use these last few years to really focus on the power of compounding it's not inconceivable to think that your money could double or more in the five years leading up to retirement so principle number one here is this is when compounding really starts to pay off the second reason these last five years before retirement are so important is you really start to understand what it will actually cost to retire if you ask a 30 year old or a 40 year old hey how much do you need to retire on it's a very difficult question they're raising families they're trying to save for a home they're doing all these different things today with their stage of life then you will be in the five years prior to retirement so in those five years you're starting to get an accurate sense of okay what do I want my retirement to look like what will travel look like what will Leisure look like what will lifestyle look like and as some of these expenses start to fall away or they start to diminish when it comes to the cost of raising a family buying a home having various jobs you start to get a very clear picture your retirement expenses is one of the most important variables in determining the success of your financial plan so if you ask a 40 year old okay what will it cost to retire the answer is probably I have no idea it's just too far off for me to even think about and there's too many other things going on they're demanding my attention but you have someone who's 60 or 62 over 65 what will it cost to retire they'll still probably say I have no idea well they'll have a much greater sense of okay here's the actual things I want to do and can come up with an answer much easier than they could 10 20 30 years earlier so use those last five years lamp to retirement to estimate what retirement might cost and then refine that to refine that and refine that so by the time that you actually retire you have a very clear picture of what it will cost to do what you want to do the third reason that the five years leading up to retirement are so important is it's a chance to pay for the big things up front so those last five years chances are good you might have a very healthy income relative to the rest of your career those might be some of your highest income years take advantage of that do you have a roof that needs to be repaired do you have a new car that needs to be purchased do you have some big things that can be prepaid but by doing that you're setting yourself up both for financial success by not having to come out of pocket for these things in retirement on a fixed income but also for emotional success one of the most difficult things to do in retirement is bring yourself to spend and sometimes if you have a big thing to spend money on have a big car purchase or a big home repair big something else that's very difficult emotionally and it's going to give you a lot of fear or anxiety that you're spending too much in retirement if you leave those big expenses for them the fourth reason those last five years are so important is it's an opportunity to take care of any medical procedures as needed now granted we can't control our health we can't control when certain things will happen but if you have good health insurance through your employer use it those last few years lead into retirement to maybe specifically those last few months leading up to retirement any procedures you know that you'll need any visits that you know you'll need get everything checked use that insurance for what it's worth so that go into retirement you've done the most you can on your employer's bill so that leading into it you're not coming out of pocket for major expenses so using those years and those months to best prepare lessens the burden on your early retirement years to have to pay for everything and then the fifth reason those years are so important is it gives you a chance to start dreaming five years out you can really start to see it you can really start to feel it if it's not here yet but it's just around the corner as I mentioned before in your 30s or your 40s you're hardly thinking of retirement hopefully you're saving to a 401k hopefully you're putting some money away but you're not actively obsessed or actively consumed with understanding what will retirement actually look like you're raising a family you're buying homes you're trying to advance in your career there's all these other things that are competing for your attention well the last few years leading up to retirement a lot of those things are no longer on your plate as much so you can fully devote this time to not just saying what do I need to do financially to get ready for retirement but what do I want to do personally and emotionally to get ready for retirement what can I do now to prepare to make this best season of my life in terms of understanding the retirement it's a blank canvas what do I want to spend my days doing what do I want to spend my weeks my months my years doing how can I be intentional about making sure I have something to retire into so it's not just retiring and then wandering aimlessly trying to figure out what to do but it's retiring and it's having a routine and it's knowing what's going to come and it's knowing what trips I want to take and what activities I want to do and who I want to spend my days with those last five years are a wonderful time to start dreaming because if you don't and if you're just focused on the financial side then you're going to prepare and prepare and prepare and you're going to be your 401k funded and your Roth IRAs funded and your mortgage paid off and your brokerage account built up and your emergency funded but you get to retirement and you're scared to pull the trigger because you don't know what's on the other side of that from a personal standpoint or an emotional standpoint so if you're not dreaming about what do you want that time to look like and then taking steps to make sure that you are actively involved in creating that outcome you're not going to feel confident in your decision to retire so this is why the five years limited retirement are so important it's a chance to both financially and emotionally prepare for this wonderful time in your life take advantage of it make sure that you're doing all the things that you need to do so the retirement can be one of the best seasons of your life now believe it or not sometimes one of the best things you can do to prepare for retirement is to stop saving for retirement once you've hit a certain point that sounds counter-intuitive I explain why that's the case in this video here once again I'm James Knoll founder root financial and if you're interested in seeing how we help our clients at root Financial get the most out of life with their money be sure to visit us at www.rootfinancialpartners.com

Channel: James Conole, CFP®

Views: 322,479

Keywords: investing, retirement planning, tax planning, financial planning, retirement, personalfinance, taxes, dividend investing, financial planning at 50, how do I retire?, long-term investing, financial planning at 60, roth conversions, roth ira, IRA, individual retirement account, benefits of investing, pros and cons of investing, donor advised fund, financial education

Id: yMux1m19ngg

Length: 8min 44sec (524 seconds)

Published: Sat Apr 29 2023