Once you're in your 50s, time is no longer on your side when it comes to compounding. If you already have a substantial nest egg saved up, the growth in that money can still make an appreciable difference in your retirement. If you hadn't been socking money away before your 50s, however, reaching retirement comfortably becomes a bit more difficult.
Still, unless you're facing substantial health issues or are otherwise at risk of a forced early retirement, you still have time to find a path to a comfortable retirement. While starting in your 50s does put you a bit behind the proverbial eight ball when it comes to reaching that goal, you do have some advantages that can help you in your quest to make up for lost time. If you're in your 50s and haven't started saving yet, here are three key tools you can use to help you reach that comfortable retirement.
1. Catch up on contributions
Once you turn 50, you become eligible to make catch-up contributions on top of ordinary contributions to your retirement accounts. For an employer-sponsored retirement plan like a 401(k), 403(b), or TSP plan, the catch-up amount is currently $6,000. Add that to the $18,000 base contribution amount and that becomes $24,000 you can sock away each year in a tax-advantaged retirement plan at work.
On top of that, you're eligible for a $1,000 annual catch-up contribution in your IRA as well, above and beyond the $5,500 available to younger folks looking to save for retirement on their own. That's $6,500 in an IRA to go along with $24,000 in an employer-sponsored plan, for a total of $30,500 you can put away in tax-advantaged retirement plans each year.
2. Take advantage of higher income and lower expenses
People frequently reach their peak earnings years in or around their early 50s. Chances are, you'll make more around this time in your life than at any other point in your career. That gives you your best shot of finding enough wiggle room in your budget to actually put some substantial cash toward your retirement.
On top of that, in your 50s, you may be reaching the point in life where some of your bigger expenses start dropping out of your budget. For instance, any kids you had in your 20s (or potentially early 30s) may very well be able to take care of themselves and live independently. In addition, if you've been in a home you've owned for a while, your mortgage may also be either paid off or very nearly so. Once that's gone, that's another major expense you won't need to worry about anymore.
The combination of higher income and lower expenses gives you your absolute best shot of coming up with cash to invest for your future. Regardless of how much Or little) you've been able to save in your past, your 50s can be a tremendous time to save up some serious coin.
3. Be flexible with your retirement plan
As you approach your retirement plan, ask yourself how important it is for you to stop all paid work and how important the specific date of your retirement is. The longer you work, the more time your money has to compound for you and the less time your nest egg needs to cover. In addition, if you are willing to work somewhere, you might be able to get a retirement job at a non-profit or a slower-paced business. Any money you earn by working in retirement is money your nest egg won't have to cover.
A general guideline for retirement planning is based on something called the 4% rule. Based on that rule, with a diversified portfolio, you can:
- Withdraw 4% of the value of your portfolio in the first year of your retirement,
- Increase your withdrawals for inflation every year, and
- Have a very good chance of not running out of money by the end of your retirement.
That particular guideline is based on a 30-year retirement. If you're willing and able to work a bit longer, your nest egg won't have to cover your cost of living for quite as long. For instance, the same study that came up with the 4% rule indicated that for a 15-year retirement, the withdrawal rate could be higher -- potentially as high as 8% or so.
In addition to the higher withdrawal rate from your portfolio, remember that the longer you wait to take Social Security up until age 70, the higher your benefit check will be.
Between income from a retirement job, a higher Social Security check, and a shorter time period that your nest egg needs to cover, having flexibility in your retirement plan can serve you incredibly well. Unless you can truly go from saving nothing at all to saving a couple thousand dollars a month or so in your 50s, finding flexibility within your retirement plans might be the strongest tool at your disposal.
Use all three tools, but get started now
As you cross into your 50s and beyond, time is no longer your ally when it comes to saving for your retirement. You need all the tools at your disposal -- and you need to get started now -- if you want a legitimate chance at a comfortable retirement. By leveraging your catch-up contributions, your peak earning years when your costs start to drop, and flexibility around your overall retirement plans, you can improve your chances at success.
So get started now and improve your chances of making the best of the time you have remaining to build the best retirement you can with the tools you have available.