If you’re about five years away from retirement, it’s time for a thorough financial checkup.
Whether you’ve spent decades planning for your golden years or you’re just starting to get serious about it, financial advisors recommend examining all aspects of your financial picture. That ranges from retirement savings and estate planning to insurance needs and housing.
“For a first-time client, the first thing we’d do is a reality check and run the numbers,” said Mark Wilson, a certified financial planner and chief investment officer at The Tarbox Group. “Are they ahead or behind the game, and how realistic is that five-year number?
“Most people don’t have a good sense of how much it really requires to retire,” he explained.
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Indeed, the Center for Economic and Policy Research says the median net worth of near-retirees—those ages 55 to 64—was $165,700 in 2013, down from $177,600 in 1989. But given that some estimates peg health-care costs during retirement at more than $200,000, that figure paints a pretty bleak picture.
So if you’re falling short but are facing retirement, what can you do? For starters, take advantage of catch-up contributions for retirement accounts, such as 401(k) plans and individual retirement accounts. On top of the 2015 contribution limit of $18,000 for all workers in 401(k) plans, employees age 50 and older can stash away an extra $6,000. The annual contribution limit for IRAs is $5,500, and the catch-up contribution limit is $1,000.
Social Security concerns
Also, think about Social Security. The longer you delay tapping it, the greater your benefits will be.
“Start thinking about a strategy,” Wilson said. “You might want to wait to [take benefits] until you’re 70.”
Eligibility for Social Security benefits starts at age 62. Full retirement age, as defined by the government, ranges from age 65 to 67, depending on when you were born. If you start taking benefits before that full retirement age, your monthly check will be reduced. If you wait until age 70, your check will be even greater than it would be at full retirement age.
Also look at your risk tolerance. That basically means evaluating how comfortable you are with your nest egg being exposed to the stock market and its volatility.
“Revisit your risk profile,” said Catherine Valega, a CFP and wealth manager at Winslow, Evans & Crocker. “You don’t want to take all risk off the table, because some people are living in retirement for 30 years.”
Data from the Social Security Administration shows that about one in three 65-year-olds today will live to age 90, and more than one in seven will live to age 95.
Estate planning also is important, regardless of your wealth. This includes having an updated will and making sure your beneficiaries for financial assets—retirement accounts and life insurance policies—are up to date.
Part of estate planning is assigning powers of attorney. The person you pick to have durable power of attorney will act as your agent if you become unable to tend to your finances. A medical power of attorney lets the chosen person make important health-care decisions if you cannot.
Living will, long-term care
A living will also is key. Called an advance directive, it addresses whether you want life-prolonging measures taken if there is little or no chance you will recover.
Long-term care insurance is also something to think about. In simple terms, it provides coverage for the cost of care for people with a medical condition that requires supervision, whether in a nursing home or elsewhere. But it’s not for everyone.
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“People can be afraid of it because it seems like an added expense, but it can be a piece of your overall plan,” said Eric Roberge, a CFP and founder of Beyond Your Hammock.
He explained that people with little saved up are better off putting the money they’d spend on premiums into those savings. On the flip side are the wealthy, who can pay out-of-pocket for long-term care without putting a big dent in their assets.
“If you’re a married couple, make sure your visions are the same. Do you want to move to where grandchildren are? Do you want to volunteer? Have a second career?”
For many retirees, their home is a big part of their net worth. And if they are struggling to meet their expenses, a reverse mortgage can make sense.
Basically, a reverse mortgage gives you access to the equity in your home, and your lender makes a monthly payment to you.
But it is a loan that must be repaid, which typically is done through the sale of your home upon your death.
“If you do a reverse mortgage, there won’t be [that house] for your kids,” Valega said. But, she said, if you needed the loan, “not leaving the house to your kids might not matter.”
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There also is the so-called soft side of retirement planning. That is, making sure you give thought to how you want to spend your time.
“If you’re a married couple, make sure your visions are the same,” Valega said. “Do you want to move to where grandchildren are? Do you want to volunteer? Have a second career?
“That’s the soft side of financial planning that hopefully someone is talking to you about.”
—By Sarah O’Brien, special to CNBC.com