If you’re looking for the bright side of turning 50, here’s one: you are now eligible to make catch-up contributions to retirement accounts. You can add $1,000 to an IRA or a Roth IRA, and an extra $6,000 to your 401(k). That could ramp up your retirement accounts to as much as $61,000 in a solo 401(k). Just be aware that the $61,000 limit is for all of your 401(k) accounts ever year.
Two Cents’ recent article, “What to Know About Money in Your 50s and 60s,” adds that if your kids are out of the house and that house is maybe even paid off (or close to it), you can move some of that extra savings toward your retirement accounts. According to Forbes, even $1,000 extra in an IRA can make a huge difference, if you contribute it every year between 50 and 67. For example:
- 5% annual return: $26,000
- 7% annual return: $31,000
- 10% annual return: $41,000
To see if you’ll have enough retirement savings, take your total income…
- Less any contributions to retirement accounts
- Less any expenses that will go away in retirement
- Plus, any added expenses you’ll have when you’re retired
- Less taxes (estimate high, as taxes will likely to go up, not down)
That gives you your rough total.
If it’s a long way from the budget you’ve been living on, dig deeper and you can see where to make improvements.
Your 50s are the critical time, when preparing for retirement. Review your savings to see the mix of tax categories on your investments: pre-tax, post-tax, and tax-free.
If you have almost all your savings in pre-tax accounts, which decreases the flexibility to pay for retirement, consider building up after-tax and tax-free savings, so you have more flexibility once you retire. This may include investing in a Roth IRA. Consider a backdoor Roth conversion, if you make too much to contribute to a regular Roth. If you’re taking qualified withdrawals (the account’s been open for at least five years and you’re 59½ or older), then your taxes won’t be impacted in retirement, which can be a helpful strategy.
Next, if you’ve made a will already, you should check to ensure that you’ve titled your assets properly. For example, on a bank or brokerage account, you can add beneficiaries to that account, called a Transfer on Death (TOD). This works the same as adding beneficiaries to an IRA account or a retirement plan. Titling your assets properly, lets you avoid probate. It’s a faster and cheaper transfer.
Your 50s and 60s are also the time to start looking into Social Security benefits. You know that waiting until age 70 will maximize your monthly benefit, but your circumstances may dictate an earlier need for benefits. Make this decision thoughtfully, as the repercussions may last decades.
And if you haven’t already had an estate plan created, or if your will hasn’t been updated since the last kid moved out of the house, make an appointment with an estate planning attorney. There have likely been changes in your life, including family changes. You may want to setup a trust for a new grandchild or update your healthcare directive to reflect a marital change.
Reference: Two Cents (August 17, 2018) “What to Know About Money in Your 50s and 60s”