Retirement appears to be far over the horizon when you're in your forties. That horizon begins inching closer as you approach and reach your fifties. It isn't too late to take some steps to catch up if you find that your savings aren't quite where you'd like them to be.
Some considerations for you as you move into your late forties and fifties are spending control, retirement education, debt trimming, and saving or investing your money.
Get a Handle on Spending
Nobody likes to hear it, but the fastest way to save more is to spend less. Trimming your lifestyle to one that costs a little less will allow you to save more now, and it will cost you less to maintain your standard of living in retirement later.
You can get a good handle on your spending habits by completing a retirement budget worksheet. Don't overlook health insurance costs. Take a close look at your estimated healthcare costs in retirement before you make any permanent plans, particularly if you plan on retiring before you reach 65 (Medicare age). These costs can be much higher than you might expect.
Trim Down Debt
You don't want to head into retirement dragging a boatload of debt along with you. Credit cards can be a factor here, but your largest debt is probably your mortgage.
You could shave thousands a month off your must-pay budget if you can manage to pay off your home before you stop working.
You could begin making extra principal payments each month in your fifties, as much as you can afford, then refinance the smaller balance to achieve more retirement-friendly payments. Or you could sell your home, particularly if you bought it when you had your young family, and it's now more space than you need. Take the cash and purchase something smaller.
You'll significantly reduce or eliminate your mortgage payment. You can save on property taxes and home insurance if you downsize as well.
Become familiar with retirement accounts and how they change as you reach specific ages. Online content, books, and classes are all great resources, but it can still be difficult to determine which advice applies best to your personal situation. Professional help from a retirement planner can help guide your decisions.
Focus on Your Career
For most people, earning power is one of the greatest assets they have, so don't be too quick to let that job go. Finding work that you enjoy might be the perfect solution. You might find that you want to stay in the workforce longer if you enjoy what you're doing, and there are some benefits to doing so.
You'll continue to pay into Social Security, potentially increasing your eventual benefits. They're based on the average indexed (adjusted for inflation) earnings over the last 35 years that you earned the most. The decent wage you're enjoying right now can offset some of the years in which you didn't earn so much.
Look for ways you can earn extra money through enjoyable hobbies and other skills if you'd like some extra income.
Keep in mind that you'll have to plan for a longer retirement if you're determined to stop working in your fifties. You'll need enough funds to last you 35 to 40 years rather than 20 to 30 years, so you'll have to save a lot more. You'll pay a 10% tax penalty if you dip into most retirement plans before age 59 1/2 if you do so for any reason other than a qualifying emergency.
Invest and Save Rather Than Speculate
You have to be able to count on your retirement money being there for you, so now isn't the time to speculate. Learn what it means to build a portfolio, then do it. Build one that's appropriate for your goals. Don't rely on "investment experts" who make unrealistic promises.
And remember that there's no such thing as a free lunch or a perfect investment. Nothing offers absolute safety with no risk. Even so-called "safe" investments can't ensure that your rate of return won't be less than inflation and that you won't lose purchasing power over time. Your best option is to create a diverse mix of investments with an acceptable medium level of risk if you are just starting to invest.
Play Catch Up
The Internal Revenue Code increases the contribution limits for tax-free retirement accounts beginning in the year in which you turn 50. You can save an extra $1,000 in an IRA, or a total of $2,000 if you're married and both you and your spouse are 50 or older. The 50-plus catch-up limit for 401(k) plans is $6,500 more for 2021 and 2022.
This puts 401(k) contribution limits at $26,000 per person in 2021—$19,500 plus $6,500—and at $7,000 per person for IRAs: $6,000 plus $1,000. In 2022 the limit could be as high as $27,000—$20,500 plus $6,500 in catch-up contributions. And that 401(k) limit does not include your employer's contributions. This is definitely something you might want to take advantage of each year until retirement if you have the financial bandwidth.
You might also want to gather up all your 401(k) plans from previous employers if they're still sitting with them and plunk them all down in one plan for optimal growth. Choose a plan with the lowest, most manageable fees. If nothing else, this should help you more easily keep track of your savings and investments as retirement approaches.
Retirement Calculators: Caveat Emptor
Caveat emptor loosely means that you are ultimately responsible for inspecting the quality and suitability of an item before you buy it. In this context, it means you are ultimately responsible for deciding whether a free online tool is reliable for decision-making.
Free online calculators can give you a broad overview of the relevant components of your retirement plan, but they're based on assumptions. Most online retirement calculators don't accurately factor in taxes, and this can make a big difference in the results as well.
You might want to enlist the help of a competent retirement planner if you want to nail down a more detailed projection.
Review Your Plan Regularly
The more often you look at your finances, the more likely you are to make progress. Consider working your way through a retirement planning checklist. After you’ve worked through the list, begin conducting annual or even semi-annual reviews. Start at the top and work your way back down again, updating as you go along.