Investing in Your 50s: 4 Practical Tips for Retirement Planning
In your 50s, you’ll want to assess your retirement plan, lifestyle, future earnings, and support for your family. Then, practice goal-based investing to help ensure your objectives are met.
Your 50s are a great time to assess your retirement planning to date and get on track with a goal-based investment strategy.
Evaluate your current and desired future lifestyle, income, and taxes, so that you can clarify your preparation for later years.
If you have children, it’s important to set proper expectations regarding how much you’re planning on supporting them as they enter adulthood.
As you enter your 50s, you may feel like your long-term goals are coming within reach, and it’s up to you to make sure those objectives are realized.
Now is also a perfect time to see how your investments and retirement savings are shaping up.
If you’ve cut back on savings to meet big expenses, such as home repairs and (if you have children) college tuition, you now have an opportunity to make up lost ground.
You might also think about how you want to live after you retire. Will you relocate? Will you downsize or stay put? If you have children, how much are are you willing to support them as they enter adulthood? These decisions all matter when deciding how to strategize your investments for this important decade of your life.
Four Goals for Your 50s
Your 50s can be a truly productive and efficient time for your investments. Focus on achieving these four key goals to make these years truly count in retirement.
Goal 1: Assess Your Retirement Accounts
If you’ve put retirement savings on the back burner, or just want to make a push for greater financial security—the good news is that you can make larger contributions toward your retirement accounts after age 50, thanks to the IRS rules on catch-up contributions.
For instance, if you participate in a 401(k), 403(b), 457, or SARSEP plan, the IRS allows you to contribute up to $6,000 over the plan limit per year (up to $18,000, depending on your plan) after you turn 50. You can also contribute an additional $1,000 toward your Individual Retirement Account (IRA) and Roth IRA in addition to the $5,500 limit after age 50, and an extra $1,000 per year into your HSA after age 55 to cover medical expenses.
If you’re already contributing the maximum and still want to save more for retirement, consider opening taxable or retirement accounts outside of your company retirement plan, such as a traditional or Roth IRA.
You may also wish to simplify your investments by consolidating your retirement accounts with IRA rollovers. Doing so can simplify recordkeeping and make it easier to implement an overall retirement strategy. Plus, by consolidating now, you’ll avoid complications after age 70, when you’ll have to make required minimum withdrawals from all the tax-deferred retirement accounts you own.
Goal 2: Evaluate Your Lifestyle and Pre-Retirement Finances
When you’re in your 50s, you may still be a ways from retirement, however you’ll want to consider how to support yourself when you do begin that stage of your life.
If you’ve just begun calculating how much you’ll need to save for a comfortable retirement, consider the following tips and tools.
Tips and Tools for Estimating Income Needs
- Make a rough estimate of how much you spend on housing, food, utilities, health care, clothing, and incidentals. Nowadays, tools such as Mint and Prosper include budgeting features that can help you see these expenditures.
- Subtract what you can expect to receive from Social Security. You can estimate your benefit with this calculator.
- Subtract any defined pension plan benefits you expect to receive.
- Subtract what you can safely withdraw each year from your retirement savings.
- Consider robust retirement planning tools, like ours, which can help you understand how much you’ll need to save for a comfortable retirement based on current and future income from all sources, and even your location.
If there’s a gap between your income needs and your anticipated retirement income, you may need to make adjustments in the form of cutting expenses, working more years before retiring, increasing the current amounts you’re investing for retirement, and re-evaluating your investment strategy.
Think About Taxes
Your income may peak in your 50s, which can also push you into higher tax brackets. This makes tax-saving strategies more valuable than ever. If you’d like to reduce your tax exposure, consider:
- Putting more into tax-deferred savings vehicles like 401(k)s or traditional IRAs.
- Donating appreciated assets to charities.
- Implementing tax-efficient investment strategies within your investments. For example, tax loss harvesting is the practice of selling a security that has experienced a loss—and then buying a similar one to replace it. Long used by DIY investors, high-balance investors, and private wealth managers, tax loss harvesting is a strategy that Betterment offers to customers at no additional cost.
Define Your Lifestyle
Your 50s are a great time to think about your current and desired lifestyle. As you near retirement, you’ll want to continue doing the things you love to do, or perhaps be able to start doing more and build on those passions.
Perhaps you know you’ll be traveling more frequently. If you are socially active and enjoy entertainment activities such as dining out and going to the theatre, those interests likely won’t change. Instead, you’ll want to enjoy doing the all things you love to do, but with the peace of mind knowing that you won’t be infringing on your retirement reserves.
Say you want to start a new business when you leave your job. You’re not alone; more than 25% of new entrepreneurs starting businesses in 2014 were between the ages of 55 and 64 according to the 2015 Kaufmann Index.1 To get ready, you’ll want to start building or leveraging your contacts, creating a business plan, and setting up a workspace.
You may also wish to consider relocating during retirement. Living in a warmer part of the country or moving closer to family is certainly appealing. Downsizing to a smaller home or even an apartment will cut down on utilities, property taxes, and maintenance.
You might need one car instead of two—or none at all—if you relocate to a neighborhood surrounded by amenities within walking distance.
If you sell your primary home, you can take advantage of a break on capital gains —even if you don’t use the money to buy another one. If you’ve lived in the same house for at least two out of the last five years, you can exclude capital gains of up to $250,000 per individual and $500,000 per married couple from your income taxes, according to the IRS.
Goal 3: Chart Your Pre-Retirement Investment Strategy
After you’ve determined how much you’ll need for a comfortable retirement, now’s also a good time to begin thinking about how you’ll use the assets you’ve accumulated to generate income after you retire.
If you have shorter-term financial objectives over the next two to five years—such as paying for your kids’ college tuition, or a major home repair—you’ll have to plan accordingly.
For these milestones, consider goal-based investing, where each goal will have different exposure to market risk depending on the time allocated for reaching that goal.
Goal-based investing matches your time horizon to your asset allocation, which means you take on an appropriate amount of risk for your respective goals. Investments for short-term goals may be be better allocated to less volatile assets such as bonds, while longer-term goals have the ability to absorb greater risks but also achieve greater returns. When you misallocate, it can lead to saving too much or too little, missing out on returns with too conservative an allocation , or missing your goal if you take on too much risk.
Setting long investment goals shouldn’t be taken lightly. This is a moment of self-evaluation. In order to invest for the future, you must cut back on spending your wealth now. That means tomorrow’s goals in retirement must outweigh the pleasures of today’s spending.
If you’re a Betterment customer, it’s easy to get started with goal-based investing. Simply set up a goal with your desired time horizon and target balance and Betterment will recommend an investment approach tailored to this information. You may also wish to read this article to more fully understand the benefits of goal-based investing.
Goal 4: Set Clear Expectations with Children
If you have children, there’s nothing more satisfying than watching your kids turn into interesting adults with passions to pursue. As a parent, you’ll naturally want to prepare them with everything you can to help them succeed in the world.
You may be wrapping up paying for their college tuition, which is not easy given that it can cost up to $9,400 annually on average, and total expenses at private colleges average nearly $44,000 a year, according to the College Board.
As your kids move through college, take the time to have a serious discussion with them about what they plan to do after graduation. If graduate school is on the horizon, talk to them about how they’ll pay for it and how much help from you, if any, they can expect.
Unlike undergraduate programs, graduate programs assess financial aid requirements by looking at only the student’s assets and incomes, not the parents’, so your finances won’t be considered.
You’ll also want to set expectations about other kinds of support—such as any help in paying for their health insurance premiums up to a certain age, or their mobile phone plan, or even whether toward major purchases like a home or car. It’s great to help out your children, but you’ll want to make sure you’re not jeopardizing your own security.
Your 50s may demand a lot from you, but taking the time to properly assess your investments, personal financial situation, lifestyle, and, if applicable, your support for children, can be truly rewarding in your retirement years.
By tackling these four goals now, you can meet your current responsibilities and increase your chances of a more financially secure and comfortable life in the decades to come.
Goal Projection and Advice Methodology
Betterment helps you get on track to meet your goals by providing projections and advice on allocation, savings, and withdrawals. Our methodology for doing so involves some assumptions worth exploring.
Is Betterment Worth It? Estimating the Added Value of a Robo-Advisor
Based on our estimation, using Betterment’s retirement recommendations could earn you 38.8% more after-tax money in retirement compared to investing on your own.
Jon Stein on “How I Built This:” Reflecting On Our Story
Jon Stein joins NPR’s Guy Raz for an episode of “How I Built This” to look back at how Betterment started, what mistakes were made, and how they turned into learnings for the robo-advisor we are today.
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