Building Retirement Savings at Any Age: Part Two of Three
In Your 40s and 50s:
Fine Tune Your Financial Plan.
With retirement just a decade or two away, you may have a more realistic idea now than you did in your twenties or thirties of how much income you may need to live comfortably in retirement. You may also have a clearer idea of how much income you can expect from pensions, Social Security, your savings, and other sources of retirement income. Use this knowledge to fine-tune your financial plan. Together with your financial advisor, estimate whether your sources of retirement income are likely to meet your retirement needs. It is important to do this now while there is still time to implement changes to your financial plan if necessary.
Increase the Amount You Save.
If you are not on track to your retirement goal at your current savings pace, look for opportunities to boost the amount you save each year. For Example:
- As your salary increases, consider increasing the percentage of it that you contribute to your retirement accounts.
- As your children complete their educations and you pay off your mortgage, consider diverting the amount that you had spent on those expenses into retirement savings.
- If you receive a financial windfall, such as an inheritance or a bonus, consider putting it towards retirement rather than spending it.
Take Advantage of Catch-Up Contributions.
Beginning in the year you reach age 50, you can generally contribute extra amounts, known as catch-up contributions, to your IRA and workplace retirement plan each year. Individuals age 50 or older in 2016 can generally contribute up to an additional $6,000 to a 401(k), 403(b), or governmental 457(b) plan, $3,000 to a SIMPLE IRA, and $1,000 to a traditional or Roth IRA.
Use Regular Accounts to Save Additional Amounts.
Although tax-favored accounts, such as IRAs and workplace retirement plans, are generally ideal places to save for retirement, they have strict limits on how much you can contribute each year. If you need to contribute more money than allowed by tax-favored accounts, use regular taxable brokerage and bank accounts to save additional amounts.
Review Your Asset Allocation.
The asset allocation that you used in your twenties and thirties may no longer be appropriate as retirement draws closer and less time remains to potentially recover from downturns in the stock market. It may be time to begin reducing your portfolio’s volatility. This typically means gradually reducing your exposure to stocks and increasing allocation of bonds and cash investments. Before adjusting your asset allocation, remember that risk and return go hand-in-hand. Shifting too much of your portfolio away from stocks, with their potential for higher long-term returns, may result in your savings falling short of your goal. Talk to your financial advisor about an appropriate asset allocation that considers both how much time remains until retirement and your need to grow the savings you have accumulated so far.
Strike a Balance between Savings for Retirement and Paying College Tuition
Whenever you are faced with completing goals for your money, such as saving for retirement and paying for your children’s college educations, it can be helpful to prioritize your goals. For many parents, saving for their own retirement should be a higher priority than paying for their children’s college educations. The reasoning behind this is simple: your children can borrow for their educations, but you cannot borrow for you retirement. You financial advisor can help you strike a balance between saving for your retirement and paying for your children’s college educations, as well as create a unified plan that addresses all of your financial goals.