Once you hit the big 5-0, blowing out birthday candles may feel less like a celebration than stoking flames on a pyre of financial obligations. This is the decade when the costs of children, aging parents, cars and homes converge, and retirement questions begin to arise.
Retirement savings benchmarks can put the value of your portfolio into perspective. For example, according to T. Rowe Price, by age 50, a person should have saved six times their salary. That’s $ 420,000 for someone making $ 70,000 a year.
But an even better record for midlife investors is running a few different saving and investing scenarios using a good retirement calculator. The exercise will provide more accurate results than when you were younger and the projected retirement expenses were a bit more fuzzy.
Did you do the math and find that you fell short of your goals? There is still time to progress. Here’s how.
1. Make up for lost time
The older, wiser, and hopefully wealthiest (these are your highest earning years, after all) can overcome past savings gaps by catching up on contributions to tax retirement accounts. advantageous.
The IRS allows people 50 and over to contribute an additional $ 6,000 per year to a workplace retirement plan on top of the 2018 contribution limit of $ 18,500, and an additional $ 1,000 per year to an IRA, for a total of $ 6,500.
This wallet padding can dramatically improve your retirement prospects. Saving $ 6,500 instead of $ 5,500 in an IRA aged 50 to 65 and earning an average annual return of 6% can add $ 25,000 more to your retirement savings. Maximize your 401 (k) at work and that’s almost $ 150,000 more.
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2. Stay with stocks
Investors of all ages experience spikes in blood pressure when the market turns, as it has done a few times lately. But now is not the time to reduce your exposure to equities.
You have years – decades, even if you’re healthy and have a family history of longevity – to weather the ups and downs of the stock market. Consider fund manager Vanguard has 78% of his retirement fund assets due 2035 invested in stocks, the remaining 22% in bonds.
3. Focus on diversification
Within the equity and bond portions of your portfolio, your money should be more diversified across asset classes. For equities, this means having exposure to large, small and medium-sized companies, established and emerging international markets, and real estate. Along with bonds, it allocates money to short, medium and long term US and international bonds.
For DIY investors, diversification can be done with individual stocks, index mutual funds, or exchange traded funds. Major brokerage firms have fund filters to help analyze options based on fund type, performance, expense ratio, and other factors. If managing a portfolio alone sounds like a puzzle …
4. Consider taking an asset allocation shortcut
Buying a target date mutual fund or using a robo-advisor makes it easier to build and manage a well-balanced portfolio.
Target date funds automatically adjust the mix of equity and bond investments to suit a person who plans to retire in any given year. Robo-advisers, or computerized investment managers, create and manage a portfolio based on your goals and tolerance for risk.
With both options, keep an eye out for fees, which can have a corrosive effect on portfolio returns. Typical management fees at a robo-advisor start at 0.25% of your assets per year. Hybrid funds spend on average 0.74% per year, according to the Investment Company Institute, although the best have expense ratios of less than half a percent.
5. Use a Roth
The diversification exercise continues with regard to the tax rules surrounding your investments. Young investors sometimes prefer Roth IRAs (which offer tax-free withdrawals) over traditional IRAs (where withdrawals are taxed but contributions may be tax deductible). This makes sense, as they are probably in a lower tax bracket than they will be when they retire. But the Roth is still a valuable retirement investment tool for middle-aged savers.
Investing in a Roth IRA gives older savers the flexibility to withdraw from pools of money with different tax treatments. The Roth is also more tax-friendly when it comes to passing money on to your heirs.
Are you not eligible to contribute to a Roth IRA? If your employer offers a Roth 401 (k) option, there is no income limit for eligibility. Consider dividing your contributions between Roth accounts and traditional accounts to keep some of the current year’s tax break.
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