How To Invest For Retirement At 50

No investor wants to find themselves unable to meet their financial needs in retirement. Avoiding that situation is why you should carefully plan your investment portfolio and start saving early to build your nest egg. Unfortunately, not everyone is able to start saving early or investing significantly before retirement. Some investors might not begin investing or seriously planning for retirement until later in life. On the other hand, some investors may have been saving for years, but are unsure or unaware of additional considerations to keep in mind as they get closer to retirement age.  Whether you are 50-years-old and just getting started with retirement planning or have been saving and investing for years, your investment decisions today may be critical to meeting your retirement goals.

Planning for retirement in your 50s might feel overwhelming, and your time left to invest may appear shorter than what you consider ideal. It may still be possible to reach your retirement goals within a shorter time span though. Here are some things to consider carefully when planning your investment portfolio.

Time Horizon and Your Portfolio

Many investors planning for retirement in their 50s believe they should invest more conservatively—steering clear of retirement investments with higher short-term volatility, such as stocks. You may be aware of the common asset allocation rule of thumb that subtracting your age from 100 or 120 will tell you the percentage of your portfolio to invest in stocks. However, this rule of thumb does not take into consideration individual circumstances and long-term goals, and you may live longer—potentially much longer—than you expect.

Given the current pace of medical advancements, we believe current projections likely underestimate how long people will actually live. In other words, average life spans may extend even beyond the current estimate. From a financial perspective, your retirement could be much longer than you might initially assume, meaning that your investments need to fund a retirement lifestyle for a longer time period.

A longer retirement means that you may need more growth than initially expected as well. Generic rules of thumb may suggest moving your assets into more conservative investment vehicles—such as fixed income investments or cash-like securities—during your 50s. However, these investments may not yield enough growth to support your financial needs throughout retirement.

Considering this, a cookie-cutter asset allocation approach might not be the best way to address your specific circumstances or provide the best means to achieve your long-term investing goals.

The Long-Term Effects of Inflation

Inflation has averaged about 3% a year since 1925.[i] If this rate were to continue, a person who needs $50,000 to cover annual expenses before retiring would need almost $90,000 in 20 years, and about $120,000 in 30 years just to maintain the same purchasing power. Investors often forget to account for the long-term effects of inflation on their ability to afford goods and services in the future. While current investments or plans may seem to cover your needs currently, think beyond just age 50 or 60. Will your current investments and asset allocation be able to provide the support you need as well as offset the long-term effects of inflation?

Further, the costs of some common retiree purchases may be rising faster than the costs of other goods and services. For example, since 1990, healthcare has experienced higher inflation than some other products and services[ii]. As shown in Exhibit 1 below, healthcare becomes a more significant portion of net income as people reach retirement age. Not only will you need to account for inflation’s effects on healthcare costs, but you will also need to account for healthcare costs likely comprising a larger portion of your budget after you retire.

Exhibit 1: Expenses as a Percentage of Net Income, Based on Age

Source: Bureau of Labor Statistics, Consumer Expenditure Survey 2016

Achieving Your Goals May Require Growth

Retirement goals vary. Some retirees aim to maintain or improve their current lifestyle, while a few may be determined to spend every cent of their savings in retirement. Others may aim to significantly increase their wealth in order to attain a better lifestyle, leave a legacy for their families or donate to charities.

If you need long-term growth to achieve your retirement goals or needs, you may need to reassess your portfolio asset allocation strategy. While many retirees believe they need to invest conservatively, this belief may be off base for some. Some retirees may reasonably expect to live for 30 years or longer, meaning they may need to achieve more portfolio growth to make sure they don’t run out of money in retirement. Short-term volatility is far from the only risk involved in investing, and if you invest too conservatively too early, you may run the risk of not meeting your long-term investing goals.

Adjustments to Meet Retirement Goals

Your 50s may be a time of higher earnings than earlier in your career, and this presents you with a prime opportunity to increase your retirement contributions. Before making adjustments, first determine how much money you have in retirement savings and investments. Are those current savings and investments on track to meet your expected retirement income needs and overall financial goals? If not, or if you want to give your savings an extra boost, then you can choose from a number of ways to adjust your contributions to meet your goals.

For instance, if you are age 50 or older, you are likely eligible to make catch-up contributions to your retirement accounts.[iii] Here are some contribution considerations:

  • If you have a 401(k), 403(b), or some 457(b) plans, your catch-up contribution limit is $6,000, bringing your full contribution maximum for 2018 to $24,500.
  • If you have a Traditional individual retirement account (IRA) or Roth IRA, you can make additional catch-up contributions up to $1,000, bringing your full contribution maximum for 2018 to $6,500.
  • If you have a SIMPLE IRA or SIMPLE 401(k), you are allowed an additional $3,000 as part of your catch-up contribution in 2018.

If you believe you are behind in your retirement savings, you can take advantage of these catch-up contributions to help you make sure you’re well-prepared for the next stage in life.

Understand Your Rollover Options

If you change jobs or decide to retire in your 50s, you may have the opportunity to roll over a retirement account. Rolling your 401(k) into an IRA may give you more flexibility in your investment decisions, because 401(k)s and other employer-sponsored retirement plans are typically limited to a small selection of investments, such as a restricted number of mutual funds. IRAs on the other hand are individual retirement accounts. They can offer you greater control over your investments and may offer a wider selection of asset types. This flexibility may help you better personalize your retirement portfolio to your personal situation and long-term investing goals.

If this applies to your situation, be aware of rollover limitations and penalties. You can either make a direct rollover—moving funds from one retirement account into another or to an IRA of similar tax status—or take a distribution and redeposit the funds into a new retirement account within a 60-day period to avoid paying taxes on the withdrawal.[iv] Just bear in mind the timeline and limitations on rollovers. You may be subject to taxes due to either your timing or the type of accounts you are moving to and from.*

In the case of direct rollovers and trustee-to-trustee transfers (moving funds from an IRA to another IRA or retirement plan), generally no taxes will be withheld from your transfer amount as distribution payments are transferred from your old plan to the new plan. But if your distributions are paid directly to you, then the 60-day rollover rule applies, meaning you have 60 days to deposit all or a portion of your funds into a new IRA or retirement plan of similar tax status to avoid paying penalties. There are exceptions to this rule as there are additional limitations to rollovers. To learn more, you can visit the IRS page on rollovers and distributions.[v]

Get the Help of a Trusted Financial Adviser

Retirement planning at 50 can be tricky. You will have to face many retirement decisions, but you don’t have to do it alone. Our advisers may be able to help with your retirement plan, no matter where you are in the retirement planning process. Call us today to speak with one of our representatives or download one of our educational investing guides to learn more.

[i] Source: FactSet, as of 2/12/2018. Based on US BLS Consumer Price Index from 12/31/1925 to 12/31/2017, average annualized inflation was 2.91%.

[ii] Source: FactSet, as of 01/09/2018. Consumer Price Index data from 12/31/1990–12/31/2017.

[iii] IRS.gov, as of 10/24/2018. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions

[iv] IRS.gov, as of 10/24/2018. https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions

[v] IRS.gov, as of 10/24/2018. https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions

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