Hitting your fifties can be a slap in the face to many people. Suddenly the retirement that seemed decades away is right there, staring at you. Just think – when you reach 55, you’re only seven years from being eligible for early Social Security withdrawals. Hopefully that’s not all you’ll be living on. If you’re age 50 and your savings aren’t where you’d hoped, here are several ways you can catch up.
Make sure you’re getting any free money
Most employers that provide a retirement plan for their employees also provide a matching contribution as an incentive for you to save. Whatever the percentage, this is additional money that you get just by saving for retirement. I hope that you’ve been contributing enough to receive the full matching contribution all along, but if you haven’t this is the first place to start.
Many employers offer Health Savings Accounts (HSA) along with normal health insurance plans. These plans allow you to save pre-tax money toward your healthcare needs. Additionally, your money grows tax-free, and any money you use from this account for covered healthcare is also tax-free. It provides a triple tax benefit. Recently companies have started offering a match on these accounts. If your company does, consider opening an HSA. However, make sure that you can afford the higher co-pays and costs for care that come with these types of plans.
IRAs
With two flavors of Individual Retirement Accounts, you will be able to save taxes either now (with a traditional IRA) or during retirement (Roth IRA), but there are a lot of caveats and income restrictions that you need to understand. For instance, most people with a retirement plan through work would receive no tax deduction for their contributions to a traditional IRA.
However, you can invest in a Roth IRA even if you have a retirement plan through work and still receive the tax benefits at retirement. The limit for 2020 is $6,000 if you’re under age 50. If you’re 50 or older, you can make an additional $1,000 catch-up contribution.
Don’t forget your spouse. Even if your spouse isn’t working, as long as the breadwinner makes enough income to cover two IRAs, your spouse can open one as well and take advantage of any catch-up contributions for which they are eligible.
Your workplace retirement plan
Now that you’ve got your full match covered at work and have maxed-out on your IRA, it’s time to consider investing any remaining funds into your workplace retirement plan. I say “consider” here because there are two trains of thought when it comes to your employer plan.
- If the investments are sound, not too expensive, and provide what you need to diversify your retirement account, you should be okay investing more than the match in your plan. You still get the advantage of your contribution coming out of your paycheck before taxes. And if you’re age 50 or older, you can contribute up to $26,000 for both 2020 and 2021.
- If the investments in your retirement plan through work are expensive or badly managed, it’s a harder decision on where to invest if you have extra money. Hopefully there’s at least an index fund or ETF that you can choose to meet your retirement goals at a low cost. If not, weigh the advantage of pre-tax contributions versus the cost of investing in sub-optimal funds.
HSAs
I mentioned HSA plans earlier. If you find that your company doesn’t match any contributions to an HSA but you think it would be the right health plan for you, you can still take advantage of the tax benefits mentioned above. Additionally, after you hit age 65 you can use the funds for any reason with no penalty (but you will owe income taxes for non-healthcare costs). Basically, it becomes a traditional IRA at that point: you get tax-free contributions and tax-free growth but pay taxes when you use the money at retirement for non-healthcare reasons. For those 55 and older, you (and your company) can contribute a combined $8,100 for 2020 and $8,200 in 2021 for family coverage.
Remember: make sure you are comfortable with this being your health plan. Additionally, ask questions before you sign up to see what happens to your account if you leave the company. Specifically, find out what the cost will be to keep the account active or have a debit card so you can easily access your funds.
Regular investing account
While opening an online brokerage account and funding it doesn’t provide tax savings, it can be a valuable way for you to invest for your retirement. If you’re close to retirement, individual stocks might not be the best option, so consider accounts that provide a broad spectrum of inexpensive mutual funds or ETFs. Know that if you trade in a taxable account, every trade could incur a tax consequence.
50s costs
When people reach their 50s, they often have children going to college and parents who may need assistance. While helping your parents and your children is a noble goal, don’t let it stop you from investing for retirement. Your kids can get loans if they need help in college. For your parents, work out a plan (with your siblings if possible) so they remain self-sufficient or develop a plan where each of you helps on a consistent basis.
Let your investments grow
Let your investments grow for as long as possible, especially if you’re late to the game. This may mean working a few extra years. The longer your investments are allowed to grow, the more you may have when you stop working.
Consider this with Social Security too. Yes, you can start Social Security at 62, but without other investments you may be better off waiting until full retirement age (or even 70). This is a complex decision, so before you make any moves, research how your monthly payment would change depending on the year you retire and also how coordinating with your spouse can provide more in the long run.
50 may seem too late to start investing. But even with no growth or match, if you can max out your retirement account at work (assuming the contribution limit doesn’t increase and you invest $26,000 per year) for 10 years, you would have over a quarter of a million dollars. Not too shabby for starting late.
Photo by Victoire Joncheray