On casual nights out, regardless of your profession, do you find yourself dressing like
you’re an adjunct professor in literature at an ivy league school? If so, you may be in your 50s.
Congratulations or should I say felicitations my well-dressed ally. Dressing well is one thing;
let’s make sure your finances look just as sharp. Your first steps are making sure you have an
emergency fund with enough cash to cover essential expenses for a few months, as well as prioritizing
paying off high-interest debt. Doing those two things would put you in a good position to save
for your biggest financial goal: retirement. If you’d like it to be comfortable, this means living
off about 80% of your working salary from age 67 for as long as you live. For the average American,
that means having around a million dollars saved up to last for about 18 years.
As far as your investing strategy, it’s time to think about how you
can protect the money you may have accumulated.
That could mean maximizing tax-advantaged accounts like 401(k)s, IRAs, or HSAs
and using investment strategies to help make sure you’re not paying more taxes than you have to.
Diversifying your mix of investments, called asset allocation,
is another way to help address some investment risks. Everyone’s risk tolerance is different but
in this life stage you might consider moving your portfolio toward a composition of 70%
stocks and 30% bonds. Many stocks have a track record of higher growth,
but that higher potential of earnings comes with a higher risk. Bonds, on the other hand, tend to
provide less growth but more safety. In your 50s, you don’t want to expose yourself to too much risk
because as you get closer to retirement you’ve got less time to recover if there’s a downturn.
If you’ve got your financial foundation in place, you’re at the right portfolio allocations for you,
you’ve been smart about taxes, and everything is going according to plan, ideally, you’d have about
six times your annual salary by age 50 and eight times by 60. Though, honestly, how often does
everything go according to plan? What happens if you’re off the mark with your retirement savings?
First off, you’re not alone. Only 44% of Americans between 45 and 59
say their retirement savings are on track.
Second, know that it’s not too late. Your 50s are a good decade to play catch up.
We’ve got a few ideas aimed at boosting your retirement savings.
You can start off by using a retirement calculator to help you determine
just how much you might need and how far off you are. This can help you
get an idea of how much you might need to set aside each week or month to catch up.
The place to put that catch-up money in retirement could be,
based on your circumstances, accounts like a 401(k) or IRAs. These accounts provide tax
benefits that can help you keep more of your money. Though, there are contribution limits.
The good news is that in your 50s the IRS allows you to contribute more. For example, as of 2021,
the IRS cap on 401(k) contributions is $19,500. But if you’re over 50,
you’re allowed to contribute $6,500 more a year, setting the cap at $26,000.
This is designed to help you catch up a bit. Remember,
these limits change over time, so you should check the IRS’s guidelines.
From mid- to low-income earners, there’s also a tax credit for contributing to retirement accounts
called the Saver’s Credit. This can reduce your tax bill even more if you qualify. In any case,
it’s best to talk to a tax professional about your specific situation.
So those are a few ideas aimed at getting the most out of the money you set aside with the
goal of catching up on retirement savings in mind, but where’s that extra money going to
come from? Let’s look at how we can contribute a bit more to our retirement savings accounts.
The first way is the old-fashioned way. Decrease your spending.
Make a budget and stick to it. Easier said than done, I know,
but the key here is to focus on big-ticket items. Smaller things like skipping coffee will make much
less of an impact than say downsizing your home particularly for empty nesters driving
a less expensive car, or rethinking how much of your kid’s tuition you’re paying.
Another consideration might be supplementing your income.
This might be done through side jobs, or if you own more than one property, becoming a landlord.
Other ideas include working longer and making sure any bonuses or inherited
assets go toward retirement. If you can max out contributions to your 401(k) or IRA,
you’ll be working on getting closer to your retirement goals.
If you own a home, you may also want to focus on paying off your mortgage early.
Not only could this help you pay less interest overall,
but if you’re able to finish paying it off before you retire, that would reduce your expenses during
retirement. It’s kind of like getting a raise. Keep in mind though, contributing to retirement
accounts is the first priority for most people. That’s because money invested in the stock market
has historically grown at a higher rate over time than the interest rate on most mortgages.
It may be worth talking to a financial advisor to work out the details of your specific situation.
With all that said, playing catch up can be hard and may feel like you’re trying to run up an
increasingly steep hill.
Although you're trying to catch up, be realistic with your goals and don't overextend yourself
by saving or investing more for retirement than you can afford.
Such a situation could lead to things like credit card debt,
or you may be tempted to borrow from your retirement savings, making matters worse.
With some careful planning, your 50s can be the decade you dial in on your retirement goals.