Proper retirement planning is important at every age, but especially in your 50s. You're only a decade or two from retirement, and you can't afford to make any mistakes with your plan because you may not have enough time to correct them. Here are four things that every 50-something should know about preparing for impending retirement.
1. You can make catch-up contributions.
Younger adults are allowed to contribute up to $19,000 to a 401(k) and $6,000 to an IRA in 2019. But adults 50 and over are allowed an additional $6,000 to a 401(k) and $1,000 to an IRA, bringing their contribution limits to $25,000 and $7,000, respectively. These are called catch-up contributions, and they can make a big difference if you got a late start on your retirement savings.
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Say you contribute $19,000 to your 401(k) this year. This could grow into $37,376 in 10 years, assuming a 7% annual rate of return. But if you contribute the maximum $25,000, you could have $49,180 after 10 years with a 7% annual rate of return. That's a difference of $11,804, meaning your $6,000 catch-up contribution has nearly doubled in value.
2. You'll pay a penalty for early withdrawals from your retirement accounts
If you're one of those lucky few who can afford to retire in your 50s, you need to be careful about when and where you withdraw your retirement savings from. Typically, you cannot access your 401(k) or IRA funds before 59 1/2 without paying a 10% early withdrawal penalty on top of income tax, but there are some exceptions. You won't pay the early withdrawal penalty if you withdraw funds for a first home purchase or qualifying educational expenses, though you'll still have to pay income tax unless you take the money from a Roth account. You can also get around the penalty if you agree to make Substantially Equal Periodic Payments (SEPPs) for at least five years or until you reach 59 1/2, whichever is longer.
If you don't want to do that, you could rely upon the money you have in a savings or taxable brokerage account. There are no restrictions on how you can use these funds, though of course, you'll pay taxes on them. Then, when you turn 59 1/2, you can begin relying on your retirement accounts.
3. Healthcare might cost more than you think.
A 65-year-old couple retiring in 2018 would need about $280,000 to cover their healthcare expenses in retirement, according to Fidelity. That includes out-of-pocket Medicare costs, but it doesn't include things like long-term care, which could drive up your costs further. Other sources, like HealthView Services, put estimated retirement healthcare costs for a couple retiring this year at around $364,000, not accounting for inflation. Medicare will cover some of your expenses, but you will still have premiums, deductibles, and co-insurance. Plus, there are some things that Medicare doesn't cover, like long-term care, dental work, and hearing aids.
If you haven't budgeted for your healthcare costs in retirement, reevaluate your savings plan. Boost your contributions to ensure you'll have enough to cover these. You may also want to think about investing in supplemental insurance, like long-term care insurance, to cover what Medicare does not.
4. When you start taking your Social Security benefits matters.
You become eligible for Social Security when you turn 62, but if you want the full benefit that you're entitled to, you must wait until your full retirement age. This is somewhere between 66 and 67, depending on when you were born.
Starting benefits prior to this age will reduce the amount you receive per check. Adults with a full retirement age of 67 who begin claiming benefits at 62 will only receive 70% of their scheduled benefit amount per check; those with a full retirement age of 66 will only receive 75% of their scheduled benefit per check if they start at 62.
But this process also works in reverse. You can delay benefits past your full retirement age, and your checks will increase. This maxes out at age 70, when you become eligible for 124% of your scheduled benefit if your full retirement age is 67, or 132% if your full retirement age is 66. The right time for you to start taking Social Security will depend on how long you estimate you will live, when you plan to retire, and how much money you have saved for retirement.
You can estimate how much your Social Security benefit will be at different ages by creating an account at the website My Social Security. Multiply these amounts by the number of years you expect to receive benefits to figure out which starting age offers the greatest benefit over your lifetime. For example, if you expect to receive $1,000 per month at your full retirement age of 67 and you think you'll receive benefits for 20 years, your total lifetime benefit would be $240,000.
Staying mindful of these four things and regularly reevaluating your retirement plan will help ensure a smooth transition into retirement. If you run into trouble, don't hesitate to reach out to a financial adviser. Now is the time to make any corrections because you may not be able to if you wait too long.
