Is Lifestyle Creep Eating Into Your Funds
Workers in their 50s likely command higher salaries than they did earlier in their careers. But as paychecks get bigger, so too can expenses: kids, a bigger house, a second car, health-care costs, and more. Lifestyle creep is real, and it can happen so slowly that workers donât realize theyâre outspending their means. And some 50-somethings may not have been as focused on retirement in their younger years, instead thinking about nearer-term goals like vacations and kidsâ college funds.
But many experts say that for investors in their 50s, retirement savings should be the first priority after non-negotiable costs like housing. To maximize retirement account funds, including catch-up contributions, workers may need to pull back on discretionary spending like weekends away and dinners out to live within their meansâor even a bit below their means in favor of contributing more to retirement.
Icipate In Your Employers Retirement Plan
Few of us have a pension anymore. That means the burden of saving for retirement is strictly on your shoulders. Fortunately, many employers make it easy by offering a retirement plan that you can contribute to automatically each pay period.
Traditional 401 contributions are pre-tax and lower your taxable income today. You pay tax on the money you save when you withdraw it in retirement.
As a rule of thumb, Clark says that anyone in a 24% tax bracket or below should go with the Roth 401. If youre a high-income earner, youre likely better off with the traditional 401 to help lower your tax bill.
Weve got a complete explanation of how the 401 and the Roth 401 work here.
Understanding Your Investment Account Options
Now that youve made the right choice in deciding to save for retirement, make sure you are investing that money wisely.
The lineup of retirement accounts is a giant bowl of alphabet soup: 401s, 403s, 457s, I.R.A.s, Roth I.R.A.s, Solo 401s and all the rest. They came into existence over the decades for specific reasons, designed to help people who couldnt get all the benefits of the other accounts. But the result is a system that leaves many confused.
The first thing you need to know is that your account options will depend in large part on where and how you work.
Recommended Reading: Can You Get Medicare If You Retire At 62
Boost Your Retirement Savings
Put as much as you can into your 401, if you have one, advises Lassus.
Once you hit 50, you are allowed to make up to an additional “catch-up” contribution each year. For 2020, the catch-up limit is $6,500, which can make a huge difference down the road, she said.
If you don’t have an employer-sponsored plan, then contribute as much as you can to a Roth individual retirement account, if you qualify, or a traditional IRA. Your annual contribution for 2020 is capped at $7,000 if you are age 50 or older.
While Roth IRAs are widely beloved by financial professionals, since contributions are made after tax and distributions aren’t taxed, there are income limits. You can contribute the full amount if you make less than $196,000, if you are married and filing jointly, or less than $124,000 if you are single. However, you can still contribute a reduced amount if you make less than $206,000 as a married person or under $139,000 if you are single.
Then, there are Roth 401 plans. Contributions are made after tax and there are no income limits. The maximum contribution is the same as the traditional 401. Walsh is a fan of the plans and said he believes it is a good way to take advantage of low taxes today.
“With the swelling debt taken on by the U.S. government, taxes are going to have to go up,” he said.
In other words, pay now at a lower rate than later at a potentially higher one.
How Much Should You Have Saved By 50
32% of their pre-retirement income replaced by Social Security benefits.
You may receive income from other sources, such as a pension, but you will probably need to lean on savings or other assets to maintain your lifestyle. One suggestion is to have saved five or six times your annual salary by age 50 in order to retire in your mid-60s. For example, if you make $60,000 a year, that would mean having $300,000 to $360,000 in your retirement account.
It’s important to understand that this is a broad, ballpark, recommended figure. You may need more or fewer assets depending on your financial situation and goals for retirement. Factors that may lead you to adjust your savings target include these:
You May Like: How To Do Early Retirement
Tips For Retirement Planning
- You might want to think about finding a financial advisor to manage your money. A financial advisor will use their expertise to help you reach your retirement goals. Finding a qualified financial advisor doesnt have to be hard. SmartAssets free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If youre ready to find an advisor who can help you achieve your financial goals, get started now.
- Dont forget about Social Security. Use this Social Security calculator to estimate what you can expect your Social Security checks to be in retirement. After all, this money will play a role in your overall retirement budget.
- If you want to set up and plan your retirement goals, SmartAssets retirement calculator can help you figure out how much you will need to save to retire comfortably.
In Sum: How To Prepare For Retirement In Your 50s
If youre like most people, you likely havent yet developed a concrete vision of your retirement. Considerations regarding when to retire, where to live, and how to fill time during retirement may still elude youand thats fine. However, these details shouldnt deter you from getting serious about the next chapter in your life, and taking the steps mentioned in this article can help.
Planning for retirement planning can be complicated and overwhelming. Vision Retirement can help simplify your journey.
Were an independent registered investment advisor located in Ridgewood, New Jersey, delivering next-generation financial advice, technology, and education. For only $69 a month, you can get financial and investment advice from a CERTIFIED FINANCIAL PLANNER professional. Click here to schedule an appointment.
DisclosuresThis document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.
Refine Your Budget Set Up Automatic Savings
First, to free up cash, review your budget and eliminate any excesses. Food, for example, is one area where many people overspend, says Nadine Marie Burns, a CFP in Ann Arbor, Michigan. Making a meal plan could save over $100 per month on discarded or unused items.
Next, calculate a realistic savings goaland how much you can save automatically on a regular basis, Wirick says. If that’s overwhelming, focus on making small changes over time. And plan on living a really long life, possibly into your 90s, and do your retirement income calculations accordingly, says George Gagliardi, a CFP in Lexington, Massachusetts. You can’t control how long you live, but the average 50-year-old male can expect to live for another 30 years, to 80, and the average 50-year-old female can expect to live another 33 years, to 83, according to the Social Security Administration.
Live Like Youre Already Retired
In planning for retirement, you may create what you believe is a sensible budget, but you cant really be sure youll able to stick to it until you try it. If you have trouble living according to your retirement budget while youre still working, chances are you wont be any more successful with more time on your hands to spend money. Whether its downsizing your house, taking fewer vacations or generally adopting a more frugal mindset, you can start retirement training now. Doing so will also make a big impact on your lifestyle costs today to help ensure you have enough money for tomorrow.
Don’t Miss: Safest Place To Retire In Mexico
Fund Your 401 To The Max
If your workplace offers a 401or a similar plan, such as a 403 or 457and you arent already funding yours to the max, now is a good time to rev up your contributions. Not only are such plans an easy and automatic way to invest, but youll be able to defer paying taxes on that income until you withdraw it in retirement.
Because your 50s and early 60s are likely to be your peak earning years, you may also be in a higher marginal tax bracket now than you will be during retirement, meaning that youll face a smaller tax bill when that time comes.
This applies, of course, to traditional 401s and other tax-advantaged plans. If your employer offers a Roth 401 and you choose that option, youll pay taxes on the income now but be able to make tax-free withdrawals later.
The maximum amount you can contribute to your plan is adjusted each year to reflect inflation. In 2023, its $22,500 for anyone under age 50. But if youre age 50 or older you can make an additional catch-up contribution of $7,500 for a grand total of $30,000.
Can You Maximize Your Investments With Catch
Especially for those who havenât begun a retirement fund or are short of their savings goals, maximizing contributions to all retirement accounts can help an investor get caught up. These tax-deferred retirement accounts include employer-sponsored traditional 401 plans as well as Roth IRAs and traditional IRAs.
Investors in their 50s can make catch-up contributions beyond these limits. These payments can start the calendar year that a worker turns 50, even if their birthday hasnât come yet.
For 401s, workers 50 or older can make an annual catch-up contribution of $6,500 in 2022, bringing their total limit to $27,000. For IRAs, itâs a total of an additional $1,000, making the limit for that bucket $7,000. These extended limits can help bridge the gap for those who didnât save as much earlier in their careers.
Recommended Reading: How Much Money Will I Need To Retire At 50
In Your 50s How To Get Ready For The Retirement You Want
While 50 may be the new 30, its simply not the case when it comes to saving for retirement. For that, theres no turning back the clock. When people reach their 50s, they tend to realize that retirement is no longer such a distant concept. Yet a recent poll found that 32% of Canadians between the ages of 45 and 64 have nothing saved for retirement1.Even among those with retirement savings, the average value of their nest egg is $345,000 while most have saved less than $250,0002.If you’re in this age group and haven’t started to focus on the looming reality of life after a paycheque, theres no time like the present to get serious about preparing for your golden years.
Make the most of the opportunities to move the needle on your retirement planning with these five tips.
What To Do If You Have No Retirement Savings
Once youve figured out what your approximate money needs in retirement will be, its time to figure out how to get there. Youll want to boost your savings and make your money work for you so you have enough when you reach the age at which you hope to retire. Even if you have no retirement savings at age 50, it isnt too late to get started. Here are the steps and options you can take:
Read Also: Pros And Cons Of Retiring In Arkansas
Retirement Calculators: Caveat Emptor
Caveat emptor loosely means that you are ultimately responsible for inspecting the quality and suitability of an item before you buy it. In this context, it means you are ultimately responsible for deciding whether a free online tool is reliable for decision-making.
Free online calculators can give you a broad overview of the relevant components of your retirement plan, but they’re based on assumptions. Most online retirement calculators don’t accurately factor in taxes, and this can make a big difference in the results as well.
Roth Ira Vs Traditional Ira
There are other types of IRAs, but the two biggies are the Roth and traditional IRA. The main difference between them is how taxes work:
Traditional IRA: The money you contribute may be deductible from your taxes for the year, meaning you fund the account with pretax dollars. Youll pay income taxes on money you withdraw from the account in retirement.
Roth IRA: Contributions are not deductible the account is funded with post-tax dollars. That means you get no upfront tax break as you do with the traditional IRA. The payoff comes later: Withdrawals in retirement are not taxed at all.
There are other differences as well. But for most people, choosing between the two comes down to the answer to this question:
When you retire and start drawing money from your investment accounts, do you anticipate that your tax rate will be higher than it is right now?
Not sure how to answer that question? Thats OK: Most people arent. For this reason, and the pluses outlined in the table above, you may want to lean toward the Roth.
Taxes are low right now, which means most people who qualify for a Roth are probably going to benefit from its tax rules down the road. So, youll pay taxes now when your tax rate is low, and pull the money out tax-free in retirement, dodging the higher rate you expect later.
If you believe your taxes will be lower in retirement than they are right now, taking the upfront deduction offered by a traditional IRA and pushing off taxes until later is a solid choice.
Recommended Reading: Jp Morgan Retirement Income Fund
Target Date Funds Make Investing Easy
If youve never invested before, you may be confused about where to invest your money. Target date funds offer an easy answer. There are funds available in five-year increments, so you can pick a fund that targets a year close to your planned retirement date.
So if retirement is, say, two decades away for you, then you would just select a target date fund for 20 years in the future. Then the money you put in is automatically adjusted between stocks and bonds as you age. The goal is to deliver growth but with an eye toward capital preservation as you near retirement.
Clark is a big fan of target date retirement funds, which he says are the the best and easiest investment choice for most people. Weve got a full explanation of how they work here.
How Much Do You Need In Retirement
Investors in their 50s do typically have a shorter time horizon, but itâs crucial to figure out when, exactly, one plans to retire and what they want that lifestyle to look like. Determining those details can help workers make decisions: Once they know how many years they have before they retire, they can plot how much theyâll need to save during that time to build a retirement fund that will last.
Retirement budgets are dependent on oneâs pre-retirement standard of living. Experts say the average retiree needs about 80% of their pre-retirement income each year, though that percentage may be adjusted if investors live above or below their means. Tools like retirement calculators can also help provide a sense of the overall picture.
And while itâs advised that investors shouldnât assume Social Security benefits will make up the majority of retirement income, they are one potential income stream for retirees. Social Security benefits are available as early as age 62, but payments are reduced for claiming before full retirement age, which is 67 for those born in 1960 and later. Retire later than full retirement age, and a worker is eligible to earn credits that can add up to as much as an additional 8% each year, up to age 70.
Side note: Try Titanâs free Retirement Calculator to project how much you’ll need in retirement.
You May Like: Irs Retirement Contribution Limits 2020
Saving For Retirement As A Nontraditional Worker
If you’re self-employed or do non-traditional work such as freelancing or temporary work, you can explore specific self-employed retirement plans. According to a 2021 Pew survey on nontraditional workers
Some examples of self-employed retirement plans to consider include:
Solo 401: Ideal for a self-employed person or business owner with no employees. In 2022, you can contribute $61,000, plus a $6,500 catch-up contribution or 100% of earned income, whichever is less.
SIMPLE IRA: Suitable if you have a larger business of 100 employees or more. Contributions are deductible and you can contribute up to $14,000 in 2022.
» Learn more about self-employed retirement plans
Make The Most Of Social Security
The earliest you can start taking Social Security is technically age 62. But at 50, it doesnt hurt to start thinking about your plan for collecting benefits. You can use Bankrates Social Security calculator to estimate your benefits.
Experts say most people take Social Security too early. Thats a mistake. Delaying retirement doesnt just give you the potential to earn more. It also affects the size of your monthly benefit checks. Elijah Kovar, co-founder of Great Waters Financial in Minneapolis, says that by drawing Social Security at 70 instead of age 62, your monthly benefit amount rises by about 76 percent.
Waiting to collect Social Security, Kovar says, is also a good idea if youre married and you earn more money. If one spouse outlives the other, the surviving spouse keeps the larger Social Security benefit. By having the higher earner wait to claim their benefits, youll have a bigger pot to pull from in retirement.
Another important consideration when deciding when to take Social Security is your tax situation. Kovar says from a tax standpoint, its the best source of income we have outside of Roth IRAs. Maximizing your Social Security benefit also comes down to implementing strategies that will lower the amount of income thats subject to taxation, like donating assets to charity.
Recommended Reading: Retirement Communities In Arizona With Golf Course