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-plus 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 2016. So if you and your spouse were to both max out your IRAs this year, you could contribute up to $13,000 combined toward your retirement financial security.
The catch-up contribution amount for SIMPLE IRAs is even higher at $3,000, for a maximum 2016 contribution of $15,500. If you each have a SIMPLE IRA and max out your plans this year, you could contribute up to $31,000 combined.
- 401(k), 403(b), and 457(b) plans — The catch-up contribution amounts for these plans are higher still: $6,000, for a total maximum 2016 contribution of $24,000. And finally, if you and your spouse were to both max out into any of these plans this year, you could contribute up to a combined $48,000 toward your retirement financial security.
Moreover, if you own a small business or are self-employed, you may be eligible to open your own plan and take advantage of an even higher annual contribution limit this year of $53,000 or 25 percent of your compensation, whichever is less. A defined benefit plan may allow even higher contribution limits. If you qualify to open your own plan, it is probably best to seek professional advice to help you select and design your retirement plan to best meet your needs and objectives.
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. However, this more “traditional” goal of “paying off the mortgage” might not be the best idea given today’s interest rate environment and the ability to lock in an incredibly low interest rate for 30 years. You might want to explore these alternatives further with your CPA and/or your financial advisor.
Protecting Your Retirement Security
As you enter your 50s you are getting closer to retirement. You will therefore also need to begin thinking about how investment risk and potential losses due to market corrections could affect your future retirement plans. It is often during the 50s that most investors begin to “dial back” the risk in their investment portfolios. This is often a difficult decision especially for those who find themselves a little behind on their savings goals as many believe that continuing to take the additional risk my help them “catch up” – but beware, the risks you are taking can also put you further behind.
Another big decision that is typically addressed during this life stage is considering the purchase of long-term care (LTC) insurance. An LTC policy will help cover your healthcare and assisted living and nursing home costs should you need this level of care later in life. In general, the earlier you buy an LTC policy, the lower the premiums will be, which can make the 50s a good time to consider buying LTC insurance.
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 three 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.”
You might want to consider using a financial advisor or a retirement planning software tool to assist you in making some of these decisions. One option is to use the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.
Brad is a Registered Representative with, and Securities and Advisory Services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. CA Insurance License #: 0B22199.