Building wealth is essential at any age but becomes even more critical as you near retirement.
People in their 50s are usually in their peak earning years and have new wealth-building opportunities available to them. But many are also handling other life transitions in their family, from dependent adult children to caring for aging relatives who can put more strain on their finances.
Your 50s are a crucial decade, one that can catalyze your final push toward completing the nest egg that supports your future retirement lifestyle. With roughly 10 to 15 years of full-time work ahead, here are some mindful and reliable money moves you can make in your 50s.
Curb Education Expenses
We all know college is expensive, but the rising cost of tuition, fees, books, food, entertainment, and more can amplify that burden for parents and children alike.
Studies estimate families can spend upwards of $30,000 per year on education expenses for each child. Assuming they graduate in 4 years (a landmark feat accomplished by less than half of students), that adds up to $120,000—for just one child. This number is just below the average 401(k) balance for people in their 50s.
While many parents want to help their kids with college expenses, they need a plan that doesn’t jeopardize their retirement goals. With proactive planning, you can minimize the amount of student debt your child takes on and keep your nest egg intact. Here are a few ideas to help:
- Work with an advisor team who specializes in college planning.
- Make the most of scholarships, grants, and financial aid.
- Prioritize in-state public colleges/universities as tuition is significantly lower than out of state or private schools.
- Save early and often.
- Make your kids part of the savings plans and discussions.
- Work with your kids to take out the appropriate loans for their situation.
When it comes to funding education, it all comes down to balance. If you can contribute fully to your retirement funds and investment accounts and still have enough leftover to cover tuition, you are in great shape. If that isn’t an option for you, the main idea is to not sacrifice your retirement savings or dip into your 401(k) to cover education costs. Remember, there is no loan for retirement.
Make a Caregiving Plan
Many in their 50s have aging parents and loved ones they become responsible for taking care of. It can be an emotionally and financially complex situation. Caregiving can take up a lot of time, cause emotional stress, and drain resources. Be sure to make a plan with your loved ones to help share these expenses.
It can also be challenging to strike the right balance between financially caring for parents and contributing to your retirement and savings goals. Here are some things you can do to help:
- Take advantage of government programs and aid.
- Enlist the help of other family members and friends.
- Hire professional caregivers, even if it’s only a few hours a week.
- Check in with loved ones about any savings or retirement accounts they have that could help cover some of the costs.
- See if they have a long-term care policy, including coverage limits and payout terms.
- Grant yourself some patience and grace.
With the average nursing home cost exceeding $100,000 per year, you should use any resource available to help cover some of those costs. Caring for an aging relative can be difficult, but you must prioritize your own financial wellbeing first to take care of your future.
Take Advantage of Catch-Up Contributions
Once you turn 50, you can partake in catch-up contributions for your retirement accounts. It’s a great way to infuse extra money into your funds, bolstering your account for retirement.
You might need to adjust spending habits to redirect some extra cash into your investments, but with 10 to 15 years of compounding, those investments could see significant gains. Here are the catch-up contribution limits for common retirement funds:
- For 401(k), 403(b), and most 457 plans, the catch-up contribution is $6,500. With an annual limit of $19,500, that extra money could bump your savings to $26,000 per year. Given an average return of around 7%, investing that amount for 10 years could accumulate about $400,000.
- For traditional and Roth IRAs, the catch-up contribution is $1,000. The 2020 limit is $6,000, meaning those over 50 can contribute up to $7,000 per year.
- For SIMPLE 401(k) plans, the catch-up contribution is $3,000.
Catch-up contributions help you maximize compound interest and accelerate the growth of your accounts. Given many workers in their 50s are at their peak earning years, redirecting money into retirement savings at these amounts may be a bit easier.
Double Down on Investments
In your 50s, you may also need to further refine your investment plan as it will likely grow and evolve, depending on your specific retirement goals.
A concrete way to infuse more resources into your investment strategy is to allocate your bonus and a portion of any raises into your investment account. When you were younger, you may have used part of your bonus to fund a home improvement project or buy a plane ticket for your next vacation. But as you near retirement, redirecting your bonus into investments will help you save more for the future.
While bonus structures fluctuate depending on the company, most are between 2 to 7% of a person’s base salary. If you are earning $100,000 and have a 5% bonus, that’s an extra $5,000 you can invest.
If you get a healthy salary bump (the current average runs about 3 to 5%) you can divert a percentage or two toward your investments. This added bump in resources can help you maintain motivation to invest, create consistency in your plan, and continue to establish healthy financial patterns.
In addition to being more intentional about your investment plan resources, it’s also essential to ensure your investments are allocated in ways that make sense for where you’re at now. Ask yourself a few questions:
- Are there areas where you can strengthen your portfolio?
- How is your investment philosophy shifting as you near retirement?
- What are your long-term investment goals? Consider retirement and beyond.
Don’t Touch Your Retirement Accounts
While your 401(k) has had twenty plus years to accumulate a healthy balance, it can be tempting to take a loan from it to supplement current extra costs. But doing so can be a lot more hassle than it’s worth. Yes, sometimes a 401(k) loan makes sense; but it needs to be a strategic choice that benefits you in the long-term.
Once that tuition bill comes in or your kitchen remodel gets closer, you might be tempted to dip into your retirement accounts to foot the bill. Remember, you can’t withdraw funds from an IRA until you are 59 ½ without incurring a penalty. Even though you can technically borrow from your 401(k), you will need to factor in interest payments on top of the repayment period.
In general, your 50s are a prime decade for earning. You don’t want to take on more debt and potentially jeopardize the savings you’ve spent so many years building.
Being debt-free is a big goal for many. Whether you are making the last payment on your car or are tantalizingly close to paying off your mortgage, there are so many benefits to being debt-free, especially as you prepare for retirement.
Eliminating your debt can free up cash flow to put toward other priorities like maxing out your 401(k), IRA, HSA, and other investment vehicles. It takes you one step closer to financial freedom and can bring added flexibility to your financial life.
Keep in mind, you want to balance your debt with other financial goals. Where it makes sense to pay off any credit card or high-interest debt quickly, sacrificing a retirement contribution to get rid of your mortgage is a much different situation. Be strategic about debt-management: pay off your debt in a reasonable timeframe while protecting your long-term financial goals.
Focus on Your Future
With retirement on the horizon, it’s crucial to start thinking about and planning for your future. Now is when you get to actively imagine the type of life you want to live in retirement. By planning early and brainstorming different ideas, you will be able to craft a plan that works best for you. What to consider:
- Figure Out Where You Want to Live
- Does it require a move? How will your taxes, retirement benefits, and general expenses be impacted?
- Make a Plan For Your Time
- Do you see yourself embarking on a new career? Or do you want to take it easy and only work part-time? Or what about not at all? It is vital to figure out how you want to spend your future. It can bring you fulfillment and purpose, two crucial elements to a happy retirement.
- Maintain Your Health
- Your health, both mental and physical, is the cornerstone of your retirement plan. Think about the type of activities you want to explore and how you will maintain your health and wellbeing.
Work With a Team You Trust
Building wealth is a worthwhile goal for everyone. To get there, you need a plan tailored to your unique needs. Abacus is passionate about helping you align your values with your money to live authentically.
Let us help you create a wealth-building plan that helps you fully thrive in retirement. Reach out today.