By Allyn Hughes, CFP®, ChFC®, CLU®, CAP®
For many, their 50’s is a feast or famine period. On average, household incomes for people in their 50’s are higher than previous working years. Successful couples are likely at or near the height of their earning capacity.
Many in their 50’s aren’t prepared for retirement, though. They often face one of four situations that can make this decade more difficult from a personal financial planning perspective:
- College costs for children can be very expensive and, if previous saving and planning were not done, this can dramatically lower retirement savings rate during this period.
- Cost of housing can be very high, especially in urban or suburban areas.
- Many couples have either gone through a divorce or could go through a divorce during this time. (Divorce can adversely impact the financial stability of a household.)
- Many have not started to save for retirement until fairly recently, and now realize they need to play “catch up” to achieve financial security by typical retirement age.
College costs. Controlling college costs can be difficult. Understanding the true cost of college – tuition, room and board, living expenses, travel costs – can help you compare college options. To arrive at net cost, take total cost and subtract it by grants and other financial aid. The net cost is an important starting point for further discussion and planning. To help your child determine the right college for him or her, it is important that you set expectations on sources of funding: what you are able to contribute, what your child needs to contribute during and post-college (via loans). This discussion should help move forward the college selection process.
Housing costs. We suggest that housing costs should never be more than 30-33% of a family’s take-home pay. Housing costs above this level often make it difficult to pay for other non-discretionary expenses and save for retirement.
Post-divorce. If you have already gotten divorced, you may need to concentrate on lowering your standard of living for a time so you can focus on rebuilding your (retirement) savings. Building a budget and understanding your annual expenses and income will be very important in navigating successfully through this transition.
Retirement savings “catch up.” What if you have not saved adequately for retirement and you realize that you have to start from scratch in your early 50’s? What do you do now? You have one more chance to amass enough savings to help pay for your retirement. The 15-20-year time horizon between your early 50’s and possible retirement is too short to fully take advantage of compounding. Instead of your retirement investments growing for 40 or more years, this investment horizon is reduced by half, which may leave your accumulated savings and investments significantly behind. For example, a person who invests $5,000 per year from 25 to 65 ($200,000 total) at 5% average annual return will accumulate more than someone who invests $18,000 per year from 45 to 65 ($360,000 total) with the same return.
If you are just starting to save for retirement in your 50’s, you’ll need to:
- Work to lower your living expenses so you can afford to maximize your retirement savings over the next 15-20 years.
- If you are self-employed, make sure that you “pay your retirement plan first” and open a SEP, individual 401K or defined benefit plan for your business and work to fund this plan fully every year.
- If your employer provides a retirement plan with a company match, you should work with your Human Resources or employee benefits department to determine the highest savings rate possible based on income level and work to fund this plan at that level.
- If you are not covered by a retirement plan through your employer, you should save as much as possible in a traditional or Roth IRA (maximum 2017 contribution $5,500 for those under 50 and $6,500 for those 50 and above).
Building on retirement savings in your 50’s
If you have saved for retirement through your employer’s retirement plan throughout your career, you need to continue saving and investing to better prepare for retirement.
- Make sure you have reviewed a recent Social Security statement to confirm that it reflects your actual earnings every year.
- Request estimates from your current or former employers for any potential pension amounts. Determine when these will be payable.
- Review your estate planning documents (e.g., wills, trust, beneficiaries of retirement plans) to make sure that they accurately reflect your goals and wishes.
- Determine if you need to keep any of your life insurance policies.
- Understand when major expenses (mortgages) will be paid off and work to complete these payments before you retire.
- Plan for any other big, one-time expenses, such as a child’s wedding.
As with any decade, your 50’s provide both opportunities and risks. While you can’t avoid every adversity that comes your way, an eye towards thrift and consistent savings could help you confidently cross a non-too-distant threshold: retirement.
- Financial Plan: What is it? Who needs it?
- How to choose a good financial advisor
- Good advisors ask questions
- Do you need a financial adviser or counselor
- Financial planning for new middle-aged orphans
- Make the most of employer-sponsored retirement plans
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