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.

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.

Avoid These Common Retirement Mistakes

Jane Young, CFP, EA

Jane Young, CFP, EA

When it comes to retirement there are many preconceived notions and myths on how you should handle your finances.  Avoid falling into the trap of what retirees are “supposed to do”.  Instead, logically evaluate your situation and make decisions accordingly.   Below are some common financial mistakes to avoid with regard to your retirement.

  • Don’t underestimate your life expectancy and how many years you will spend in retirement. It is reasonable to spend 20 to 30 years in retirement.  Most retiree’s should plan to cover expenses well into their 90’s.
  • Avoid overestimating your ability and opportunity to work during retirement. Be cautious about including too much income for work during retirement in your cash flow projections.  You may lose your job or have trouble finding a good paying position.  Additionally, your ability and desire to work during retirement may be hindered by health issues or the need to care for a spouse.
  • Many retirees invest too conservatively and fail to consider the impact of inflation on their nest egg. Maintain a diversified portfolio that supports the time frame in which you will need money.  Money needed in the short term should be in safer, fixed income investments.  Alternatively, long term money can be invested in stock mutual funds where you have a better chance to earning returns that will outpace inflation.
  • Resist the temptation to take Social Security early. Most people should wait and take Social Security at their full retirement age or later, full retirement is between 66 and 67 for most individuals.  Taking Social Security early results in a reduced benefit. If you can delay taking Social Security you can earn a higher benefit that increases 8% per year up to age 70.  This can provide nice longevity insurance if you live beyond the normal life expectancy.  You also want to avoid taking Social Security early if you are still working.  In 2016 you will lose $1 for every $2 earned over $15,720, prior to reaching your full Social Security retirement age.
  • Avoid spending too much on your adult children. The desire to help your children is natural but many retirees need this money to cover their own expenses.   You may be on a fixed income and no longer able to earn a living, your children should have the ability to continue working for many years.

One of the biggest retirement mistakes is the failure to do any retirement planning.  Crunch some numbers to determine how much you need to put away, when you can retire, and what kind of budget you will need to follow.  Without proper planning many retirees pull too much from their investments early on leaving them strapped later in life.  It’s advisable to have your own customized retirement plan done to determine how much you can annually pull from your investments.  As a general rule, annual distributions should not exceed 3-4% of your retirement portfolio.

Taking Social Security Early Not the Best Option

Jane Young, CFP, EA

Jane Young, CFP, EA

The best time to take Social Security is a personal decision based on your financial situation, health, lifestyle, family longevity and when you stop working.  Social Security will provide you with the same total amount, if you live to the average life expectancy, regardless of when you take it.   The full retirement age for most people is between 66 and 67.  You can begin taking reduced benefits as early as 62 or you can wait and take an increased benefit as late as age 70.  If you begin at 62 your benefit is reduced by about 30%, if you take Social Security after your full retirement date your benefit will increase 8% per year until age 70.

You will probably benefit from taking Social Security at full retirement or later.  Unless you have a serious medical condition, there is a good chance you will live longer than the Social Security average life expectancy.  Social Security life expectancy tables are based on 2010 data and lag what can be reasonably expected.  They indicate a 65 year old male will live to around 84.3 and a 65 year old female will live to around 86.6.  Taking Social Security later is like buying longevity insurance.  It can provide you with more money later in life which can help put your mind at ease, if you are worried about out living your money.

If you are still working it can be especially detrimental to take Social Security before your full retirement age.  In 2015 you will lose $1 for every $2 earned over $15,720.   Once you reach full retirement age there is no limit to how much you can earn.   However, taxation of your Social Security benefit is based on your overall earnings.  If you take Social Security after you stop working a smaller portion of your benefit is likely to be taxable.  Additionally, if you continue to work and delay Social Security you may be able to increase your total Social Security benefit. The Social Security Administration annually recalculates benefits for recipients who are still working.

The decision on when to take Social Security is significantly impacted by your marital status and your spouses expected benefit.  If you have been married for at least ten years you have the option to take the greater of 50% of your spouse’s benefit or your full benefit. If you wait until your full retirement age you can start taking 50% of your spouse’s benefit, let your benefit grow, and switch back to your full benefit at age 70.   If you take the spousal benefit prior to your full retirement age you cannot switch back to your own benefit at a later date.  If you have been married for at least 10 years, and your spouse dies, you are eligible for the greater of your benefit or 100% of your spouse’s benefit.

More information about your Social Security benefit is available at www.ssa.gov.

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