When you're in your 50s, it's likely that you've been in the workforce for a number of years and are in your peak earning years. Retirement is no longer something way off in the future; it's real and will be upon you quite soon. These are the years you need to be maxing out your 401(k) plan, and saving as much as you can in other places, too. You also need to be doing some concrete retirement planning.
Here's one way to check your savings progress, according to investment management company T. Rowe Price:
- At age 50, you should have six times your annual salary saved for retirement. For someone earning $100,000, this would be $600,000.
- At age 55, you should have eight times your annual salary saved for retirement. For someone earning $100,000, this would be $800,000.
- At age 60, you should have 10 times your annual salary saved for retirement. For someone earning $100,000, this would be $1,000,000.
Although these are just benchmarks, they do serve as a guideline. If you're in this phase of your life, follow these tips to master your 401(k) in your 50s.
1. Take advantage of the catch-up provisions
Once you determine whether you're on track for retirement, be sure you're taking advantage of your 401(k)'s catch-up provisions. People who will be 50 or older at any point during the year can make extra contributions over and above the $18,000 contribution limit.
"For 2016, this means saving an extra $6,000 in addition to the $18,000 of employee deferrals," said financial advisor Sterling Raskie of Blankenship Financial Planning. "For many individuals, this is the time to really ramp up savings if they got a late start or income was limited in their early working careers."
2. Ramp up your savings
As you enter your 50s, you might find that you're an empty nester. You might also be done paying for your children's college. If this is the case, it's important to allocate more toward saving for retirement, especially if you find yourself behind.
"According to Statistic Brain [in] 2016, the average 50-year-old has $42,797 in savings, so this is a good time to reevaluate your financial goals," said financial advisor Winnie Sun of Sun Group Wealth Partners. "You may have extra funds now that you are an empty nester in your 50s, so get a handle on your income and expenses."
3. Hedge your bets on future tax rates
If your company offers a Roth 401(k), consider contributing to it in addition to a traditional 401(k), said financial advisor Shomari Hearn of Palisades Hudson Financial Group.
"With the Roth 401(k), you will be contributing after-tax money, so you won't benefit from upfront tax savings that come with contributing to a traditional 401(k)," he said. "However, it provides tax-free growth, so qualified withdrawals are not subject to tax in retirement. That is, assuming Congress doesn't take away this benefit in the future. This is where the uncertainty lies, so it's best to diversify for tax purposes."
The Roth 401(k) option offers several advantages. First, contributions are not limited by your income -- as with a Roth IRA account -- and the contribution limits are higher than the Roth IRA. In addition to the tax break that you might receive, the Roth 401(k) offers a number of estate-planning options once you retire.
4. Take advantage of your peak earning years
Beyond your 401(k), this is the time to save additional amounts for retirement if you can. Utilize IRAs, save in taxable accounts and be sure that your spouse is maxing out his or her retirement accounts, too.
"Your 50s are great for making up for lost time," said Benjamin J. Brandt, financial advisor with Capital City Wealth Management. "Saving the additional funds might be tough, but harnessing your peak earning years as you approach retirement is a great way to master your 401(k) in your 50s."
5. Limit exposure to company stock
It's rarely a good idea to have too much of your investment portfolio concentrated in any one holding, including your company stock. "If your employer is a publicly traded company, limit your exposure to company stock within your 401(k) plan to no more than 10% of your total retirement portfolio," said Hearn.
"Any company has the potential to go out of business," Hearn said. "Enron and Tyco are just two examples of companies that went out of business, wiping out significant wealth for employees that were overexposed to company stock. In addition to exposure through your 401(k) plan, you have exposure to your company in the form of your salary, as well as possibly through stock options and restricted stock."
6. Start planning your exit strategy
In your 50s, you should be coordinating all aspects of your plan to transition into retirement, with a list of actionable steps and a timetable to complete them. "Start thinking about an exit strategy," said Portland, Ore., financial planner Grant Bledsoe.
"Once you stop working, anything you take out of the account will be taxed as income," he said. "Devise a strategy now that will minimize the impact of taxes down the road. This might include a conversion to a Roth 401(k) or Roth IRA, or waiting to take withdrawals until you're forced to, starting at age 70 1/2."
7. Understand your withdrawal options
If you leave your job at or after age 55, you can withdraw funds from your 401(k) account without incurring the 10 percent withdrawal penalty that normally hits those who withdraw funds prior to age 59 1/2. In order to qualify:
- You must separate from service with your employer anytime during the calendar year in which you turn age 55, or later.
- This won't apply to money from a former employer that was left in a plan or rolled to an IRA. To tap your 401(k) penalty-free, do some advance planning if you can, and roll any eligible pre-tax money into your current employer's plan to be able to take advantage of these rules.
- This exception applies only to 401(k) plans; IRAs are not eligible.
8. Manage old 401(k) accounts
At this point in your life, it's important to manage all of your old 401(k)s and other retirement accounts as part of an overall portfolio geared toward your retirement needs. Don't ignore those old accounts. Consider consolidating your old accounts into a single IRA, or into the 401(k) of your current employer, if eligible -- if doing so fits with your retirement plan, and your current 401(k) plan is a solid one.
9. Be wary of target date funds
Target date funds can offer a professionally managed solution for 401(k) plan participants who are not comfortable making their own investment decisions. However, by the time you hit your 50s, you really should have a more personalized investment portfolio that is tailored to your situation.
If you choose to go with target date funds, be sure to understand how the allocation dovetails with any outside investments, and if the fund with the target date closest to your expected retirement date is the right one for you. Note that you're not restricted to this fund and can go with a fund with a shorter or longer target date.
As one cautionary example, in 2008, many investors were surprised by the size of the losses for that year incurred by the 2010-dated funds for the big three providers -- Fidelity, T. Rowe Price, and Vanguard:
- Fidelity: -25.32%
- T. Rowe Price: -26.71%
- Vanguard: -20.67%
Although all three funds lost less than the S&P 500 index's 37% drop for the year, to many, these losses seemed high for funds geared toward people who were retiring in the next few years. So choose this option carefully.
10. Seek professional advice if you need it
This is a good time to seek out the services of a qualified financial advisor -- if you don't already have a relationship with one. Consider choosing a fee-only financial advisor, who will serve you in a fiduciary capacity that places your interests first. Even if you are financially savvy, the third-party perspective offered by a financial advisor can be invaluable.
Besides your 401(k), a financial advisor can help you plan your exit strategy, a Social Security-claiming strategy and other aspects of retirement planning. Your 401(k) plan might offer advice options; some are free, others are not. Consider checking into these, as well.
This article originally appeared at GoBankingRates.
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