The 50s are crunch time for saving for retirement. If you set a retirement savings target but have been neglecting it, you need to dust it off for a careful review.
“You should be looking at your plan periodically, at least every three years,” says retired CFP professional Dick Bellmer, a past president of the National Association of Personal Financial Advisors.
Once you’ve reacquainted yourself with the financial destination you want to reach, take these steps in your remaining pre-retirement years to make sure you get there.
1. Set realistic goals
First item for consideration: your savings and investments thus far. Hopefully, you’ve been stashing away money consistently, making maximum contributions to 401(k) plans and IRAs, as well as other accounts.
How much is enough? That depends on your lifestyle and expenses, potential medical bills and the kind of support you’ll have from, say, a pension plan and Social Security. As you review your savings goals, be careful not to set the bar too low. According to Fidelity Investments, investing professionals recommend that you reach retirement with savings of at least 10 times your last full year’s worth of income from work.
“People typically don’t downsize,” says Harold Evensky, a Texas-based CFP professional and chairman of Evensky & Katz/Foldes Financial. “It’s not uncommon for them to spend more in retirement than less.”
2. Call in the experts
It may be a good idea to seek professional guidance to ensure you’re on the right track and setting realistic goals.
The Employee Benefits Research Institute, in its 2018 Retirement Confidence Survey, found that workers who have a financial adviser are more likely to be satisfied with their workplace retirement plan than workers without an adviser.
The survey also found that workers with an adviser were more likely to say they will roll their workplace savings into an IRA at retirement.
For many, hiring a financial adviser is the best thing they could do to help themselves. Numbers and financial planning are tedious and complicated to some people.
3. Take advantage of catch-up contributions
One of the first things a pro will encourage you to do is to keep saving. If you’re still working and over 50, there are ways to catch up. You can begin putting more money into tax-sheltered retirement accounts such as 401(k)s and IRAs. In 2018, individuals age 50 or older can save up to $24,500 in a 401(k) and up to $6,500 in an IRA.
Take advantage of these opportunities. “It’s not hopeless!” says Dee Lee, CFP professional and author of “Women & Money.”
To illustrate, Lee describes a couple who decide they need to do some belt-tightening. If each contributes $10,000 a year to a 401(k) plan, they’ll have about $90,000 each after seven years, assuming the money grows by 7 percent a year.
Now for the caveat: In order to earn that 7 percent, you’ve got to be willing to take on some risk. Stocks have averaged returns of about 10 percent a year over the past century or so. Bonds perform about half as well, so if you’re unwilling to invest in stocks, you may wind up short of your goals.
“The question besides ‘What do you need?’ is ‘What is your risk preference?’” Bellmer asks. “It doesn’t matter that you might need a 10 percent rate of return. You might not be able to handle the risk associated with that.”
Financial planners will say that most people in their 50s are too young to flee to the safety of cash instruments. “This is not the time when you go to cash,” says Ellen Rinaldi, chief security officer at Vanguard and a former principal of Vanguard’s retirement agenda. “You may stay 50-50 in stocks and bonds. But you’re going to need growth in your portfolio.”
4. Time your exit
Savings and investments may not be enough to adequately fund your retirement. Planning means making some vital life decisions, too.
You may want, or need, to delay retirement. If so, you’ll have plenty of company. Many workers these days are opting to “downshift” into retirement by working part time or working longer than they had originally planned. A September 2016 Bankrate survey found that 70 percent of Americans plan to work “as long as possible.” And only half expect that will mean retiring in their 60s.
Delaying retirement doesn’t just give you the potential to earn more. It also affects Social Security benefits, which are based on your earnings and the age at which you start collecting them. If you were born by 1938, you qualified for full benefits by age 65. But individuals born after then have to wait longer — up to age 67 for those born after 1960. If you draw benefits earlier, you’ll see reduced benefits over your entire lifetime.
Meanwhile, you have to wait until you’re 59 1/2 to cash out of other retirement funds, such as a 401(k), IRA and Roth IRA. If you jump the gun, you’ll usually pay a 10 percent penalty for early withdrawal.
One bright spot: You may find it easier to find work or stay at your current job as you get older. Instead of pushing older employees out the door, many companies are finding that they need to retain experienced individuals to fill staffing gaps, says Tim Driver, CEO of RetirementJobs.com.
“It’s a supply-and-demand issue,” he says. “There’s a much lower supply of younger people coming into work. Then, because of longevity, there’s a whole new need for people to work longer. People find they didn’t save enough. Work is a fundamental and new part of retirement.”
5. Tackle debt
Part of the equation when you quit work is lingering debt. By the time you’re 50, one big debt hurdle you may have left to clear is your mortgage.
Once upon a time, mortgage-burning parties were common, a fun way to celebrate the achievement of owning your home free and clear. But that rite of passage is becoming less common. A Consumer Financial Protection Bureau analysis of Census data shows that 30 percent of homeowners age 65 and older still carry mortgage debt.
There are arguments both for and against paying off your mortgage as quickly as possible. Being without a mortgage would allow you to earn more by investing money in the stock market. That’s the argument made on paper. In real life, most retirees find it too difficult to quit working and keep paying for their home.
“It comes down to whether you look at your home as a home or an investment vehicle,” Vanguard’s Rinaldi says. “But going into retirement with a large mortgage is not the best situation.”
6. Prepare for the unexpected
Safeguard your finances against unexpected medical costs. Large medical bills can eat up a lifetime of savings quickly.
A couple in their mid-60s will need $280,000 to cover health care costs in retirement, according to a 2018 Fidelity Investments estimate. Then there’s the stratospheric cost of extended care at nursing homes. A report from Genworth says the median annual cost of a semi-private room in a nursing home was $85,776 in 2017. With that in mind, retirement planning must include some consideration of future medical costs.
One option is long-term health insurance, which pays for extended medical care, including such things as nursing and assisted living. “It has to be easily affordable not just for today, but for the whole premium period,” says Marilee Driscoll, founder of Long-Term Care Planning Month, a public-awareness campaign that takes place each October, and author of “The Idiot’s Guide to Long-Term Care Planning.”