The beginning of a new year prompts many of us to start thinking about a personal-finance tuneup, but if you’re 50 or older — a time when those vague retirement dreams are starting to coalesce into a hoped-for reality — it’s crucial to take time to assess your finances.
Age 50 “is a turning point,” said Debra Whitman, executive vice president for policy, strategy and international affairs at AARP. “You’re really starting to look toward retirement,” she said. “You need to check in to make sure you’re on the right path.”
Here are five financial strategies for those in their 50s to consider, plus links to further reading.
1. Check your Social Security statement online
The Social Security Administration no longer mails annual statements, but you can review your expected future benefits by going to www.ssa.gov and creating an account.
You should do that both to confirm that the SSA is correct about your earnings history, and also to see what amount you’re likely to collect each month. Knowing that dollar figure is a key piece in understanding how much you need to save on your own.
“It’s really important to get a true sense of what your Social Security benefit is going to be well in advance of retiring so you can have a sense of how much more savings you need,” Whitman said.
“Social Security is really not very generous — average benefits are about $13,000 a year — and a lot of people don’t understand that,” she said.
Also, check that the Social Security Administration’s records are correct with regard to your earnings history — if there’s a mistake, you could face reduced payments.
“Mistakes sometimes happen with people’s earnings statements, potentially leading to incorrect Social Security payments,” writes Jonathan Peterson in his book “Social Security for Dummies.”
“These mistakes don’t happen very often, but they happen enough that you should pay attention to your own earnings statement,” he said.
His advice? On a regular basis, check the summary of your earnings history and if anything seems amiss, compare against your own records, such as pay stubs or tax returns, and, if necessary, contact the SSA to get the mistake fixed.
2. Assess whether your savings are on the right track
Knowing how much you need for retirement can get complicated. At minimum, run your numbers through an online calculator to see whether you’re on track. Your retirement-plan provider probably offers a calculator, or try the Ballpark Estimate offered by ChooseToSave.org.
But, when you’re 50 or older, it’s time you created a written retirement plan, detailing where your income will come from, and how much money you’re likely to spend in retirement.
Some planners advocate a goals-based approach — you detail your goals, prioritize them and quantify the costs associated with each. For more on creating a goals-based plan, read Money moves to make if you’re forced to retire.
3. Try to increase your savings rate
Can you bump up your retirement-account contribution rate? The sad truth is that few savers manage to save the maximum allowed of $17,500 for 401(k)s and similar plans, let alone the additional $5,500 catch-up contribution allowed for people aged 50 and over. But every bit extra you can save now gives you a better retirement outlook.
IRAs also offer a catch-up contribution for older savers: In general, the maximum allowed is $5,500, plus another $1,000 for people age 50 and older. Read this IRS page for more on contribution limits.
Consider this: The more you save now, the less you’re spending now. Not only does that improve your account balance, it also helps the spending side of your retirement plan. Come retirement, you’ll need less to live on.
4. Manage investment volatility
Volatility “is ultimately what destroys portfolios,” said John Nersesian, managing director for Nuveen Investments in Chicago.
“I can take it when I’m 20 because I’ve got 30 years to recover…but as I get closer and closer to that finish line, I can’t sustain a large decline in my portfolio value because very soon I’m going to start taking a distribution from it,” he said.
That does not mean your 50s are the time to push your portfolio entirely into conservative investments.
“The 50-year-old has to realize that retirement age 60 or 65 is not a finish line but really a first step in the next chapter,” Nersesian said. “Your horizon is probably 25 or 30 years given longevity. They need to take some acceptable level of risk and take a long-term view, but one of the goals is reducing volatility as they get closer to the finish line.”
Reduce volatility by diversifying your investments, and rebalancing your portfolio when necessary.
“That’s a way they can reduce that volatility,” Nersesian said. “That will allow them to keep their money in risk assets, which they have to do today. The Fed is kind of forcing us to embrace risk assets. We want to manage volatility through diversifying effectively and rebalancing regularly.”
5. Do your tax planning
Pay attention to taxes. “Taxes are one of the things investors can control,” Nersesian said. “I can’t control or predict market returns, but taxes are a known entity. Every dollar saved in taxes is a free dollar.”
For example, make a point of harvesting stock losses to reduce your capital-gains tax hit, and possibly to reduce your taxable income (if you don’t have capital gains). That’s a smart strategy for most investors, but especially for high income taxpayers. The capital-gains tax rate is now 20% for people whose income tops $400,000 ($450,000 for joint filers), up from 15% a year ago. Plus, investors with income of $200,000 ($250,000 for joint filers) face an additional 3.8% tax hit on net investment income.
For high-income taxpayers, “Losses are more valuable today than they were last year,” Nersesian said.
But even if your income is not so lofty, it makes sense to plan your taxes. For example, it might be worthwhile to consider converting your IRA to a Roth IRA.
If you’re not meeting with a financial adviser or tax expert now, it makes sense to consider a one-time retirement and tax-planning consultation.
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