Dave Ramsey's Best Advice for Anyone Within 5 Years of Retirement

When you're five years away from retirement, you can see the finish line. You likely have many ideas of how you want to spend your time in retirement and are looking forward to stopping work.

However, before you retire, Dave Ramsey, a well-known financial expert, has a few pieces of advice to help people prepare. His advice includes topping up your retirement plan, saving an emergency fund, and, ideally, becoming completely debt-free, including your mortgage. Here's a compilation of his advice for soon-to-be retirees.

Getting completely out of consumer debt before leaving the workforce

Ramsey is a huge proponent of being debt-free. In fact, he recommends that his listeners become debt-free before they invest at all. However, if you already have investment accounts, but you also have high-interest debt, Ramsey recommends paying off your debt using the snowball method.

This is especially important for people who are nearing retirement, because you'll be switching from a salaried income to a fixed income. Typically, people have less money to live on in retirement, so paying off debt can help free up money because you won't have monthly payments.

Pay off your mortgage before retirement

In addition to paying off your consumer debt, investing 15% of your income, and saving a 3 to 6-month emergency fund, Ramsey also recommends paying off your mortgage before you retire. Not only can this give retirees great peace of mind, but it can also help minimize their expenses. If you plan to retire in approximately five years, this can be a good financial goal to work towards because of the cash flow it creates.

Keep investing during your final working years

During your last five years of work, Ramsey also encourages people to continue to invest 15% of their gross income into retirement accounts. However, for those who feel behind on their investments, take advantage of catch-up contributions. Those who are above age 50 can contribute an extra $8,000 a year to their 401(k). Those who are between age 60 and 63 can contribute an extra $11,250 to their 401(k)s in addition to hitting their maximum contributions. This is one way people can use their high-earning years before retirement to top off their 401(k)s.

Plan for healthcare costs that Medicare won't fully cover

Although retirees are eligible for Medicare at age 65, it's still important to plan for healthcare costs that Medicare won't fully cover. Ramsey recommends purchasing long-term care insurance, having a dedicated savings account, and contributing to an HSA if eligible. Taking these steps can help pay for healthcare costs, which can be as high as $172,500 in retirement, according to Fidelity.

Always keep a robust emergency fund

As part of the 7 Baby Steps Ramsey teaches, he recommends keeping a robust emergency fund covering 3 to 6 months of expenses. Having an emergency fund is especially useful in retirement. That's because retirees can use it for expenses if they face an unexpected expense or the market drops. Withdrawing money from a 401(k) during a market downturn isn't ideal for retirees. So, having a large emergency fund can help.

Work a few extra years if necessary

Although most retirees don't want to hear it, Ramsey recommends working a few extra years if you feel behind on your retirement savings. A few years of working, contributing the maximum to 401(k)s, and taking advantage of catch-up contributions can make a big difference when it comes to your retirement nest egg. Though most people are ready to retire, a few more years of sacrifice working can add significantly to their retirement accounts.

Ramsey's withdrawal rate differs from conventional advice

During your last few years of working, it's a good idea to plan your withdrawal rate in retirement. Ramsey differs from many financial experts on the most appropriate withdrawal rate for people. For example, he argued that the 4% withdrawal rule is too conservative for those who are in good financial shape. Instead, he recommends something closer to an 8% withdrawal rate.

Some financial advisors have criticized his take on this, saying 8% is far too high. That's why individuals need to take the time to assess their own personal financial situation and decide how much they need to retire comfortably. Remember also that claiming Social Security at age 62 can permanently cut your benefits, so your retirement timing is important.

Bottom line

Ultimately, the last five years before you retire are an opportunity to prepare for your golden years. Ideally, Ramsey recommends retiring completely debt-free, including your mortgage. He also recommends building an emergency fund and continuing to invest steadily.

Additionally, take the time to plan your withdrawal strategy for retirement. If you're not sure how to take the steps to reach your retirement goals, make an appointment with a financial planner. A planner can assess your specific situation and recommend the best way to prepare for retirement.