Your 50’s are a great time to get serious about planning for retirement. By making specific, actionable plans now, you can maximize your retirement goals during these critical years.
What makes this decade important? Unlike when you first started, your future is becoming clearer. You might know what age you will retire, what your lifestyle is like, how much you will have saved, etc. This allows for financial planning rooted in realistic goals. Additionally, your income is at its peak and kids (might) be out of the house. This means your cash flow is ready for efficient use.
Here are four specific financial actions you can take in your 50’s:
1. Play catch-up in your retirement accounts.
Once you turn 50, you can put more away in your retirement accounts. These so-called “catch-up” contributions allow you to turbo charge your annual savings. Here is an example of ways you can bulk up your existing accounts each year:
- 401(k): extra $6,500 ($26,000 total)
- IRA: extra $1,000 ($7,000 total)
- HSA: extra $1,000 (after age 55)
2. Have an effective mortgage plan in place.
We’ve written about how younger people should think twice before aggressively paying down their mortgage. But does this still ring true in your 50’s?
Our advice is to maximize the efficiency of your dollars. While younger people can leverage their money using a mortgage at historically low rates, those in their 50’s need to assess whether they can or should carry a mortgage into retirement.
Carrying a mortgage into retirement
While having a mortgage in retirement isn’t bad, it can create additional risks to your retirement income.
If your retirement income is partly or wholly dependent on investment returns, what happens when you experience a bad stretch? A mortgage is a large, fixed expense that can heighten your exposure to sequence of returns risk (bad market returns early on in retirement).
You can’t not pay your mortgage. If you need to cut expenses for a period of time due to bad market returns, you have less flexibility if you have a mortgage.
Housing in retirement
An effective mortgage plan will explore future housing options. While some plan to downsize in retirement, it isn’t uncommon for people in their 50’s to relocate.
What type of mortgage should someone in their 50’s get? How much of a down payment should they make? These are all questions that should be thoroughly addressed with retirement around the corner.
3. Understand how retirement income works.
Think about a young person planning for college. A student who successfully gets into his/her “dream” university doesn’t just wait for senior year to send out an application or two. The most successful students familiarize themselves with the college admission process early on in high school (or even junior high). They maximize their chances of success by getting involved in sports, clubs and community service. They get good grades and take SAT-preparation classes.
The same is true for retirees! A successful retirement isn’t something you start once it’s time to quit working. Retirees that provide themselves the highest retirement income and probability of success educate themselves in advance on how retirement income works.
Do you know how to turn your retirement assets into retirement income? Do you know what tools are available, or what risks retirees face? Knowing the answers to these questions helps you make preparations now to maximize your future retirement income.
4. Review your investment mix.
Determining your investment allocation is a twofold challenge when nearing retirement.
Challenge #1: You need to plan on a 30 to 35-year retirement.
We don’t know how long we will live. This is a challenge when trying to make our assets last. Many don’t realize how long they will need their assets to work for them.
A retirement lasting 30 to 35 years means owning enough “growth” assets like stocks to keep up with inflation, especially with bond yields being so low. Relying on rules of thumb like, “subtract your age from 100 to find out what percentage to invest in stocks” will likely result in too conservative an allocation.
Challenge #2: Volatility near your retirement date matters.
Stocks are volatile. When you’re saving, it’s beneficial to you. However, when you are near retirement or newly retired, volatility can be dangerous to your long-term success. Even if the market recovers, the damage has already been done.
Balancing these two challenges is at the heart of retirement planning.
With retirement around the corner, why wait to get a plan in place? Turn your 50’s into an effective decade and get a financial plan now!