Turning 50 is a big deal -- and not just because you've lived for half a century. Many people hit the peak of their careers around the age 50, having maximized their earnings and established strong business relationships. Many parents turning 50 have already seen their kids grow up and leave the home, freeing up a lot of money to save for their own financial needs.
That doesn't mean it's time to make huge changes to your long-term investing strategy, but it is a good time to start thinking about the changes you'll need to make as retirement draws near. Here are three ways to take greater control of your financial future as you enter your 50s.
1. Save more aggressively
The most important thing you need to do when you turn 50 is to get serious about your long-term financial needs. It's easy in your 20s and 30s not to think about far-off things like retirement, and even in their 40s, many investors have competing financial needs that make them put off retirement saving. Yet if you're looking to retire at 65, then 15 years isn't a lot of time put together a viable retirement nest egg.
Even the federal government recognizes the importance of saving aggressively in the last 10 to 20 years of your career: Americans aged 50 or older get to make additional catch-up contributions to tax-advantaged retirement accounts like IRAs and 401(k)s, adding $1,000 and $6,000, respectively, to the annual limits that apply to the under-50 crowd. A few thousand dollars in additional savings each year can go a long way. Investing another $6,000 per year and earning an average of 7% would leave you with an additional $161,300 to your name in 15 years' time.
2. Consider investing more conservatively
Hitting 50 is a good reason to take a close look at your existing investments and whether they're still serving their intended purpose. Throughout the early part of your career, investing for the long run would generally have meant choosing aggressive investments like stocks, because you wanted to tap into the high growth that stocks have delivered over periods of decades, and you had plenty of time to ride out the market's inevitable rough patches. However, as your retirement approaches, it may be smart to reduce your risk somewhat.
That said, cutting your stock allocation right at age 50 doesn't make sense for everyone, and abrupt moves aren't usually necessary. For instance, if you look at the changes that target-date mutual funds make, the typical reduction in stock exposure at age 50 compared to age 45 is just five percentage points, from an 80% stock/20% bond mix to a 75%/25% split. If you're 10 to 15 years away from retirement, then you still have time to overcome market corrections and bear markets and come out ahead.
3. Make contingency plans
Finally, by age 50 you probably know that things don't always go the way you expect them to. Having a financial plan that can adapt to changing circumstances is crucial, and if you've prepared well up to this point, then adding in some flexibility to deal with setbacks can be extremely valuable.
One of the biggest potential setbacks is the sudden loss of a job. You may be planning to retire in your mid-60s, but your employer could lay you off and leave you to fend for yourself. Other examples include an unexpected illness or injury that could lead to major medical expenses or make you unable to do your job.
The more you save and the better you invest, the better the position you'll be in if something bad happens to you. But there are also things you can do specifically to address some potential problems, including buying disability insurance and other supplemental insurance products designed to pay benefits if you get sick and are unable to work. Understanding the benefits you'd be entitled to receive, including unemployment insurance and Social Security disability benefits, is critical in coming up with an all-inclusive financial plan to protect you.
Use your 50s wisely
Turning 50 might be scary, but even if you haven't done much in the way of financial planning until now, it's not too late to put yourself in a much better situation when the time comes for you to retire. Use your 50th birthday as a call to action, and you'll be happy that you did in your golden years.