Most Americans have less in their retirement accounts than they would like, and far less than the rules say they should have. So obviously if this describes you, you’re not alone. Now, most financial advisors recommend that you have between five and six times your annual income in a 401(k) or other retirement savings account by age 50. With continued growth over the rest of your working career, this amount should generally allow you to have enough savings to retire comfortably at age 65.
Consider working with a financial advisor as you build out your retirement plan.
What your retirement savings should look like at 50
Financial experts sometimes suggest planning your retirement income to be around 80% of your pre-retirement income. So, for example, someone who was earning $100,000 a year at the time of retirement would plan to have about $80,000 a year in retirement. The reason for this discrepancy is that most households tend to have fewer needs and responsibilities in retirement, and therefore fewer expenses. The only major exception to this rule concerns health care. You should expect these costs to increase in your later years.
To make your savings last, financial experts recommend that you plan to withdraw about 4% per year from your retirement fund. This will depend on three main factors:
How much money do you have in your retirement fund
The average rate of return your pension fund generates
Your anticipated social security income
So, for example, let’s say you expect to need $80,000 a year in retirement.
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First, you need to research how much money you can expect from Social Security each month. This income will depend on how much you earned during your working life, as well as when you choose to retire. If you’re an average Social Security recipient, that’ll be about $1,650 a month, or $19,800 a year. You should therefore plan to withdraw an additional $60,200 per year to make up the difference.
Applying the rule of thumb of 4%, $60,200/$0.04, this suggests that this household will want about $1.5 million in their retirement fund. Other, more conservative recommendations suggest making these plans without considering social security. In this case, you would want about $2 million in your retirement fund.
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The 4% rule can result in too much shrinkage. It comes, in part, from conservative estimates of your pension fund returns. By the time you retire, you should have shifted your portfolio to safe assets. Many retirement funds, with relatively safe assets, will have a rate of return of around 3% to 5% at this point, allowing you to hover around the replacement rate of your withdrawals.
So someone earning $100,000 a year will want to have about $1.5 million in their retirement fund by age 65. At age 50, many experts therefore suggest that this retiree would need to have – at the bare minimum – about $600,000 in a 401(k), or other tax-efficient account. This would give the retiree 15 years to increase their retirement nest egg by an additional $900,000, or increase by an average of $60,000 per year for each of the next 15 years. This is unlikely to happen without significant capital appreciation in the retiree’s tax-advantaged account. Many advisors recommend looking for a rate of return around 7% to 8% to reach the $1.5 million needed.
Reaching the retirement finish line
In addition to making sure your retirement fund’s asset allocation is aggressive enough, there are at least four other steps you can take to grow from $600,000 at age 50 to $1.5 million at age 65.
Maximize your catch-up contributions
It’s the most important thing you can do. The IRS limits the amount you can contribute to 401(k), Individual Retirement Account (IRA), and Roth IRA in a single year. After reaching age 50, this raises the cap, allowing you to make what are known as “catch-up contributions”. In 2022, for example, most workers can only contribute up to $20,500 to their 401(k) account. However, anyone age 50 or older can contribute up to $27,000. That extra $6,500 is significant, and between the ages of 50 and 65, it has time to add up to something very real. Take it to your advantage.
Concurrent Retirement Funds Opened
The IRS allows you to contribute to a 401(k), an IRA, and a Roth IRA in the same year. However, there is an overlap between the contribution limits for an IRA and a Roth IRA.
If you’re already maxing out your 401(k) contribution limits but still worry that it’s not enough, consider opening an IRA or Roth IRA to supplement your savings. This will allow you to put money into multiple retirement accounts at the same time, helping to significantly increase your savings.
If you already have concurrent retirement accounts, just consider opening a dedicated account. While it won’t have the same tax benefits, there’s no reason you can’t save for retirement with a regular investment portfolio. You can invest as much money in it as you want, then just plan to leave it there for retirement.
Manage debt, manage expenses
A great way to free up money is to stop paying interest on debt. If you have existing debt, paying it off faster will reduce the amount you spend on interest and fees. This in turn will give you more money to spend on your retirement account.
When it comes to long-term debt, like a mortgage, paying it off more aggressively can also lower your potential expenses in retirement. You won’t have to make these payments, which can reduce the amount of money you’ll need each month after you stop working.
At the same time, consider your overall lifestyle. If you think you might not have enough for your retirement, are there ways to make long-term lifestyle changes that will reduce your expenses? Is there a cheaper place where you could live, for example? It’s not as easy as skipping your morning latte. Instead, ask yourself if you can change your monthly needs in a way that could significantly change your budget now and in retirement.
Consider working more and retiring later
If you don’t have enough money to fund additional retirement accounts, consider taking on extra work to earn that money. This can range from freelance or gig work to formal part-time employment.
This is not a recommendation we make lightly. By the time you’re in your 50s, the last thing most people will want to do is “hustle.” However, a side job is a great way to boost your finances, and if you need money for retirement, it has to come from somewhere. More importantly, while it would be unpleasant to need a second job at 55, it would be much worse to need a job at 75. Working today could save you from having to work tomorrow.
The jump in Social Security payments from the normal retirement age to 70 is significant. If you were born between 1943 and 1954, If you start receiving benefits at age 66, you receive 100% of your monthly benefit. If you start receiving pension benefits at age 67, you will receive 108% of the monthly benefit because you delayed benefit payments by 12 months. If you start receiving pension benefits at age 70, you will receive 132% of the monthly benefit because you delayed benefit payments by 48 months.
Most financial experts suggest that retirees should have about five to six times their annual income saved in their retirement account by age 50. If you haven’t reached this threshold, now is probably a good time to maximize catch-up contributions and consider opening one or more additional retirement accounts. Also, make sure your investments are ready for capital appreciation, which of course carries more risk, and reduce your discretionary spending.
Advice on retirement planning
We can all need help with our finances, and never more so than when it’s time to save for retirement. This is where a financial advisor can offer valuable advice and insights.
Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
Use SmartAsset’s 401(k) calculator to get a quick estimate of how much you’ll have in your 401(k) when you retire.
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