The years before your retirement can be rather crucial. Regardless of when you decide to settle into retirement, the time left to retire significantly narrows down when you reach 55. Considering the fact that most people retire by 65, you have only 10 years to save for your retirement at 55. If you are older, the window is even smaller. Therefore, the years between the ages of 55 to 65 are rather crucial and an important time to take matters into your hands.
Having a retirement savings plan is recommended for all working people. Moreover, it is recommended to start saving for your golden years from the very beginning of your career. Your first paycheck is as important as your last one. And most financial experts and advisors would recommend planning for your retirement the moment you start earning. However, not all people may be able to do so. Sometimes, life takes over and you may have more pressing and time-sensitive goals than retirement that can take up your attention and focus. In some cases, you may not have the right acumen and knowledge to save and invest your money in the younger years. But, regardless of your financial goals or understanding in the early years of your life, the moment you reach the age group of 55 to 64, you must start concentrating on your retirement savings. If you feel you require help with retirement planning when it comes to choosing the right investment options, long-term care insurance, or debt management, consult with a professional financial advisor who can offer you financial advice.Â
Having a distinct retirement savings plan at the age of 55 to 64 years is also necessary for people who have been diligently saving for their golden years from the beginning of their careers. Your only source of money in retirement is most likely through your investments and savings. So, when you enter the age bracket of 55 to 64 years, you must evaluate where you stand and how much more you need to enjoy a safe and comfortable retirement.
Here are some tips on how to start saving for retirement if you are between the ages of 55 and 64 years:
1. Plan the age by which you wish to retire: By the time you enter the age group of 55 to 64 years, you are pretty much aware of when you wish to retire. If you have any health complications at this age, you could get a diagnosis from a doctor to gauge how your health and capability to work would be affected in the years to come. You would have also saved a certain sum of money by now. So, you can take a call about how much more you need to save and by when you can arrive at your desired corpus to retire comfortably. Your children would also be financially settled or at least have a plan drawn out in front of them of what and where they wish to be.Once you have your retirement age in mind, you can go ahead and start planning for your retirement. Typically, a lot of people save up to 10 times their pre-retirement income. Such a sum is considered to be sufficient to cover all your needs, unexpected emergencies, and at the same time, can stand the test of time and combat inflation. However, it is not possible to save such a sum in one go. So, you can break down the required average retirement savings by age. For instance, you can save up to 3 times your pre-retirement income by the age of 40. By the age of 50, you can aim to save up to 6 times of your pre-retirement income. Analyzing your retirement savings by age can help you understand how much more you need to save. When you cross the age of 55, make sure to take a look at all your cumulative savings and fix a retirement age for yourself. A retirement savings calculator can help you ascertain your needs.
2. Maximize your workplace retirement account contributions:Â Your late 50s and early 60s is a great time to maximize your contributions for your workplace retirement account as well. If you have a 401(k) account, a 403(b), or a 457 account, you can increase your contributions to the maximum limit allowed for the year. Contributing to these plans will help you put off taxes until withdrawal. Moreover, since workplace accounts allow an additional catch up contribution to people over the age of 50, you can save up a substantial amount of money in your last few years before retirement.For example, as of 2021, the maximum amount of money that you can contribute to a 401(k) account is $19,500. For people over 50, there is an additional catch-up contribution of $6,500 per year. If you maximize your contributions, you will be able to put in a total of $26,000 every year. If you start this at the age of 55 years and you retire at 65, you can contribute up to $2,60,000 in total, provided the contribution limits remain the same. This can amount to a lot over time and help you make up for any lost savings or investing opportunities of the past.It can also help you to maximize your retirement accounts along with your contributions. For instance, you can start investing in an Individual Retirement Account (IRA) along with a workplace retirement account. An IRA is an additional retirement savings vehicle that can be used over your other retirement accounts. As of 2021, you can contribute up to $6,000 to an IRA annually. If you are over the age of 50, you can contribute an additional $1,000 bringing your total to $7,000. If you start contributing to an IRA at the age of 55 years and you retire at 65, you would have saved up to $70,000, provided the contribution limits remain the same. Combined with $2,60,000, this can offer you $3,00,000 in just ten years.
3. Take a look at your investments:Â Your investment composition cannot be the same all your life. Your 20s, 30s, and 40s may be a good time to invest in high risk and high reward investment options. However, any financial advisor will suggest you to move to more conservative choices as you age. Take a look at your investment portfolio, including your 401(k) and an IRA. As you move closer to your 60s, you can gradually increase the composition of bonds and further decrease the percentage of stocks to make your portfolio more conservative. Carrying high risk investments over the age of 55 may not be suitable as it can be hard to overcome a loss at this stage of your life. One retirement saving advice that can help you during this time is to focus on capital appreciation and not capital preservation. Even if the returns seem low, you would have better financial security that can act like a pillar of support for you in your golden years. So, right from independent investments to your 401(k)s and IRAs, make sure to revise your allocation. If you are not sure how to do this yourself, you can consult a professional financial advisor for some retirement saving advice.
4. Cut out any debt:Â Debt after the age of 50 can be very tricky. The interest payment on your loans or credit cards can be detrimental to your retirement savings plan, especially if you are already running short of funds. It also disrupts your savings growth and forces you to shell out money that can otherwise be saved or invested. While it may be hard to completely ignore debt as most people rely on home loans, car loans, etc., to fulfill their dreams, it may be recommended to settle your debt once you reach your mid-50s. Being debt-free can benefit you in a number of ways. Firstly, you do not owe anybody any money. This gives you better control over your finances and helps you live stress-free. Secondly, your mind is able to focus more on accumulating or preserving wealth rather than spending money. As mentioned above in the previous point, the ages of 55 to 64 are meant for capital preservation. And limiting and eliminating debt can be one of the best ways to preserve your capital.
5. Create an emergency fund:Â It is crucial to have an emergency fund outside of your retirement savings plan. Typically, an emergency fund must constitute up to 6 months of your monthly salary. Moreover, the emergency fund should be stored in a place where it can grow, and at the same time, be easily accessible without incurring any penalties or lengthy procedures. An emergency fund is crucial for people in the age bracket of 55 to 64 years, as you are likely to experience a lot of changes in your life during this phase. Your child might need money to open a business, for marriage, education, or other similar things. Some companies force or fade out older employees to accommodate younger people. So, you could lose your job sooner than you plan for. You can also suffer from a health issue that can result in high medical expenses and, at the same time, prohibit you from working. All of these unexpected situations and more can demand money, and an emergency fund can help you tackle them.It is important to remember that an emergency fund is crucial at any stage of your life, both pre and post-retirement. A lot of people make the mistake of entering retirement without emergency savings, assuming that unexpected circumstances where you or your loved ones may require urgent cash are behind them. However, retirement is as unpredictable as any other time in your life. And your late 50s and early 60s are a critical time to build emergency savings for your retirement, if you do not have sufficient funds yet.
6. Draw out a withdrawal plan for retirement and chalk out your tax liabilities:Â When you use a retirement savings calculator to ascertain your retirement needs, you also have to figure out a way to plan your withdrawals so they last you a lifetime. If you withdraw more money than you have, you risk running out of funds during the later years of your life. Similarly, if you do not withdraw enough you can incur penalties or live a less comfortable life due to lack of proper use. Hence, you must plan out a withdrawal plan for yourself after you cross 55 and get an idea of what your life will be like in retirement. When you plan your withdrawals, you must also pay attention to your tax liabilities. If you choose traditional accounts, you would have to pay taxes on your withdrawal in retirement. This could reduce your retirement income considerably, depending on the income tax slab you fall into. However, if you choose Roth retirement accounts, you would not owe any taxes on your withdrawals and hence do not have to worry about taxes as much. It is important to understand the repercussions of taxes on your cumulative retirement income, so you are able to plan your finances better.
7. Do not start using your retirement income before you retire: Regardless of when you plan to retire, make sure that you do not use your retirement income before you actually retire. A lot of people get relaxed as they move closer to retirement, assuming they have saved up enough and a few withdrawals from here and there will not make much of a difference. But, in reality, using up your retirement savings plan money before you retire can be detrimental in more ways than one. Firstly, withdrawing money prematurely can impact your financial discipline. It interferes with your monetary routine and gives you a false sense of financial security that only lasts for a little while. The long-term consequences of withdrawing money from your retirement corpus sooner than necessary are far more serious. You may have to live a restricted lifestyle later or compromise on your wants in retirement. Your loved ones can also suffer and you may have to borrow money in your golden years to stay afloat. You may also be compelled to work for a few more years if you are not able to make up for the spent savings. Secondly, withdrawing money prematurely can also attract penalties. For instance, unqualified withdrawals from a 401 (k) or an IRA before the age of 59.5 years can result in a 10% penalty. So, try to overcome the urge to use your retirement savings for other purposes. A lot of people use their IRAs to fund their children’s education. But there are other ways to do this. You can use a 529 education savings plan instead of an IRA and help your child get the education they want. If you have not been saving in these instruments and it feels too late to start saving now, you can consider a student loan. Your child will have many years ahead of them where they can pay back the loan and also make their own lives and careers. But you would have limited time in hand and fewer opportunities to make money for your old age. So, if you have to make a choice between your retirement and any other financial need, it would help if you choose your retirement first.
8. Do not ignore retirement healthcare costs: The age of 55 to 64 can be a very critical age as far as health is concerned. You may fall sick more often or develop lifestyle conditions like diabetes, arthritis, thyroid, hypertension, etc. Hence, it is important to not ignore these signs of aging and plan for medical costs that might crop up in the coming years. Make sure to invest in a senior citizen health insurance plan that can provide you with sufficient financial protection in retirement. Other than this, it may also be advised to plan for your long-term care needs with adequate insurance or savings. Paying attention to your health in general by eating balanced meals and exercising is also critical during these years.