Ideally, you should start planning for your retirement as soon as you begin earning. However, retirement feels a long way off when you’re in your 20s, which leads many people to put off saving until later. Before you know it, though, you’re just a couple decades — or perhaps even only a few years — from retirement and still don’t have your finances in order.
Although it’s far from ideal to plan for retirement later in life, it’s better late than never. No matter if you’re in your 40s, 50s, or 60s, there are things you can do to help ensure a smooth transition from work to retirement.
How to Save for Retirement in Your 40s
By the time you’re in your 40s, you should have settled into a career and will likely be earning more than you did in your 20s and 30s. This should mean you’re in a good place to put some of your earnings toward saving for retirement. A few strategies will help you meet your goals.
Pay Off Your Debt
For most people in their 40s, the biggest financial challenge is staying out of debt. Even if you’re earning well, there’s a good chance you have several types of debt, including student loans, car payments, a mortgage, and credit card debt. It makes little sense to put more into savings if this will mean your debt increases. Instead, your priority needs to be to pay off as much debt as fast as possible.
Your aim should be to pay off all your debt (except for your house) and then accumulate an emergency fund to cover three to six months of living expenses. Once you’ve done this, you should move on to your retirement savings plan.
Maximize Your Retirement Contributions
When retirement feels far off, you may prefer to contribute only a small amount to your 401(k). However, once you’ve paid off your debt and are living within your means, it makes sense to increase your contribution by at least a few percentage points. This will have a minimal impact on your paycheck and bring you to the maximum sooner — in 2024, this is $23,000 for those aged under 50.
Diversify Your Investments
You’ll see greater returns if you diversify your investments. One good option (for the tax advantages) is an IRA. This is especially important if you don’t have an employer-sponsored retirement plan — although it’s also useful even if you do have a retirement plan through work.
However, since you’re still far from retirement age, there’s no need to be too conservative. Invest in some volatile asset classes (including in stocks and mutual funds) and well as fixed bonds. The proportion you assign to each category will depend on your risk aversion.
Prioritize Saving for Retirement
It’s difficult to build up retirement savings if you don’t make this your priority. As soon as you’re able, you should be putting 15% specifically toward retirement — not just to savings in general.
This may mean allocating less than you would like to your kids’ education fund. Whereas it’s natural to want to put your kids first, it makes more sense to ensure a comfortable retirement. After all, there are multiple ways to pay for tuition (including grants and scholarships), whereas you don’t have such options when it comes to retirement.
How to Catch Up on Retirement Savings in Your 50s
By the time you’re in your 50s, you hopefully have a decent amount saved up for retirement. If you’re behind where you want to be, make sure you waste no time rectifying that.
Pay Off Your Mortgage
You should have already finished paying off all your debt, except your mortgage. When you’re in your 50s, it’s time to finish paying off your house as well. Shift your focus to using any extra funds you have available to make as close to the maximum payments as possible.
Use Catch-Up Contributions
Once you turn 50, you’ll be able to make catch-up contributions to your tax-advantaged retirement accounts. This is good news if you’re behind on your retirement savings. In 2024, the limit is $7,500. This amount is added to the $23,000, bringing the total up to $30,500.
Reallocate Your Savings
Rethink where you’re saving money to replace any investments that have become too high risk. It’s worth keeping some stocks because they have the highest potential for gains and you still have more than a decade to recover from any short-term volatility. However, you may decide that now is a good time to increase your percentage of fixed-income investments.
One new investment to consider in your 50s is a health savings account (HSA). This provides crucial protection against unexpected medical expenses that could otherwise decimate your savings. It’s a great way to invest tax free — and you’ll be able to withdraw the funds without penalties when you turn 65, provided you only use it for healthcare.
How to Prepare for Retirement in Your 60s
When you reach your 60s, your retirement may be only a few years off. It’s time to shift your focus away from saving to considering how you’ll take advantage of the resources at your disposal.
Decide When to Collect Social Security Benefits
You’re entitled to start collecting Social Security benefits when you turn 62. However, the longer you wait, the more you’ll receive, with the maximum beginning when you turn 70. If you’ve taken advantage of other investment opportunities, you should be able to afford to wait.
Make Sure You Withdraw the Required Minimums
Retirement plans like 401(k)s and traditional IRAs have annual required minimum distributions (RMDs). This is the minimum amount you need to withdraw each year. If you fail to withdraw the RMD, you’ll pay a penalty tax that may be as high as 25%.
Currently, RMDs start when you turn 73, but this will increase to age 75 in 2033. Depending on the plan, you may have until December 31 of the year you turn 73 (or 75) or April 1 of the following year. In either case, the second RMD is on December 31 of the year you turn 74 (or 76).
Calculate the Funds You’ll Have Available
Use the above to determine how much you’ll have available each year. Remember to factor in taxes from sources including your investment income, distributions from your 401(k) or traditional IRA, pension, and (in some states) Social Security benefits.
Learn About Medicare
You’ll be able to sign up for Medicare when turn 65 (unless you’re eligible early). It’s important to sign up as soon as you become eligible — not only to avoid a gap in healthcare coverage but also to prevent facing a late enrollment penalty.
Figure Out the Fine Details
Decide what age you’d like to stop working. You may decide to keep working after you reach retirement age — in your current job, through part-time employment, or by pursuing a passion project. You also need to think about where you’ll want to live. For instance, you may like to move to be closer to family or to somewhere with better weather. Lastly, think about how you’ll fill your time and what you should expect to spend on those activities. Of course, always be sure to consult with a licensed financial and/or tax advisor to ensure your plans are on track.
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