They say the 40s are the new 30s, and the 50s are the new 40s. And “They”, whoever they are, are so right. After all, you’re active, you may have new freedoms from a suddenly empty nest, and you may be making more money than you ever have. At this point, retirement still seems like a pretty far-off destination. And while we definitely support your youthful mindset, retiring comfortably takes some planning. So, if your birth year is between 1961 and 1970, it is time to take a look at your savings, your investment portfolio, and your goals, and possibly make some moves to help ensure you’re on track for the retirement lifestyle you seek.
Save, Save, Save
The obvious resource for retirement is a person’s savings, so in your 50s, I suggest that you evaluate your spending and make a conscious effort to put aside money where and when you can. At this stage in life, your income is likely at an all-time high, while your expenses are likely lower- especially with that empty nest, so it may be possible to significantly increase the amount you are saving each month. A good rule of thumb is to aim for saving 20% of your income, but if that amount impacts your comfort level negatively, you can start lower and increase the percentage as you adjust to spending less.
Maximize Your Retirement Plan
If your employer has a retirement plan that matches your contributions, the conventional wisdom is to participate in the plan and contribute enough to take full advantage of this benefit. For example, if your employer matches up to 3%, it would be wise to be contributing at least this amount. The matching percentage is based upon your salary, so if you made $100,000 per year, and you contributed at least $3000 per year to the plan, your employer would match this amount. If you contributed less, they would match less. If you contributed more, they would only match a maximum of $3000. Not taking advantage of employer match is like leaving money on the table instead of using it for your retirement goals.
While there are contribution limits for 401(k) plans, thanks to the “catch-up” rule of the IRS, workers age 50 and older are able to put aside an additional $6000 into their plans, as long as their employers allows for catch-up contributions (which most do). And they can put an additional $1000 into an IRA. This “catch-up” rule is specifically designed to better set up people for security in retirement, so you definitely do not want to miss this opportunity.
Pay off Debt
As you are looking for ways to save money, your 50s is also an important decade to pay off debt. Once your income becomes fixed, you will not want it consumed by the high-interest rates of credit cards or auto loans. The average interest rate on credit cards ranges from 15% to 20% in 2020, and credit card interest offers no tax benefits, unlike home loans. While you can still book trips and purchase big ticket items, you will want to think twice before using your plastic to pay. Or, if you still want the points that your credit card offers, just make sure you can pay it off each month before accruing interest.
Although interest rates on mortgages are significantly less than credit cards, it may still be a good idea to pay off the balance of your house as soon as possible. Going into retirement with no mortgage payment means more money freed up for other expenses.
Health Care Considerations
A Health Savings Account (HSA) is a way to save even more tax-advantaged dollars towards retirement. If it is not needed for current health expenses, an HSA offers the triple benefit of being pre-tax, growing tax-free, and being generally untaxed when it is withdrawn, as long as it is used for qualified medical expenses. Once you reach age 65, amounts can be withdrawn for any reason. However, keep in mind that amounts withdrawn for reasons other than qualified medical expenses will be treated as taxable income.
In 2020, individuals can contribute up to $3550 into an HSA, while the family maximum is $7100. Before considering an HSA, you need to make sure you are eligible. Only individuals and families with a High-Deductible Health Plan (HDHP) are eligible for an HSA. What is a HDHP? This is a health plan that has an individual annual deductible of $1400 or more ($2800 for a family) and it must also have a maximum out of pocket annual expense of $6900 for an individual ($13,800 for a family). Out of pocket expenses included deductibles, co-payments and co-insurance, however, do not include your monthly premiums.
According to research from HealthView Services, the average 65-year-old couple will spend upwards of $380,000 on health care over the remainder of their lives, even with Medicare, which does not cover many medical needs later in life, including vision, dental, or long-term care. That figure was tallied in 2019, so in accounting for rising costs, just imagine how big that number will be by the time you are ready to retire! Long-term care insurance could be a smart option, and although this technically adds another expense in a decade where you are trying to spend less, purchasing this insurance now may save you money in the long run- before the premiums become too expensive and before you develop any health issues that could disqualify you for coverage.
Consult with a Financial Planner
We know COVID-19 has wreaked havoc on the retirement plans of many Americans. According to a recent TD Ameritrade-sponsored survey, before the pandemic, six in ten Americans were regularly contributing to their retirement savings, and on track with their retirement plans. Now, seven in ten Americans expect the coronavirus-fueled economic turmoil to impact their plans. Times may be uncertain today, but it is certain that you will need to plan for tomorrow.
To ensure you are living the retirement lifestyle you envision, I feel that your best bet in your 50s is to meet with a CERTIFIED FINANCIAL PLANNERTM practitioner. They are the professionals that can strategize with you to optimize your plan, help maximize your investments and contributions, and to maintain the spending power of your savings by staying ahead of inflation. By obtaining retirement security, I hope you will be able to stay active and enjoy all that life has to offer in your golden years.
Located in Truckee, CA, Pacific Crest Wealth Planning retirement & financial planning should be a highly personalized process. Effective planning may enable you to enjoy the freedom of your retirement years. Without it, it may take everything you have just to get by. Please feel free to Contact Us at (530) 563-5250 or emailing us.
This article is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. Please consult your financial advisor prior to making financial decisions.
John Manocchio (CA Insurance Lic#0H73423) is a Registered Representative and Investment Adviser Representative with/and offers securities and advisory services through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services offered through CES Insurance Agency.