There are certain retirement milestones every working American should know about. For example, 62 is the earliest age you can claim Social Security, 65 is when you'll be eligible for Medicare, and 66 or 67 is when you're able to collect Social Security benefits in full. In fact, 55 isn't a particularly noteworthy age on the way to retirement, but it is a good time to make some key financial decisions. If you're turning 55 next year, here are a few things you ought to know.
Retirement is closer than you think
The average retirement age in the U.S. is around 63, and many Americans retire at 62, when they're able to start collecting Social Security. Of course, there are also plenty of folks who work well into their 70s, both for personal and financial reasons. But even if you haven't narrowed down a specific retirement age at this point, it's fair to say that if you're like most Americans, you'll be retiring within the next decade and a half. And that means you should be maximizing your savings now, while you can.
If you're in your 50s, you can contribute up to $6,500 a year to an IRA and $24,000 to a 401(k). And now's when you should aim to hit those limits, because even if you're planning to retire in your early 60s, you still have an opportunity to take advantage of compounding and grow your savings.
Imagine you're planning to retire as early as 62 but manage to sock away $24,000 a year in a 401(k) for the next seven years. If your investments generate a conservative average annual 4% return, by the time you're ready to retire, you'll have an extra $189,000 at your disposal. Even if you're only able to save $6,000 a year for the next seven years, that would still give you an extra $47,000 for retirement assuming a 4% return. No matter when you're planning to retire, save as much as possible while you still have a chance to do so -- because once you leave the workforce, your opportunities to generate extra income will be far more limited.
It may be a good time to downsize
You know those 55-and-over communities you keep hearing about? If your house is aging and you no longer need as much space, you may want to book a tour. Whether you opt to rent or buy in an adult community, there's a good chance you'll save on housing compared to what you're currently paying.
As you very well know, when you own a home, you're responsible for maintaining it. Most homeowners spend anywhere from 1% to 4% of their property's value on annual maintenance and repairs, but if your home is getting older, you'll probably hit the higher end of that range. Renting might therefore help you minimize your risk of incurring hefty upkeep costs as retirement nears. Even if you opt to buy an apartment or condo in an adult community, there's a good chance your maintenance fees will be lower than what you're paying to maintain a stand-alone home. Best of all, many of these communities are loaded with amenities, from clubhouses to swimming pools, to keep you well entertained when you're not at work.
A layoff could compromise your retirement
Though there's never a convenient time to lose your job, getting laid off in your mid-50s could upend your finances and hinder your retirement plans. According to research out of Boston College, unemployed workers 55 and up are less likely than unemployed younger workers to find new jobs. After the 2008-2009 recession, it took unemployed workers 55 and over an average of 40.6 weeks to get rehired, compared to just 31.6 weeks for younger workers. And the longer you remain out of work, the more of a financial hit you might take. In a 2014 Rutgers University study, 55% of workers who were unemployed for six months or longer said they'd need to postpone retirement as a result.
All of this is not meant to scare you but rather to make you aware of the consequences of getting laid off later in life and encourage you to take steps to protect your job. While layoffs are sometimes unavoidable, you can do things to make yourself more valuable, from staying up to date on your skills to renewing or obtaining new professional certifications.
Turning 55 can be a major wakeup call on the road to retirement, so now's the time to examine your savings and start making plans for the future. A few smart moves this year could put you in a strong financial position as you navigate this next exciting stage of your life.