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When you are in your 50s you will find yourself thinking more and more about your retirement. However, instead of thinking where you’ll travel to first in your caravan or which color the tiles in your remodeled bathroom should be, you’ll need to turn your mind back to financial matters for a little longer to make sure your travel and decorating budgets are up to scratch.
While you may have financial plans in place for your retirement, when you are in your 50s it is the time to review these plans and take another look at your expected expenses in your retirement. If you find that changes need to be made, you’ll have the time to successfully make them, and ensure that you will still be able to enjoy the retirement you’re dreaming of. Therefore, make sure your pre-retirement investment strategy includes these five steps.
1 – Know what you can contribute and withdraw from retirement funds
During your working life it is easy to absentmindedly make contributions to your retirement fund, hoping it will be enough. However, by the time you reach your 50s you need to start looking more closely at your contributions, to work out if you want or need to make extra contributions, or you are ready to start withdrawing from your retirement fund.
When you reach fifty-nine and a half, you can start making withdrawals from your 401K or IRA retirement funds, penalty free. However, from the time you are 50 you also have the opportunity to make catch up contributions which are more than the annual contribution limits. Since you are likely to be in your peak earning years later in life, with the highest salary of your life, this is the time to take advantage of your experience.
If you have found that you won’t have as much in your retirement fund as you would have hoped, you can contribute up to $22,000 to a 401K plan in 2011 and this includes a $5,500 catch up limit. In 2011 you can also contribute up to $6,000 to IRA accounts, including a catch up limit of $1,000. Contribution limits are adjusted each year and you will need to check with your financial advisor for 2012 limits.
It is also important you take the time to consolidate your retirement plans in your 50s because all of the smaller plans you have with each employer you’ve worked for throughout your life can be costing you money. With a consolidated retirement plan you have an overall view of your position heading into retirement and you can more easily manage your portfolio.
2 – Assess your assets
In your 50s you still have a number of years before you need to access your retirement funds, so you can continue to take advantage of assets such as stocks. Stocks are the only asset type which has consistently outpaced inflation so your retirement nest egg will not be eroded by the increasing cost of living. At the same time, consider reducing some of your stock allocation and replacing it with bonds which can generate an income into your retirement, and reduce the volatility of your portfolio.
When looking at your assets you will need to make sure you also have a sufficient allocation of cash because if you have to sell long term investments to free up cash for an unexpected expense, if you happen to be in a market downturn at the same time the longevity and success of your portfolio will suffer. While having ready cash available will lower your investment returns, your long term investments will be better placed to overcome market fluctuations.
Also look at how you are protecting your retirement assets and products such as long term care insurance which will ensure you won’t have to dip into your retirement assets if you need expensive medical assistance in the future. If you are planning to retire early, in your 50s, you may also want to purchase an annuity which will maintain an income stream for as long as the insurer is solvent. An annuity guarantees that you won’t outlive your retirement assets and can be helpful if you are not comfortable managing your own assets into your retirement.
3 – Minimize your investment risks
As you head into your 50s it is not the time to make high risk investments in the hopes of a high return, as the chances are often just as likely you’ll pay a high price. Therefore, minimize the risks to your retirement investments by ensure your portfolio is a mix of stocks, bonds and short term cash investments such as term deposits.
You will also need to make sure you have balanced the risks and rewards, as you don’t want to diminish your retirement returns either. You will also need to make sure you can access funds when you need them, to avoid having to sell stocks when you need cash, and risk selling at a low point.
4 – Reduce your debts
If you have been paying just the minimum on your mortgage in order to channel more funds towards investments, you could actually be better off clearing your home loan and being mortgage free. In the later years of a home loan term, very little of your repayment is going towards interest charges, and so only a small amount of your mortgage repayments are tax deductible. Therefore, you can get a better return on your money by reducing your interest expenses and paying off your home loan sooner, and there is no risk to the return of paying off your loan.
It is also important that you don’t have high interest debts such as credit cards as the interest you are earning on your investments won’t usually be higher than the rate of interest you are being charged on these debts. Plus, the compounding effects of credit card interest will quickly diminish the interest income from your retirement investments so focus on clearing these high interest debts to really let your retirement funds grow.
5 – Will you keep working?
As you approach retirement age, you may need to keep working to bring in an income, or you may want to keep working to stay active. No matter what your reasons, there are a number of ways you can earn an income in your retirement, and keep your retirement investments healthy. For example, you may be able to switch your current position to a part time position and continue your current role, or you may have a hobby or skill you can turn into your own business.
The social security rules have also been changed to make it more financially attractive for you to keep working. Where your benefits were reduced if you earned an income over a certain amount, you can work as much as you like in your retirement and still receive the full benefit.
Just keep in mind that earning an income after retirement is not always a viable contingency plan as you may see your skills and health diminish, or find it hard to secure work as an older employee. Instead, aim to secure your retirement investments with these steps, and work because you want to, not because you have to.
Alban is personal finance writer at Home Loan Finder, home loan comparison website.