With retirement right around the corner, your 50s are arguably the most crucial years for your finances.
That’s partly because today’s 50-somethings aren’t just dealing with the pressure to save for retirement. The so-called sandwich generation is often saddled with the role of caretaker for not only for their kids but their parents as well.
Nearly half of adults in their 40s and 50s are raising a kid or financially supporting an adult child, while 15% say they’re financially supporting elderly parents as well, according to a Pew study.
The pressure to support not only themselves but their families can leave a lot of room for error. To help you better protect your finances, we tapped financial experts to find out some of the most dangerous money mistakes 50-somethings make today. Here’s what they had to say:
Dipping into your 401(k) to put your kids through college
We all know that college costs are growing wildly out of control, a trend disproportionately affecting middle-class households (too broke to pay for college in cash, yet too rich to qualify for financial aid). Rather than co-signing a student loan on your child’s behalf and taking on more debt, it might make sense to make a penalty-free 401(k) withdrawal to pay for higher education. There’s just one problem with this strategy: Unless you’re expecting a windfall or a cushy promotion at work, how will you ever be able to pay yourself back?
“Often those funds are tough to replenish to appropriate levels,” says Laurie Burkhardt, a certified financial planner in Boston. “There are numerous ways for a child to assume responsibility for an education funding shortfall … However, there are limited ways to fund a retirement shortfall once you reach a certain age and are unable to increase your earnings and savings.”
Rather than bankroll your kids’ college degree, encourage them to work part time, seek out public or community colleges rather than pricier private and out-of-state institutions (unless, of course, they can qualify for financial aid).
Rolling over your 401(k) into an IRA if you retire early
This is such a common mistake for 50-somethings that nearly every financial expert we spoke with pointed it out.
If you decide to retire a bit early, between ages 55 and 59, it may make perfect sense to roll your employer-held 401(k) into an IRA. But the rules for IRA withdrawals are different and you could be shooting yourself in the foot if you’re too hasty to ditch your 401(k).
“If you leave your employer in the calendar year that you turn 55 or older, you can take money out of your 401(k) and not pay a 10% early withdrawal penalty tax,” says Michele Clark, a CFP in Chesterfield, Mo. “This is terrific for people that are younger than 59 1/2.”
But withdrawals made from an IRA before 59 1/2 is subject to a 10% penalty.
“I tell clients that are retiring early (55 to 59 1/2) to keep their 401(k) at their employer until after they turn 59 1/2 to give them flexible access to the money in their 401(k) without penalty,” Clark says.
Letting your kids take advantage of you
In plenty of different cultures, it’s perfectly reasonable for adult children to continue to live under their parents’ roof until they’ve married or can at least sustain a household on their own dime. But if supporting your kids means putting your own retirement in jeopardy, you have to draw a line at some point.
“It starts innocently enough by keeping the... kids on the family plan for the cellphone, but then before most people know it, they are ‘helping’ their adult children with the rent on their new apartments,” Costa says. “If you do this for too long, you can’t easily stop doing it because the kids expect it.”
That doesn’t mean there isn’t a way to support your adult children — or any relative who may need a helping hand, for that matter — and get something in return as well. For example, if they want to move back home while they work at paying down their student loans or finding a job, charge them rent or require them to help out with household responsibilities. Costa gives this advice to all her clients, even if they’re wealthy enough to comfortably support their kids.
“It provides incentive for the [child] to eventually get a place of their own,” she says. “If the parent is exceptionally well prepared for retirement, they can always return the rent money to the kids when they move out and that money can be used to buy or rent a place.”
Hiding your finances from your children
It’s not uncommon for parent-child relationships to shift as parents get closer to retirement age. Those kids who are too broke to afford their own apartment today may be the ones driving you to doctor’s appointments and managing your finances sooner than you think. It’s important to not only prepare for your future —by writing a will, and designating a power of attorney and a health care power of attorney—but to make sure your children know exactly what those plans are.
“Make your decisions ahead of time and let them be known in the form of these legal estate planning documents,” says Kathleen Campbell, a CFP in Fort Meyers, Fla.. “That way, if you are incapacitated or if you die prematurely, you won't have a judge making the decisions for you.”
Your children — or whoever you plan on trusting with your estate plan — should know exactly where to find your documents, whether that means giving them the security code for your office safe or keeping a list of passwords to all of your electronic accounts.
Prioritizing mortgage debt over all other debts
Retiring without a mortgage is one of the most common goals for older workers, but mortgage debt shouldn’t always take priority over other debts.
The average 50-something has $5,347 in credit debt. More than one in ten Americans over age age 50 still have student loan debt, and 20% of those borrowers is in default on their loans, according to a report by the Federal Reserve Bank.
It’s not like your mortgage and credit card debt is forgiven the minute you leave the workforce. Even Uncle Sam won’t hesitate to garnish your Social Security income (up to 15%) to recoup student loan debt or past taxes owed.
“You’d be amazed how many people punch out for the last time at work and waltz home with credit card debts, boat payments, two car payments, timeshare obligations, and a hefty mortgage,” writes Roger Roemmich, chief investment officer for ROKA Wealth Strategists, in his book, “Don’t Eat Dog Food When You’re Old”.
Unless your mortgage rate is greater than 5%, Roemmich advises against pre-paying on home loans. A tax advantage of having a mortgage is that you can always deduct the interest. The same can’t be said for lingering credit debt, which is almost sure to have a higher interest rate anyway.
“Non-deductible debt (i.e., credit cards) should be viewed as very short-term debt and paid off at the earliest possible time,” Roemmich says. “There are very few investments that return enough to suggest investing in lieu of paying off credit card debt.”
Underestimating your health care costs
The average 401(k) balance in the U.S. today may be at a five-year high (just shy of $90,000 at last count), but when you consider health care for the average retiree will cost upwards of $220,000, it’s pretty sobering to realize that so many Americans may be unprepared.
Because of its high cost, nearly 80% of the cost of long-term care for the elderly is provided by family members. It can cost up to $6,700 a month for standard nursing home care, and unless you’ve either got deep pockets or family members willing to pick up the tab, it’s unlikely you’d be able to afford it without long-term care insurance. Nursing home care isn’t covered by Medicare either.
In her book, “The Charles Schwab Guide to Finances After 50,” Carrie Schwab-Pomerantz says long-term care insurance (LTCI) should be a part of every retirement plan. LTCI is one smart way to protect yourself against costly health expenses after retirement, and the sooner you sign up for a policy, the better. One in four people over age 60 are denied LTCI coverage, according to Bankrate.
The American Association of Long-Term Care Insurane is a great place to find information: http://www.aaltci.org/.
If you already have life insurance, think about adding a long-term health care rider to your existing policy, or buy a fixed or variable annuity with additional long-term care coverage.
Expecting too much
Christopher Knight, a CFP in Matthews, N.C., often has to work against his clients’ unrealistic expectations for their own financial futures.
“Sometimes clients in their 50s go through late-career crisis, where all that matters is being able to walk away at a certain specified age, let's say age 60,” Knight says. “Unfortunately, too many times clients become mentally fatigued and emotionally blinded at the late-career stage and end up with the unrealistic expectation of retiring at a certain age, when if they look at things objectively are very unrealistic.”
For a sobering dose of reality, sit down with a financial planner and take a hard look at your finances — you might be saving less for retirement and spending more on your day-to-day expenses than you realized.
“They may think they have x, y or z, but when we look at things, they're off a good bit,” Knight says. “A lack of clarity and reality will lead to the wrong decisions that can derail their retirement.”
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