Get Serious About Planning for Retirement in Your 50’s

Jane Young, CFP, EA

Jane Young, CFP, EA

In our 50’s we still have time to plan and save for retirement and it’s close enough that we can envision ourselves in retirement.  Below are some things to address as you plan for retirement.

  • Set some goals and make plans, what does your retirement look like? Consider your path to retirement and your timeframe – you can gradually transition by working fewer hours in your current job, work part time in a new career field or completely stop working.  Think about how you will spend your time in retirement.   Work usually provides us with mental stimulation, a sense of purpose and accomplishment, social interaction and a sense of identity.  How will you meet these needs in retirement?
  • Evaluate your current situation. Take a thorough look at current expenses and assets.  Analyze your spending habits and compare this to your earnings.   Look for opportunities to save money to invest and prepare for retirement.
  • Ramp up savings and maximize your retirement contributions – try to save at least 10% to 15% of your annual income. Increase contributions to your 401k and IRA to take advantage of catch-up provisions.  These are your highest earning years where you can really benefit from investing in tax deferred retirement plans.
  • Invest in a diversified portfolio that will grow and keep up with inflation. Your retirement savings is long term money that will need to last another 30 – 40 years.   A reasonable portion of this money should be invested in stock mutual funds to provide you the growth needed to carry you through retirement.
  • Take steps to reduce your retirement expenses – pay off high interest debt, credit cards and vehicle loans. Make extra payments on your mortgage to pay it off around the time you retire.
  • Think about where and how you want to live. Do you want to move to a lower cost area or downsize to a smaller home? Put plans in place to meet your goals.  Complete major remodeling, repairs and upgrades on appliances before you go into retirement.
  • Develop a retirement budget. Consider the impact of inflation and taxes on your monthly outflow.  Many retirees are more active and spend more early in retirement.   Include expenses for health care and long term care in your budget.
  • Evaluate your Social Security options. Delay taking Social Security benefits as long as possible, up to age 70.
  • Calculate how much you need to pull from your retirement savings by subtracting your monthly expenses from your Social Security and pension benefits. As a rule of thumb, avoid spending more than about 4% of your retirement savings per year.  This will vary with the amount of risk you are comfortable taking in your portfolio.  To get a more precise projection on when you can retire, how much you can spend and how much you should save, periodically work with a financial planner on some formal retirement planning.

Patience is the Key to Successful Gardening and Investing

Jane Young, CFP, EA

Jane Young, CFP, EA

We recently built a new home and have been feverishly working on landscaping and planting new flower beds.   While going through the process of planting and nurturing my flower gardens I realized there are many similarities between gardening and investing.  I planted a lot of perennials to create a garden that will last for many years.  However, I’m anxious for the perennials to grow into the large, colorful flowers I have envisioned.  I realize it takes time and patience to develop a gorgeous garden.  To satiate my immediate need for some color I interspersed some annuals with the perennials.  The annuals will meet my short term needs but aren’t a good long term investment.  They will provide beautiful color this year but will die and won’t return next spring

To build a successful garden you have to plan ahead, prepare the earth and plant seeds long before reaping the benefits.   Investing is similar to gardening in that you need to think ahead to create a plan that will meet your long term objectives.  You have to start by planting the seeds and continue feeding and nurturing your investment plan.  After your initial investment is made, continue making contributions and annually re-balance your portfolio to be sure you stay on track.  Periodically some weeding is required to remove poor performing or inappropriate investments from your portfolio.   You may also need to add some nutrients by adding better performing mutual funds or by expanding on the categories of funds in which you are invested.

It’s essential to meet short term needs.  This year I had a short term need for some annuals to add color to the garden.    In your portfolio, you need to include short term money for emergencies and living expenses.  If short term needs are addressed you can invest your long term money more effectively with greater confidence.

Additionally, in both gardening and investing it’s important to stay diversified.  My garden has a variety of flowers that bloom at different times of the year or react differently to varying weather conditions.  Your portfolio should also be diversified with a variety of different investments that help you buffer against a variety of market conditions and changes in your personal life.

Just like perennials in the garden, investments in your portfolio need time to grow and absorb fluctuations in the market.  If you become impatient and give up before they have time to fully bloom you won’t meet your end goal.  Just as vibrant short term annuals can provide a lot of immediate satisfaction they don’t result in a garden that is sustainable over many years.

Investing, as in gardening, is a slow and steady process.  Get started, set a plan, keep a long term perspective and stick to your plan.   Patience and perseverance will help you build a gorgeous garden and a more secure financial future.

Most Effective Investment Approach Combination of Male and Female Traits

Jane Young, CFP, EA

Jane Young, CFP, EA

Numerous studies have found that men and women generally approach investing differently.  Generalizations can be dangerous but there is ample evidence to indicate there are some common gender traits that may hinder our investment performance.  An increased awareness of our potential strengths and weaknesses may help us to adjust our behavior for a better outcome.

Studies have found that men are more confident than women when it comes to investing.  According to Meir Statman, professor of finance with Santa Clara University, “Women tend to be less overconfident than men.  In the stock market, where so much is random, trying to do better than average is more likely to get you results that are below average.  This really is where all the confidence is going to hurt you”.  On the positive side confidence can prompt you to make a decision and take action, but overconfidence can result in taking too much risk and investing in things you don’t know enough about.  A lack of confidence can result in taking too little risk and a reluctance to take action.

In another study conducted by Brad M. Barber, professor at UC Davis and Terrance Odean, professor at UC Berkeley, researchers found that overconfidence leads men to trade excessively.  As a result their returns suffer more than women’s.  But women and men sell securities indiscriminately;    women just do it less often, so their performance doesn’t suffer as much.

According to the 2010 study by the Boston Consulting Group, women have a tendency to focus more on long term goals.  Their investment strategy and risk tolerance revolves around long term goals and financial security.  Men have more of a business orientation and tend to be more focused on efficient transactions and short term performance.  Men are likely to be more competitive and thrill seeking in nature which can lead to a focus on short term returns.  Women’s longer time horizon may help them to prepare for retirement but if they are overly concerned with security they may not take enough risk to earn the investment returns needed to meet retirement needs.

Additionally, the Blackrock Investor Pulse Survey of 4,000 Americans found that 48% of women describe themselves as knowledgeable about saving and investing vs. 57% of men.  Women generally felt less confident making investment decisions and investing in the stock market.  Typically women were likely to do more research, take more time to make investment decisions, use more self-control and stay the course.

Studies have also indicated women enjoy learning about investments in a group setting and men are more likely to be independent learners.  Women are also more receptive to financial research and advice.

The best approach to successful investing is a blend of habits commonly practiced by both men and women.  Identify your personal biases and tendencies and make adjustments to achieve optimal investment results.

Volatile Market Good Time for Retirement Savings

Jane Young, CFP, EA

Jane Young, CFP, EA

This is a great time to maximize your retirement contributions.  Not only will you save money on taxes but you can buy stock mutual funds on sale.  The one year return on the S&P 500 is down about 8% and market volatility is likely to continue throughout the year.

Dollar cost averaging is a great way to invest during a volatile market and it is well suited for contributing to your retirement plans.  With dollar cost averaging you invest a set amount every month or quarter up to your annual contribution limit.  When the stock market is low you buy more shares and when the market is high you buy fewer shares.  You can take advantage of dips in the market and avoid buying too much at, inopportune times when the market is high.

Ideally, the goal is to maximize contributions to your tax advantaged retirement plans however, this isn’t always possible.  Prioritize by contributing to your employer’s 401k plan up to the match, if your employer matches your contributions.   Your next priority is usually to maximize contributions to your Roth and then resume contributions to your 401k, 403b, 457 or self-employment plan.   Contributions to traditional employer plans are made with before tax dollars and taxable at regular income tax rates when withdrawn.  Roth contributions are made with after tax dollars and are tax free when withdrawn in retirement.   Some employers have begun to offer a Roth option with their 401k or 403b plans.

For 2015 and 2016 the maximum you can contribute to an IRA is $5,500 plus a catch-up provision of $1,000, if you were 50 or older by the last day of the year.  You have until the due date of your return, not including extensions, to make a contribution – which is April 18 for 2015. There are income limits on who can contribute to a Roth IRA.  In 2015, eligibility to contribute to a Roth IRA phases out at a Modified Adjusted Income (MAGI) of $116,000 to $131,000 for single filers and $183,000 to $193,000 for joint filers.  In 2016 the phase out is $117,000 to $132,000 for single filers and $184,000 to $194,000 for joint filers.

Your 401k contribution limits for both 2015 and 2016 are $18,000 plus a catch-up provision of $6,000, if you were 50 or over by the end of the year.  If you are employed by a non-profit organization, contact your benefits office for contribution limits on your plan.

If you are self-employed maximize your Simple (Savings Investment Match Plan for Employees) or SEP (Simplified Employee Pension Plan) and if you don’t already have a plan consider starting one to help defer taxes until retirement.

Regardless of your situation take advantage of retirement plans to defer or reduce income taxes on your retirement savings.  Current market volatility may provide some good opportunities to help boost your retirement nest egg.

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