Starting to Plan For Retirement in Your 50's

Starting to Plan For Retirement in Your 50s

Retirement in 15 years? Feeling too young to retire? If you don't start planning for it now, you may not have the choice.

Your golden years are looming closer and closer. If you haven't started your retirement plan yet, you better start today. You may only have 15 years of your working life left, and lots of saving to do. Don't forget that retirement planning is just one element of a comprehensive financial plan. You'll want to balance your retirement planning against other important objectives, such as savings, budgeting, insurance, and debt.

It's never too late to start saving for your retirement. Every dollar you put away today will help you after you stop working.

Where Does the Money Come From?

Three commonly available sources of retirement income are:

Private savings or investments, including Individual Retirement Accounts (IRAs)
Employer-sponsored retirement plans, such as pensions, 401(k)s, Keogh plans, SEP-IRAs, or SIMPLE IRAs
Social security benefits

There is an additional source of retirement income — working after you reach retirement age. And while you may decide to continue working during your retirement years, you may want to start your retirement plan now so you won't have to rely on this income.

Private Savings or Investments

Creating this portion of your retirement income is entirely within your control. Many financial advisors agree that you should save approximately 10% of your income annually. Some of this should be set aside for emergencies and the rest should be earmarked for retirement.

For your retirement, consider taking advantage of tax-deferred investments. Tax-deferred means you don't pay taxes on your investment earnings until you use the funds. You can invest in an IRA to maximize your rate of return. You might even be able to deduct your IRA contributions on your taxes. Check with a financial professional or the Internal Revenue Service (IRS) to determine if you qualify for a tax deduction. Don't forget that IRAs are specifically designed as investments for retirement, and you may pay a substantial penalty for early withdrawal. See IRSPublication 590: Individual Retirement Arrangements.

Employer-Sponsored Retirement Plans

Have you been investing in your employer-sponsored 401(k)? Take full advantage of this savings opportunity. Remember that 401(k) deposits are tax-deferred. This means they are deducted from your pay before taxes are assessed. For example, assume you are in a 20% tax bracket, and you are thinking about investing $50 of every paycheck into a 401(k). If you were not investing in the 401(k), that $50 (considered part of your income) would be taxed at 20% and you would only receive $40 (20% = $10, subtracted from $50). However, if you put the $50 into a 401(k), it is not considered part of your income for tax purposes (and lower income means lower tax). Even better, you earn tax-deferred interest on your investment in the retirement plan.

Frequently the employer will match your contribution to a 401(k). Take advantage of this. You have less time to accumulate retirement savings than young workers in their 20s. Look at your budget carefully and try to allocate as much as possible into investment savings for retirement. Don't forget that 401(k)s are specifically retirement investments, and you may pay a substantial penalty for withdrawal before the age of 59½.

In 2006, new tax rules allowed employers to offer Roth 401(k) plans to their employees. The Roth 401(k) plan differs from a traditional 401(k) in that contributions are considered part of your gross income and are therefore taxed at the beginning rather than at the end (when you close your retirement account and take the money). If there is a likelihood that your income tax at the time you retire is going to be higher than it is now (either because your income is greatly increased or the government raises income taxes) then a Roth 401(k) might be a good investment option for someone in the over-50 age group. For more information about Roth 401(k) plans, read the IRS article FAQs Regarding Designated Roth Accounts and the Sound Mind Investing article Introducing the Roth 401(k).

For more information about 401(k) retirement plans in general, read the Federal Citizen Information Center article Life Advice About 401(k) Plans and the related articles in our Knowledge Center Library.

If you currently work, or previously worked for a company that provides an employer-paid pension, that's great news. A pension is a retirement plan entirely paid for by your employer. You may want to check with your company's benefits administrator and ask for an estimate of how much you will receive once you finally retire. Don't forget to periodically check the financial condition of previous employers that owe you a pension to make sure it's still a reliable source of retirement income.

Social Security

The Social Security Administration (SSA) provides free estimates of your projected retirement benefits based on your historical income to date and the number of years you have worked. If you haven't already received an estimate, you can request this estimate any time. At your age, there should be minimal impact from all of the concern around social security benefits drying up. While you should be able to rely on social security as a part of your retirement income, there may be an additional tax burden levied on your benefits. If you were born between 1950 and 1960, the normal retirement age has been increased from 65 to 66. For those born in 1960 and later, the retirement age is 67. See the SSA Find Your Retirement Age table.

How Much Do You Need?

Many financial advisors agree that, to maintain the standard of living you have become accustomed to, you should plan on needing roughly 80% of your annual working pay during retirement. Remember, your retirement funds can come from any or all of the sources discussed. To illustrate, let's say you earn $65,000 during the year just before you retire. You'll need to plan on having $52,000 ($65,000 x 80%) each year during retirement to live comfortably and in the general style to which you have become accustomed. Let's take this one step further. If you plan on a long retirement of 20 years, you'll need $1,040,000 ($52,000 x 20). This is a very simplistic approach since it doesn't allow for potential investment earnings or the effect of inflation on your buying power. But it will give you a general guideline of how much your expenses may be during your retirement years.

How Do You Get There?

You are responsible for investing your private savings and your 401(k) funds to maximize return, growth, and income. When you reach your 50s, you may want to get a little more conservative in your investment choices. While many financial advisors subscribe to some general investment strategies for people getting closer to retirement, you should consider your personal financial situation carefully and may want to consult with a financial professional. The most important evaluation criteria you need to consider is your own financial condition and your risk tolerance. As a general rule, you may want to consider keeping about 60% of your investments in stocks and the other 40% in bonds and other fixed-income investments. This approach still allows you the benefit of higher returns from stocks but also ensures a solid and predictable rate of return from a sizeable portion of your nest egg. Remember that stocks are always potentially risky, so you should adjust your allocation according to your own personal circumstances.

Supplementing Your Retirement With Part-Time or Full-Time Work

If you are still in good health at retirement or you need additional income to make ends meet, you may decide to supplement your retirement income by working either full-time or part-time. There are many options to consider, from turning a hobby into a business, to starting your own brand new business, to continuing your old career. Changes to social security rules makes this an attractive option for current retirees. It used to be that social security benefits were reduced if your earned income exceeded a certain amount, but now you can work as much as you wish and still receive full social security benefits. Working after retirement may also provide benefits beyond those that are financial; it allows retirees to preserve social interaction and reap the personal rewards of maintaining a working life.

Keep in mind, though, you might not want to count on this income as part of your retirement. Your health and the availability of jobs are difficult to anticipate, even over the next few years. If you plan carefully now and make sure you have enough set aside, you may not have to rely on this as a necessary source of income and can choose to work only if you want.

Consider your situation carefully today. Once you get into the habit of setting aside money for your retirement, it will be easy and you probably won't even miss it. You may even enjoy watching your savings grow. Remember you can always adjust your retirement savings plan and investment decisions as your situation changes. To help you plan your retirement, read the U.S. Department of Labor booklet Taking the Mystery Out of Retirement Planning.

For more information about retirement, 401(k)s, pension plans, or social security, read the related articles in our Knowledge Center Library.

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