Investing With Confidence in Your 50s

Investing in Your 50s: 10 Steps to Retirement Planning

For most of your life, saving for retirement probably wasn’t a high priority. But as the years count down on your career, nerves set in and rhetorical questions start flooding your head: Have I saved enough? Was I smart to try aggressive investing? Do I have the right kind of insurance?

Planning for retirement isn’t the most straightforward process, but these 10 steps are a great place to start:

1. Assess Your Situation

To build an accurate retirement plan, determine how much you have in the bank. Calculate your total net worth by subtracting what you owe (e.g., debt, mortgage, and credit card balances) from what you own (e.g., cash, retirement accounts, and assets). You’ll want to have a clear picture of your financial status before you chart your retirement journey.

2. Project Your Future Expenses 

According to Investopedia, most people believe that their annual spending during retirement will be 70% to 80% of their past expenditures. However, you must also factor in expected (and unexpected) expenses that may occur. You might decide you want to travel or buy a new car, for example. Make a list of all your planned costs so you can build those expenditures into your budget.

3. Run a Tax Projection

Tax projections help inform how to allocate your existing cash flow so you can minimize taxes today and during retirement. Whether it’s bunching charitable contributions using a donor-advised fund or making partial Roth conversions, the years leading up to retirement are optimal for maximizing your tax planning. 

For example, a donor-advised fund allows you to make tax-deductible donations so your donations can grow tax-free. You receive tax deductions when you place your assets, like cash, stocks, and real estate, into the fund. When you time it well, you can reap higher benefits. A partial Roth conversion also offers tax-free benefits, which we dive into below. 

In addition, business owners may find they can accelerate or delay certain income and expenses to stay below net investment income tax thresholds. Doing this is not a one-time exercise, though, and you should stay aware of changing tax laws.

4. Consider Partial Roth Conversions 

The decade before retirement is crucial because it’s the best time to manage current and future taxes. If a large portion of your nest egg resides in IRA accounts, for example, you’ll have significant required minimum distributions subject to income taxes that eat away at your hard-earned savings. With partial Roth conversions, however, you can take money out of your IRA, pay taxes on it right away, and have a tax-free income source. The best part is it’s not all or nothing. You can convert smaller amounts over several years instead of paying taxes all at once. This also helps you stay within your current tax bracket to minimize taxes. If done wrong however, a partial Roth conversion may leave some of your potential savings on the table. It could even cost you money in the long run. Being intentional about your conversion, paying taxes with regular cash flow, and working with a trusted advisor are some ways to avoid costly partial Roth conversion mistakes.

5. Take Advantage of Tax-Deferred Accounts and Catch-Up Contributions 

Every year, the IRS determines the maximum contribution limits for IRAs and 401(k)s. In 2021, the maximum contribution for 401(k)s will be $19,500. If you’re 50 or older, you can kick in an extra $6,500 for 2021 for a total of $26,000.  The annual contribution limit for Roth and traditional IRAs, on the other hand, will be $6,000 if you’re under the age of 50 and $7,000 if you’re 50 or older. If you have multiple 401(k) accounts, your total contributions to all of them, traditional and Roth, cannot exceed $19,500. If you don’t personally have earned income anymore, but your spouse does, you can use a spousal IRA which allows the person with earned income to contribute on behalf of the other. No matter what your situation is, you should take advantage of these new, higher limits that allow you to put more money into your retirement accounts and reap higher rewards later—especially if your employer matches contributions.

6. Reduce Your Debt

In 2016, the median debt of households headed by someone 65 or older was more than twice the total it was in 2001. To avoid debt hanging over your head during retirement, begin paying it off now. Start with high-interest debt, like credit card balances, personal loans, or mortgages. This is known as the debt avalanche strategy, which may be more fortuitous as you age as you want to eliminate as much debt as possible before you retire.  But don’t use a lump-sum withdrawal from your retirement accounts to pay it off—the taxes you’ll pay will likely be higher than any interest savings.

If you still have a home mortgage, consider refinancing to reduce the interest burden over the life of the loan. But don’t forget about closing costs – these can reduce how much money you actually save, or could extend the point at which you would need to stay in your home to hit the break-even mark. To determine where or not refinancing makes sense for you, divide your closing costs by the monthly savings. If your answer is 24 or less, then refinancing may work in your favor.

7. Sharpen Your Retirement Budget

Instead of only budgeting for retirement, consider a spending plan. A spending plan allows you to set aside funds for luxuries such as travel or shopping. Envision your dream retirement as well as what it will cost. Then, you can set aside the amount you’ll need to fund your dream. Without a spending plan—or any retirement plan—you are far more likely to run out of money as the years pass. 

To sharpen your budget, ask yourself how your annual income will change? Will you have any opportunities for passive income like renting out a home? Do you have a pension or any deferred compensation plans? What will a full year of spending actually look like for you? Can your family help you out if you need them? Writing down these answers to these questions will improve the chances of your retirement income planning. 

8. Understand Your Healthcare Options 

It’s almost inevitable that you’ll have to pay healthcare expenses during your retirement. According to Fidelity Investments, the average 65-year-old couple will spend about $11,000 on healthcare in the first year of retirement. Furthermore, with average prescription drug expenses factored, you’d need about $301,100 in savings to have a 90% chance of meeting your insurance premiums and out-of-pocket healthcare costs. To avoid those out-of-pocket costs, pick a healthcare plan that offers you the best benefits. Medicare kicks in at age 65, but it often doesn’t cover everything. Unless you’re prepared to pay for deductibles, copayments, and coinsurance, you may want to purchase a supplemental Medigap insurance policy to make up the difference. These are sold by private health insurers and offer different levels of coverage and could pay some of your out-of-pocket expenses that original Medicare A and B may not cover. You can find the best healthcare plan for you by determining the strengths and weaknesses of different kinds. You may also find a better deal depending on where you live. Also consider utilizing a health savings account (HSA), which provides unique tax breaks such as 100% tax-deductible contributions and tax-deferred interest and earnings, making covering healthcare costs in retirement easier.