Five Years From Retirement: What You Can Still Change

What the window actually is

People tend to treat retirement as a single date with a single decision attached to it. In practice it is a set of decisions that close at different times, and a fair number of them close before the date arrives.

That is what makes five years out worth marking. It is far enough ahead that contribution room, conversion sequencing, and the composition of the portfolio are all still adjustable, and close enough that the numbers you are working with are the real ones rather than a projection thirty years out. At two years the picture narrows considerably. Several of the items below are effectively settled by then.

Timing rules and limits change and are indexed annually. This describes the shape of the decisions rather than current-year figures. Confirm both with a qualified professional.

The last full earning years

Contribution room is the one item on the list that expires quietly. Workplace plans and IRAs both allow additional catch-up contributions from age 50, and plans differ on whether a further increase applies in the early sixties. None of it carries forward. Room that goes unused in a given year is gone.

What makes the last five earning years worth a second look is that they are frequently the highest-income years of a career, which means a pre-tax contribution is being made against the highest marginal rate the household will ever face, and drawn down later at a rate that is usually lower. That is the mechanism. Whether it applies depends on what the household expects to earn between now and the date, and whether the plan offers a Roth option that changes the calculation.

The related item is where new savings go rather than how much. Households arriving at retirement with everything in pre-tax accounts have less to work with than households holding a mix across taxable, tax-deferred, and Roth. Five years is enough time to build the missing category deliberately instead of discovering it is missing.

The conversion runway

A Roth conversion moves money from a tax-deferred account into a Roth account and creates taxable income in the year it happens. The whole point of doing it deliberately is to fill the lower part of a bracket in years when income is low, rather than being pushed into a higher one later by required minimum distributions.

That is arithmetic that needs years. Converting a large balance in one tax year usually defeats the purpose, because the conversion itself pushes the household up through the brackets it was trying to avoid. Spread across a longer window, the same total moves at a lower average rate. The window that matters most is often the stretch between the retirement date and the year required distributions begin, when earned income has stopped and the plan has not yet been forced to distribute anything.

Two constraints sit alongside it. A conversion cannot be undone once made. And because Medicare premium tiers are set from income reported two years earlier, a conversion done close to or after 65 can raise a premium later without any obvious connection at the time. Both are reasons the modeling belongs before the transaction rather than at tax time.

Pension elections

Households in the south and southwest suburbs frequently have a defined benefit pension in the picture, whether from a corporate plan or from one of the Illinois public systems covering teachers, university staff, and municipal employees. Where one exists, the election attached to it is usually the single largest irreversible decision in the plan.

The core of it is the tradeoff between a larger payment for one life and a smaller payment that continues to a surviving spouse. Plans present that as a menu of options, and the menu is not obviously ranked. The right answer depends on the age gap between spouses, on health, on what other income the survivor would have, and on whether life insurance already covers the same risk. It also interacts with the Social Security claiming decision, because the survivor benefit there is doing part of the same job.

Some plans coordinate with Social Security, some do not, and some public employees have limited or no Social Security coverage from that employment. Those details change the analysis enough that they need to be read from the plan documents rather than assumed. Five years is when to pull them.

The first bad year

A portfolio that has to fund withdrawals during a decline is selling into that decline, which removes shares that are not there to recover afterwards. The same average return over the same period produces a different result depending on the order the years arrive in. It is why two households with identical long-run returns can end up in different places.

The usual structural answer is to hold a reserve of stable assets sized to cover a period of spending, so that withdrawals in a poor year come from the reserve rather than from equities. How large that reserve should be is a function of the spending it has to cover and how much of that spending is already met by Social Security and any pension. A household whose fixed income sources cover most of its baseline needs a smaller reserve than one drawing most of its income from the portfolio.

The reason this belongs at five years rather than at two is funding. With earned income still arriving, the reserve can be built from cash flow. Built later, it is funded by selling, and possibly by selling at exactly the moment you were trying to avoid selling.

What Illinois changes

Illinois treats retirement income unusually well. The state does not tax Social Security benefits, and distributions from IRAs, 401(k) plans, and most qualified pensions are excluded from Illinois income tax. Against a neighboring state, that is a durable structural difference rather than a rounding item, and it changes the conversion math too: a conversion done while still working is taxed by Illinois, while the distribution it replaces would not have been.

Property tax runs the other way, and in Cook County it runs hard. For a retiree with a paid-off house it is often the largest fixed annual cost in the plan. Work from your own most recent bill rather than a county average, and check whether you are receiving every exemption you qualify for, including the senior exemption and the senior assessment freeze where income limits are met.

The third item is estate tax, and it is the one most often assumed away. Illinois levies its own estate tax with an exemption well below the federal threshold, and the state figure is not indexed for inflation. A long-held house in the south or southwest suburbs, combined with retirement accounts and life insurance, can carry an estate past the state threshold while staying nowhere near the federal one. That is a question for an estate attorney, and a plan built at five years should surface it rather than leave it to be found later.

What to ask at this stage

Five years out, the useful test of a planner is not whether they can describe these decisions. It is whether they will show you the schedule on which they close, for your household, in writing.

• Which decisions in my situation have a deadline in the next five years, and what is each deadline?
• What does the conversion runway look like year by year, and what does it assume about my income?
• How would you analyze my pension election, and what would you need from the plan documents?
• How large should the reserve for early losses be, and how do you propose funding it before I stop working?
• How and when do you coordinate with my CPA and my estate attorney?
• How are you compensated on each service line?

On that last point, be precise, because the labels get used loosely. Some professionals are registered representatives who receive transaction-based compensation. Some are investment adviser representatives who receive fees. Many, including this practice, are both, and the accurate description in that case is fee-based rather than fee-only. Advisory accounts carry the fiduciary duty under the Investment Advisers Act; brokerage recommendations are governed by Regulation Best Interest; insurance is transacted through licensed affiliates. Ask for compensation itemized by service line and read the ADV Part 2A.

This practice is founder-led and based in Palos Heights, and Richard Casolari has spent roughly fifty years in financial services. Clients work with him directly. The work coordinates retirement income planning, investment management, tax-aware withdrawal sequencing in coordination with your CPA, and protection planning through licensed affiliates, into one written plan rather than separate recommendations.