Your Complete Guide to Retirement Planning in Your 50s
Common advice says it’s important to start planning for retirement as soon as possible. Even though you may have opened a retirement savings account in your 20s or 30s, that doesn’t mean your plan has to be on autopilot until the day you permanently leave work. There are important steps to take in your 50s as well to make sure you’re on track for your golden years.
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Prioritize your retirement
As you approach retirement age, it’s important to prioritize a comfortable retirement over other financial goals. This often means less spending in other areas.
For example, their children’s college education is one of the biggest expenses for people in their 50s, according to Julia Vanzler, managing director, senior wealth advisor for wealth and trust management at SVB Private. “It’s a great gift to be able to help pay for college, but it’s important to remember that students can borrow money for school, and there are no loans for retirement,” she said. Save for retirement first, then determine if there is excess savings that can go toward other things, such as college expenses.
Here’s more information about saving for retirement and preparing for the costs that come with it:
John Campbell, head of wealth planning for the Eastern District of US Bank, said people 50 and older have the opportunity to save more on an employer’s savings plan and possibly make up for lost time. For example, the contribution limit for a 401(k) in 2022 is $20,500, but workers age 50 and older can add an additional $6,500 for a total of $27,000 each year. If you have an IRA, you can make a compensatory contribution of $1,000 in addition to the $6,000 annual limit.
On top of that, Campbell said it’s important to capitalize on your company’s match. “This has two advantages: You save more for retirement and reduce your taxable income.” An employer match is free money that can help bridge the gap between what you’ve saved and what you need for retirement, so be sure to contribute at least enough to get the full match.
Here is some investment information:
Put your savings to work
For many workers, Vanzler said, the peak of their earning years is in their 50s. It can present a great opportunity to increase savings. “Be aware of what you’re spending on fixed versus discretionary expenses, and set a goal to save more each month,” she said.
Additionally, target how these savings will be allocated. If you want to split your savings into different goals, Campbell suggests: Set aside at least 50% for retirement investments, 10% to 25% toward paying off variable rate debt and 10% to 25% toward home repair savings.
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Your Health Savings Account (HSA) limit
A 401(k) or IRA isn’t the only savings vehicle available for retirement. If you have a health plan with high deductibles, you are eligible to put money into an HSA account. This account offers triple tax savings that can help in retirement. Your contributions can be made pre-tax, you don’t have to pay dividend taxes and you can withdraw tax-deductible money now or in retirement to pay for qualified medical expenses.
Additionally, after age 65, you can use the money in your account for non-medical expenses without any penalties. However, you will have to pay income taxes on any ineligible withdrawals. Campbell noted that the HSA is also transferable, with the account going with you if you change jobs.
Anticipate the need for long-term care
At some point in your retirement, you may not be able to take care of yourself fully. It’s a situation no one likes to think about, but one that needs to be planned. “Long-term care costs have skyrocketed in recent years, leaving much of the aging population unwilling to fund care or aging at home,” said Andy Friedman, Vice President of Marketing and Experience at Assured Allies. In fact, the average cost of a semi-private hospice care room is now over $93,000, and home health aides are over $50,000.
Investing in long-term care insurance (LTC) can save you thousands of dollars in the future, Friedman said. “When planning for retirement, be sure to anticipate the unexpected and factor in those costs,” he said. “It is also important that you fully understand the nuances of LTC insurance and whether or not you qualify.”
Create a plan for income taxes
Campbell noted that many people focus on cumulative (saving) planning for retirement, but many neglect distribution planning. As in the taxes you will have to pay when you take out your money.
“Think about various tax sources of income, such as after-tax accounts,” he said. For example, a Roth IRA allows you to contribute with after-tax dollars, which then grow tax-free and can also be withdrawn tax-free. This is a good place to keep high-growth investments that will lead to a large tax bill when you retire. Roth IRAs come with income restrictions, but there may be ways around them, such as a “back door Roth IRA.” It’s always a good idea to talk with a financial advisor about the best tax strategy for your retirement investments.
Here’s more information about taxes in retirement:
Look at life insurance
Finally, Campbell recommends getting a permanent life insurance policy. Unlike life insurance, a perpetual policy (such as life, universal or variable life insurance) protects you throughout your life and also contains a monetary value component. This means that your loved ones not only have financial protection in the event of your death, but you have interest-bearing money that you can take advantage of while you are still alive.
Life insurance rates generally rise with age. So the earlier you can secure a policy, the less you will have to pay in premiums.
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This article originally appeared on GOBankingRates.com: Your Complete Guide to Planning for Retirement in Your 50s
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