Note: This is the fourth in a series of Lifecycle Planning articles for every age group.
In this series of articles, we have been describing some of the personal financial planning challenges faced by Americans during different life stages. Most recently, we looked at some of the financial challenges and opportunities faced by individuals in their 30s and 40s, many of whom are advancing in their careers and enjoying a higher level of income than at any other time in their life.
The 50s often represent a shift in both the lifestyle and financial priorities of many people. Their children may have left the house and perhaps even graduated college, relieving a large financial burden. Many 50-somethings are also in their peak earning years. These two factors combined can present tremendous opportunities for individuals and couples in this life stage to make a strong final push toward securing their financial futures for the rest of their lives.
The top financial priorities for many 50-somethings typically revolve around the two objectives that are paramount to solidifying your long-term financial future: Maximizing Your Retirement Savings and Eliminating Your Debt.
Maximizing Your Retirement Savings
Fifty years ago, the Rolling Stones released their hit, “Time is on my Side,” a song many 50-somethings know. Unfortunately, the financial and retirement reality for most 50-somethings is just the opposite: Time is not on your side. Unlike when you were in your 20s, 30s or even 40s, your window for saving and investing for retirement is now starting to close quickly.
This is why socking away as much money as possible in your retirement savings accounts should probably be one of your main financial goals during this life stage. The good news is that if you are at least 50 years old, you can take advantage of special catch-up contribution limits to most qualified retirement plans, including these:
- Individual Retirement Account — 50-somethings can make an additional IRA catch-up contribution this year of $1,000, for a maximum annual IRA contribution of $6,500 in 2014. The catch-up contribution amount for SIMPLE IRAs is even higher at $2,500, for a maximum 2014 contribution of $8,000.
- 401(k), 403(b), 457(b) and SARSEP — The catch-up contribution amounts for these plans are higher still: $5,500, for a total maximum 2014 contribution of $23,000. So if you and your spouse were to both max out your plans this year, you could contribute up to $46,000 combined toward your retirement financial security.
Moreover, if you own a small business or are self-employed, you may be eligible to open a SEP-IRA, which features an annual contribution limit this year of $52,000 or 25 percent of your compensation, whichever is less. This is the highest contribution limit of all the qualified retirement plans that are available, making the SEP-IRA an ideal retirement savings option for 50-somethings who qualify to open one.
Eliminating Your Debt
The flip side to boosting savings is getting out of debt. Any debt (beyond your home mortgage) that you carry into your 50s and beyond will be like a financial millstone around your neck when it comes to securing a comfortable long-term financial future.
Your goal should be to pay off all of your debts — with the possible exception of your home mortgage — by the time you turn 60 years old.
Start with credit card debt, which is likely the most expensive debt you are carrying if you have it. Devise a plan for eliminating this debt as quickly as possible — and then start paying off your credit card balances in full every month going forward. If you do not have the financial discipline to do this, tear up your credit cards and pay for everything with cash or a debit card instead.
Next is student loan and consumer debt. A surprisingly high percentage of 50-somethings still carry student loan debt, whether it was accumulated from their own college educations or their children’s. Consumer debt, meanwhile, includes loans taken out to buy cars, RVs, boats or similar items. Again, devise a plan for paying off both of these types of debt as quickly as possible.
When it comes to your home mortgage, this is generally considered to be an acceptable debt, given the potential benefits of home ownership and the fact that there may be tax write-offs for mortgage interest. But it is still a debt, and if you can pay off your home mortgage in your 50s, this will give you much more financial flexibility during retirement. Therefore, you might want to start making extra payments toward your mortgage principal with the goal of owning your home free and clear by the time you enter retirement.
Welcome to the Big 5-0!
If you have hit the big 5-0 and your financial situation is not as solid as you would like it to be, don’t panic. Time may not necessarily be on your side, but it is not too late to start making financial moves in these two areas that will help secure your long-term financial future. As the Rolling Stones also put it, “You can't always get what you want. But if you try sometimes, well, you just might find you get what you need.”
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