It is common to read about how young people are not saving enough for retirement. While it is always better to start early, they still have many decades to correct their financial mishaps. The real concern is for people who are age 50 and do not have enough saved to support their current standard of living in retirement. What could this population do to secure their retirement?
If you are age 50 and do not have any retirement saving, early retirement might have passed you by. There is still enough time, however, to build a secure financial future. There might even be enough time for you to reach financial independence by the time you reach the traditional retirement age of 65.
I was once at a benefits seminar and the speaker who was there said that there are two things that can make your retirement suck. The first is poor health. The second is not having enough money. While I am not going to write about diet and exercise in this post, I am going to write about what you can do to improve your finances before you retire.
Hopefully, you are already contributing at least enough to capture what your employer is matching. If you are not, it is time to start using your 401K as your main source of retirement savings. I am not referring to contributing 3% of your salary. I am referring to contributing the maximum that is allowed by the IRS. If you are younger than age 50, you can contribute $18,500 per year in your 401K account. If you are over age 50, you are allowed an additional $6,000 in catch-up contributions.
If you max out your 401K starting at age 50, have an average return of 6.5%, you will have over $620,000 saved by age 65. If you are part of a dual income couple, and your spouse maxes out their 401K, you will have over $1.2M combined at age 65. At a 4% withdrawal rate, that would provide a couple with $4,000 in passive retirement income per month.
Once you are over age 50 and meet the income requirements, you can contribute to a Roth IRA. The 2018 income limits for Roth IRA accounts are $199,000 for married couples and $135 for a single person or head of household. If you are age 50 you can contribute $5,500 to a Roth IRA plus an additional $1,000 in catch-up contributions.
If you max out your Roth IRA from age 50 until you are age 65, receive a 6.5% return, you will have over $165,000 in your Roth IRA. That money will grow without owing any taxes. If your spouse also takes advantage of their Roth IRA, that would be over $330,000 in savings by age 65.
Health Savings Account (HSA)
A Health Savings Account or HSA is like a Roth IRA. The contributions are tax-deductible, but withdrawals are made tax-free if used to pay for medical expenses. It is wise to fund your Health Savings Account. This money can compound and be used for future medical needs. In 2018, an employee can contribute $3,450 to their Health Savings Account and there is a $1,000 catch-up for those over age 55.
If you want to save more money after you have your tax-deferred and tax-exempt account maxed out, you can fund your taxable accounts. These include brokerage accounts or bank savings accounts. There are fewer restrictions on funding these types of accounts. These accounts also do not have any Required Minimum Distributions (RMDs)
Do not forget about Social Security. Your benefits are based on the average of your highest 35 years of earnings. Many retirees claim their Social Security benefits at age 62. For every year that you postpone drawing these benefits between age 62 until age 70, the amount that you receive compounds by 7%. To find out more about these entitlements, go to the Social Security website.
Do you have a defined benefit retirement plan from your employer? They are less common in private industry today, but some government employees will still receive a pension at retirement. If you are not sure, make an appointment to talk to your benefits coordinator. If you do have a pension, be sure that your spouse has been designated to receive the survivor benefits. Signing up for survivorship benefits might reduce how much you will receive in your annuity payments, but it extends the coverage of the pension to your spouse if you pass away first.
After reading this post, I hope that you feel more hopeful about your future. Yes, the opportunity to enjoy an early retirement might have passed you by. There is no sense in looking to the past and wishing that you had created a better retirement plan. It is time to move forward.
You can still have a great retirement. It is up to you to take action. You might have to make some serious cutbacks. That might include selling the house that was used to raise your family. If your kids are grown and gone, you do not need all of that extra square footage. You might even want to consider moving to a state with a lower cost of living and practicing geographic arbitrage. If you live in a state with high-taxes like New Jersey or New York, you might want to consider moving to a state with lower taxes like South Carolina.
Other than making cuts consider earning more income. If you are a non-exempt employee, does your employer offer overtime? If you are an exempt employee, look at picking up a part-time job to earn some extra money to fund your retirement accounts.
At any rate, do not panic. That will not improve your situation. Make a financial plan and follow the plan. As long as you have between 10 to 15 years to save and invest in tax-advantaged accounts, you can still save enough to have an enjoyable retirement. Time is running out. The sooner you start taking advantage of these catch-up provisions, the more money you will have for retirement.
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