Retirement planning is important at every age, but if you are in your 50s it is especially important. Your runway for adjusting your retirement plan is getting shorter, you have a little more than a decade to make any adjustments. You cannot afford to make any mistakes because there is not enough time to make up for mistakes. Here are four things people in their 50s should know about when it comes to planning and preparing for retirement. .
1. You can make catch-up contributions
People under the age of 50 are allowed to contribute up to $19,000 to a 401(k) and $6,000 to an Individual Retirement Account (IRA) in 2019. But adults 50 and over are allowed an additional $5,000 to a 401(k) and $1,000 to an IRA, bringing their contribution limits to $25,000 and $7,000. These are called catch up contributions, and they can make a big difference if you have not saved enough in your retirement accounts.
Say you contribute $19,000 to your 401(k) this year. This could grow into $41,020 in 10 years, assuming 8% annual interest rate. If you contribute the maximum $25,000, you could have $53,973 after 10 years with 8% annual interest rate. That's a difference of $12,953, meaning your $5,000 catch-up contribution has grown by more than 250% in value.
2. You will pay a penalty for early withdrawals
If you are one of those lucky few who can afford to retire in your 50s, you need to be careful about where you withdraw your retirement savings from. With few exceptions, like a first-home purchase or qualified educational expenses, you cannot access your 401(k) or IRA funds before age 59 1/2, unless you want to pay a 10% early withdrawal penalty on top of the income tax on the amount.
Your best option is to begin using money you have kept in savings or in taxable brokerage accounts. There are no restrictions on when or how you can use this money -- though, of course, you will have to pay taxes on it. Then, when you turn 59 1/2, you can begin relying upon your retirement accounts.
3. Health care might cost more than you think
A 65-year-old couple retiring in 2019 would need somewhere between $280,000 to $364,000 to cover their health care expenses during their retirement years. That includes out-of-pocket Medicare costs, but it does not include things like long-term care, which could drive up your costs further. Medicare will cover some of your expenses, but you will still have premiums, deductibles, and co-insurance. There are some things that Medicare does not cover, like long-term care, dental work, and hearing aids.
If you have not budgeted for your healthcare costs in retirement, reevaluate your savings plan. Boost your contributions to ensure you'll have enough to cover these. You may also want to think about investing in supplemental insurance, like long-term care insurance, to cover what Medicare does not.
4. When you start taking Social Security matters
You become eligible for Social Security when you turn 62, but if you want the full benefit that you are entitled to, you must wait until your full retirement age. This is somewhere between 66 and 67, depending on when you were born. Starting benefits prior to this age will reduce the amount you receive per check. Adults with a full retirement age of 67 who begin claiming benefits at 62 will only receive 70% of their scheduled benefit amount per check; those with a full retirement age of 66 will only receive 75% of their scheduled benefit per check if they start at 62.
But this process also works in reverse. You can delay benefits past your full retirement age, and your checks will increase. This maxes out at age 70, when you become eligible for 124% of your scheduled benefit if your full retirement age is 67, or 132% if your full retirement age is 66. The right time for you to start taking Social Security will depend on how long you estimate you will live, when you plan to retire, and how much money you have saved for retirement.
You can estimate how much your Social Security benefit will be at different ages by creating an account at the Social Security website (www.ssa.gove). Multiply these amounts by the number of years you expect to receive benefits to figure out which starting age offers the greatest benefit over your lifetime. For example, if you expect to receive $1,000 per month at your full retirement age of 67 and you think you'll receive benefits for 20 years, your total lifetime benefit would be $240,000.
Staying mindful of these four things and regularly reevaluating your retirement plan will help ensure a smooth transition into retirement. If you run into trouble, don't hesitate to reach out to a financial adviser. Now is the time to make any corrections because you may not be able to if you wait too long.
If you are looking for a Financial Consultant that can work with you to develop a strong strategy for next year - contact Stephen Westurn (214.240.0701) or Stephen@Westurnconsulting.com for a complimentary session. Check out the website: www.Westurnconsulting.com .
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