Retirement Planning in Your 50s

If there is ever a critical time for retirement planning it's when you hit your 50s.  You've still got ten to fifteen years left in the workplace and you're entering your peak earning years.

With many of your larger expenses hopefully behind you, or winding down, it's time to do some serious number crunching and figure out what it's going to take to live comfortably in retirement.

Final Retirement Planning Opportunity

Your 50s are really your final chance at creating a true retirement plan.  Once you hit your 60s, there's simply not enough time left to make a plan.  The good news is that many of your larger expenses such as a mortgage should be nearing their final payments or quite "affordable" by the time you leave your 50s.  And research on salaries in the workplace tells us you're in your peak earning years.

Realistically, there are probably two major groups of retirement planners in this particular age bracket:

• Those of you that are evaluating their retirement plan to see if it is still working. This group really just needs to run through some calculations and figure out if they need to save more aggressively or not.
• Those of you that have held off, for whatever reason, putting together a retirement plan and now want to get one started.

Example Retirement Plans

At this point, we think it's useful to look at a couple of examples of retirement scenarios that folks in their 50s might find themselves in.  In this example, we're going to look at two different 50 year olds and talk about how well they might be positioned for retirement today.

Retirement Savings Examples H3

We prepared this example using our retirement savings calculator and if you try to replicate these scenarios using that calculator you'll find some other interesting information.  For example, these retirees both expect to be making nearly $128,000 when they reach their retirement age of 65.

They also want to make nearly $90,000 per year in retirement.  And to supply that income they are depending on Social Security, a pension plan, and the funds in a retirement plan such as an Individual Retirement Account, 401k plan or 403b.  In both scenarios above, each retiree needs to have a little over $300,000 in their retirement account to supplement the income from their pension and Social Security.

The difference in these two examples is the current retirement assets each individual owns - one 55 year old has $125,000 saved, while the other only has $10,000.  This retirement savings gap translates into $5,964 in required annual savings for one individual and $21,589 for the other - quite a difference.

Saving for Retirement in Your 50s

The point of this example is to demonstrate the large retirement planning difference that may exist between two 55 year olds.  The first individual needs to continue to work their plan by saving nearly $6,000 per year.  The second individual needs to make some significant financial sacrifices if they are going to reach their retirement saving goal of nearly $22,000 per year.

By age 50 you should have a very good idea of what it's going to take for you to live comfortably in retirement.  You should also be finishing up paying for large expenses such as weddings, student loans, and paying off your mortgage.  The fact that you're in your peak earning years and your expenses should be declining mean that you can get very aggressive, if necessary, with your annual retirement savings plan.

Retirement Planning Tools

If you're interested in creating "what-if" retirement scenarios, then you may want to take a close look at some of the retirement planning tools we have to offer, including:

• Retirement Calculators - Here you'll find several retirement calculators that are designed to help you run through a variety of examples / planning scenarios.
• Investing in Retirement Plans - This publication walks you through a series of questions aimed at helping you to decide where to start or continue your retirement savings.

Most individuals have two options when it comes to retirement savings - IRAs and employee sponsored savings plans such as 401k plans and 403b accounts.  This second guide helps you to figure out which retirement account you may want to fund first - if you have the need or the luxury of having a significant amount of disposable income.

Retirement Planning Strategies in Your 50s

This is actually the fourth publication in this retirement planning series.  Our third publication - Retirement Planning in Your 40s detailed a very methodical approach to creating a retirement plan.  That particular approach relied on the practice of using Plan, Do, Check, Act to create and monitor the progress of a particular plan.

If you're interested in learning how to put a retirement plan together, you may want to take a look at that article.  Listed below are some of the more important steps and specific activities that a 50-something should consider when planning for retirement.

Consolidating Retirement Plans

If you've worked for several employers through the years and you've got a number of "smaller" plans with each employer, it might be time to consolidate your retirement plans.  The benefit of consolidating plans is that it allows you to gain a better picture of what's happening with your total retirement portfolio and makes managing the portfolio itself much easier.

Whether it's an IRA, or a 401k plan, it's a fairly common request to transfer one retirement account into another.  Your plan administrators should be able to supply you up with all the required paperwork.  Be careful about taking personal ownership of the money or it could be viewed by the IRS as an early withdrawal.

Take a look at our article on 401k Rollovers or 403b Rollovers for some helpful hints that will keep steer clear of early withdrawal penalties that can be imposed by the tax code.

Balancing the Risk and Rewards of Investments

At this point in your life, the ideal retirement account should be a mix of stocks, bonds and shorter-term cash investments such as CDs.  Make sure you're comfortable with the risk and rewards of each investment type.  Generally, it is advisable to move money into "safer" investments the closer you get to the point in time when you actually need to use the money.

For example, you don't want all your money in highly volatile growth stocks in the same year you anticipate needing the money for income.  You don't want to have to close out a position in a stock when it's in the middle of a downswing.

Balancing a Portfolio

Once you've decided on the mix of stocks and bonds in your retirement portfolio, make sure you are looking at the percentage allocated to each type of investment at least once a year.  As each asset class appreciates or declines in value, you may find it necessary to redirect future investments or rebalance your portfolio between asset classes.

50 Year Olds Playing Catch Up

Finally, if you find yourself in the situation where you need to play catch up with your retirement savings, keep in mind that the IRS has some catch-up limits that apply to individuals 50 and older:

• 401k Plans - In 2007 and 2008, you can contribute up to $20,500 to a 401k plan - which includes a $5,000 catch-up limit.  For more information on future limits, including those for2009, take a look at our publication on 401k contribution limits.
• IRA (including Traditional IRAs and Roth IRAs) - In 2007, you can contribute up to $5,000 - which includes a catch-up limit of $1,000 - to a traditional or Roth IRA.  In 2008 that limit moves up to $6,000.  Once again, we've also got information for 2009 in our articles on IRA Contribution Limits and Roth IRA Contribution Limits.

Finally, make sure you stay informed of the retirement planning options your company offers.  Many companies are beginning to offer Roth 403b plans and Roth 401k plans that provide employees planning for retirement with the combined benefits of each of these plans.

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