Things for trailing-edge boomers & Gen Xers to consider.
When you turn 50, retirement starts to seem less abstract. In terms of retirement planning, a 50th birthday can act as a wake-up call. It may offer a powerful reminder to trailing-edge baby boomers and Gen Xers, many of whom are wrapping up their second act with inadequate retirement savings for their third.
You may find yourself with such a shortfall, and you wouldn’t be exceptional. Your peak earning years may arrive in your forties or fifties, but so do other responsibilities with big price tags (raising a family, caring for aging parents, building a business). Throw in some “wild cards” like divorce, bankruptcy, or health scares, and any fortysomething would be challenged to build significant wealth – and yet it happens.
According to the latest Wells Fargo Middle Class Retirement Study, the median monthly retirement savings contribution by middle-class Americans aged 40-49 is $200. How about middle-class folks in their fifties? It must be more, right? No, the median contribution is even less: $78, working out to $936 per year. (Wells Fargo defined middle-class households as having 2013 income of $50,000-99,999 or investable assets of $25,000-99,999.)1
Just as alarming, 50% of the survey respondents in their fifties said they would ramp up their retirement savings efforts “later” to make up for what they weren’t doing now. When you’re in your fifties, there is no “later” – you have to act now. “Later” equals your sixties and your sixties will likely be when you retire.1
So what can you do here and now? Whether you’ve saved a great deal for retirement or not, what decisions could possibly strengthen your retirement nest egg?
Make those catch-up retirement plan contributions. They may seem inconsequential in the big picture, but when you factor in potential investment returns and the power of compounding, they really aren’t. You can start making catch-up plan contributions in the year in which you turn 50. (You can make your first one while you are 49; it just has to be made within that calendar year.) If you only have a five-figure retirement savings sum at age 50, your retirement savings may double (or more) by age 65 through consistent inflows, compounding and catch-up contributions and decent yields.2,3
For 2015, there is a $1,000 catch-up contribution limit for IRAs and a $6,000 catch-up contribution limit for 401(k)s, 403(b)s, most 457 plans & the federal government’s Thrift Savings Plan.4
Explore ways to save even more. Are you self-employed and a sole proprietor? You could create a solo 401(k) or a SEP-IRA. If eligible, you can defer up to $53,000 into those plans for 2015. Also, SIMPLE plans (to which both employers and employees may contribute) have contribution limits of $12,500 next year with a $3,000 catch-up limit.4,5
Slim down your debt. Retiring debt-free is a remarkable financial gift that you can give to yourself, and you ought to strive for it. You will always have some consumer debt and you may incur medically-related debts, but paying off the house and avoiding large, new, “bad” debts should be high on your financial to-do list. If accelerating or pre-paying your mortgage payments makes sense, see if your monthly budget will let you do so; be sure you won’t face those rare prepayment penalties. Once your residence is paid off, you might consider living in a cheaper, tax-friendly state – another way to retain more money.
Consider revisiting your portfolio’s allocation. Since 1964, there have been seven bear markets. On average, they lasted slightly more than a year. On average, it took the S&P 500 3.5 years to return to where it was prior to the plunge. If you are 50 or older, think about those last two sentences some more. If your portfolio is allocated more or less the same way it was 30 years ago (some initial portfolio allocations go basically unchanged for decades), revisit those percentages in light of how soon you might retire and how much you can’t afford to lose.6,7
These are just some suggestions. For more, tap the insight of a seasoned financial advisor who has known and seen the experience of saving during the “stretch drive” to retirement.
1 – forbes.com/sites/nextavenue/2014/10/23/retirement-saving-workers-and-firms-must-step-up/ [10/23/14]
2 – forbes.com/sites/ashleaebeling/2013/05/03/playing-catch-up-with-your-401k/ [5/3/14]
3 – forbes.com/sites/mitchelltuchman/2013/11/21/financial-planning-for-late-starters-in-five-steps/ [11/21/13]
4 – irs.gov/uac/Newsroom/IRS-Announces-2015-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$18,000-to-their-401%28k%29-plans-in-2015 [10/23/14]
5 – forbes.com/sites/ashleaebeling/2014/10/23/irs-announces-2015-retirement-plan-contribution-limits-for-401ks-and-more/ [10/23/14]
6 – traderhq.com/illustrated-history-every-s-p-500-bear-market/ [4/5/14]
7 – mainstreet.com/article/stop-thinking-about-risk-tolerance-try-risk-capacity-instead/ [10/7/14]
This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This material was prepared by MarketingLibrary.Net Inc., for Mark Lund, The 401k Advisor, Investor Coach and author of The Effective Investor. Mark offers investment advisory services through Stonecreek Wealth Advisors, Inc. an independent, fee-only, Registered Investment Advisor firm providing 401k consulting for small businesses and financial Advisor services for professional athletes and individuals. Stonecreek is located in Salt Lake City, Murray, West Jordan, Sandy, Draper, South Jordan, Provo, Orem, Lehi, Highland, Alpine, American Fork all in Utah.