17 July 2018

How 50-Somethings Get Serious About Retirement Planning

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The big 5-0 is one of those birthdays that can make people take serious stock of the half-century behind them.

Passing that milestone also can bring on the realization that retirement— or whatever you choose to call that phase of life when full-time work is largely behind you — is no longer a distant concept. And if you haven't focused on that looming reality, it can be anxiety provoking.

"Sometimes people don't really know how to assess their future needs and don't want to talk about it," said certified financial planner Charlotte Dougherty, president of Dougherty & Associates in Cincinnati. "But a lot of times there are opportunities at that age to really move the needle on your retirement planning."

Various research suggests many 50-somethings are ill-prepared for their golden years.

In 2016, the median retirement account balance — half are below, half are above — for people ages 55 to 64 stood at $66,643, according to Vanguard. The average for that age group was $178,963. For ages 45 to 54, the median was $43,467 and the average was $116,699.

Remember, whatever amount you've saved will need to be combined with other sources of income in later life — i.e., Social Security — and stretch across the remainder of your life.

The good news is that your 50s are an ideal time to turn the notch up on your savings.

"This is the point when you could be hitting your peak earnings years and your expenses may be declining if you're empty nesters," said Howard Pressman, a certified financial planner and partner at Egan, Berger & Weiner in Vienna, Virginia. "If there's a gap between what you've saved and what you need, you've probably got another 10 or 15 years to fill it."

The idea, basically, is to determine what you want the next chapter of your life to look like, and then take the time to plot out how to get there.

"Be as detailed as you can be about what you want the next phase to look like," Pressman said. "People who have a really good idea about what they're going to have more success than those who don't."

Here are five aspects of your financial life that take on new meaning in your 50s and can help you prepare for later years.

Did we mention savings?  

When you hit age 50, the IRS starts letting you put more tax-advantaged money in retirement accounts.

While the contribution limit for 401(k) plans is $18,500 for 2018, workers age 50 and older are allowed to stash an extra $6,000 in their accounts under the so-called catch-up rule. That's a total of $24,500 you can put away, as long as your company allows the catch-up contributions (most do). This applies to both traditional and Roth 401(k)s.

The rules are less generous for IRAs. Both traditional and Roth IRAshave contribution limits of $5,500, with an extra $1,000 allowed per year once you reach age 50. Be aware, though, that while traditional IRA contributions come with no annual income limits, Roth IRAs do.

"We like to see people save as much as possible in their 50s," Dougherty said.

Of course, finding extra money to funnel into those retirement accounts often means changing your spending habits or squeezing extra money out of your budget.

Taking a close look at where your money is going can help identify extra cash.

"It can be enlightening to see how much you're spending that you really could be saving," Dougherty said.

Give your investment portfolio a checkup  

If you haven't checked on exactly how your retirement savings is allocated among different investments, now's an important time to revisit your portfolio.

In your 50s, two things become more important: your risk tolerance — how well you stomach the value of your investments going up and down — and when you anticipate taking distributions from your portfolio.

"If that's going to happen in seven or 10 years, you might want to put some money in [fixed income] so you know you won't have funds subject to the market volatility we've got right now," said certified financial planner Nicole Strbich, director of financial planning for Buckingham Financial Group in Dayton, Ohio.

Get rid of really bad debt  

If you have credit card debt, aim to get it paid off as soon as possible.

"Credit card debt is really an issue for many people," Dougherty said. "It's a pure cost, and it can be a high cost. And it's a big impediment to being able to save."

Right now, the average interest rate on credit cards is about 16.7 percent. That is more than three times the average rate on a 30-year fixed mortgage (4.7 percent) and five-year car loan (4.2 percent).

Even private student loans — which typically are several percentage points higher than federal student loans — are lower. Credit card debt also comes with zero potential tax benefit, unlike mortgage interest and student loan interest.

In other words, credit card balances typically are far more expensive than other forms of debt.

"There's nothing wrong with taking vacations and buying gifts, as long you don't use plastic to pay for it and pay a huge interest rate," Dougherty said.

Your future self will thank you.

Health care savings  

For those who count themselves among the 40 million Americans with a high-deductible health plan, the health savings account that comes with those plans is a way to put away extra tax-advantaged money for retirement.

If you don't need to use it to pay for current health costs, it delivers a triple-tax benefit: It's pretax, grows tax-free and is generally untaxed at withdrawal as long as it is used for qualified medical expenses.

In 2018, individuals can put away up to $3,450 in an HSA. The family maximum is $6,900.

While many people assume they'll just keep working full-time long past the average retirement age of about 63, the risk of health issues interfering with those plans becomes greater as you age.

In fact, the average 65-year-old couple today will spend $280,000 on health care over the remainder of their lives, research from Fidelity Investments shows.

While you get to sign up for Medicare right around your 65th birthday, it doesn't cover some medical needs in later life, including dental, vision and long-term care (extended help with daily living activities like bathing and eating).

New insurance consideration  

Speaking of long-term care, when you reach your 50s, it's a good time to think about how you'll pay for it down the road.

Someone turning age 65 today has nearly a 70 percent chance of needing some form of long-term care in their remaining years, according to the Department of Health and Human Services. On average, women need care longer (3.7 years) than men (2.2 years).

If you don't want to rely on family members or spend down your assets — and you are above the income threshold to qualify for Medicaid — insurance for long-term care can be an option.

While some people turn to policies that exclusively cover those costs, there also are hybrid options that combine life insurance with long-term care coverage.

Click here for the original article from CNBC.

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