When many people reach their 50s, they may come to the daunting realization that they do not have enough money saved for their retirement. Furthermore, as modern medicine continues to advance, people are living longer and many financial experts recommend preparing to have retirement funds available to last 40 years or more. Lifestyle plays a crucial role at this stage in your life, so be sure to live within your means to effectively prepare for retirement.
According to Alicia Munnell, director of the Center for Retirement Research at Boston College, people in their 50s often expand their lifestyles to a point that is often difficult to maintain in retirement. As Munnell says, “People tend to kick up their heels in their 50s when the kids are gone and you’ve paid for college, and up their standard of living.” For those in their 50s, it is crucial to not “up the standard of living” beyond reason because retirement funds may ultimately pay the price.
Another mistake that people in their 50s make is taking on entrepreneurial endeavors to account for a shortcoming of retirement preparation. Certainly entrepreneurship can yield great results, but it can be a dangerous bet to take on the risk associated with entrepreneurship during this period in life. “You’re putting all of your eggs in your human capital, and often your savings too,” says Annamaria Lusardi, professor at George Washington University School of Business. Often times we can overestimate the application of our skills in the market and as a result, may set ourselves up to fail. In order to avoid such a mistake, it is suggested by research that those approaching retirement should take a conservative approach to investing.
Although those in their 50s may feel the pressure of looming retirement, there exists a “really, really important lever,” according to Dr. Munnell. That level is the ability to withdraw from Social Security. If you are able to wait until age 70 instead of age 62, monthly benefits will be approximately 62% higher. Such increased benefits could be the difference between a stressful and stress-free retirement.
Similar to our previous post about money and investing in your 40s, you should make sure you are contributing as much as you can up to the maximum contribution limit to tax-deferred retirement plans through IRAs, employer sponsored plans or both. At age 50 and older you are also eligible to contribute more to IRAs and 401(k)s known as a catch-up. For Traditional and Roth IRAs, the catch up limit is $6,500 and for 401(k)s the limit is $24,000. Another reminder from our previous post is that you will never be able to borrow for retirement so if you are looking to purchase a vacation home or take on an entrepreneurial endeavor you should look to borrow money for these things and try not to dip into those retirement savings.
When you are in your 50s, you are on the “home stretch” to retirement. With retirement “just around the corner,” it is pivotal that you are smart with your lifestyle decisions such that you do not jeopardize your retirement goals. If you have not been contributing to retirement accounts, it is never too late to start and this should be the time in your life where you may have excess income to contribute. After years of hard work, don’t let a few poor decisions dictate your retirement. Be sure to stick to your financial plan to ensure that you will have the finances you will need in retirement.