If you are between the ages of 55 and 64, you still have time to increase your retirement savings. Whether you plan to retire early, late or never, a enough money being saved can make all the difference, both financially and psychologically. Your focus should be on building out — or catching up, if necessary.
It’s never too early to start saving, of course, but the last ten years before you reach retirement age can be especially crucial. By then, you’ll probably have a pretty good idea of when (or if) you’ll want to retire and, more importantly, have some time to make adjustments if needed.
If you find that you need to put more money aside, consider these six time-honored tips for retirement savings.
Key learning points
- If you are between the ages of 55 and 64, you still have time to boost your retirement savings.
- Start increasing your 401(k) or other retirement plan contributions if you haven’t reached the maximum yet.
- Consider whether working a little longer can contribute to your retirement or Social Security benefits.
Top Retirement Saving Tips for Women
1. Fund your 401(k) to the max
If your workplace is a 401(k)—or a similar plan, such as a 403(b) or 457– and you are not fully financing yours yet, now is a good time to increase your contributions. Not only are such plans an easy and automatic way to invest, but you can defer paying taxes on that income until you withdraw it upon retirement.
Since your 50s and early 60s are likely to be your highest income years, you may also be in a higher marginal tax bracket now than you were in retirement, meaning you will have a smaller tax bill by then. Of course, this applies to traditional 401(k)s and other tax-advantaged plans. If your employer has a Roth 401 (k) and you choose it, you pay tax on the income now, but can withdraw tax-free later.
The maximum amount you can contribute to your plan is adjusted for inflation each year. In 2021, it’ll be $19,500 for anyone under 50. But if you’re 50 or older, you can make an additional $6,500 catch-up for a total of $26,000. If you have more than the max to socks off, a traditional or Roth IRA can be a good option.
2. Reconsider Your 401(k) Assignments
Conventional financial wisdom says you should invest more conservatively as you get older, putting more money into bonds and less into stocks. The reason is that if your stocks fall for a long time, bear market, you don’t have that many years to recover their prices and you may be forced to sell at a loss.
How conservative you should become is a matter of personal preference, but few financial advisors would recommend selling all your stock investments and getting fully into bonds, regardless of your age. Equities still offer growth potential and a hedge against inflation that bonds do not. The point is you have to stay diversified into both equities and bonds, but in an age-appropriate way.
For example, a conservative portfolio might consist of 70% to 75% bonds, 15% to 20% stocks, and 5% to 15% in cash or cash equivalents, such as a money market fund. A moderately conservative party could lower the bond portion to 55% to 60% and increase the equity portion to 35% to 40%.
If you’re still putting your 401(k) money into the same mutual funds or other investments you chose in your 20s, 30s, or 40s, now is the time to look closely and decide if you’re happy with that allocation as you approach retirement age. A handy option that many subscriptions now offer is: target date funds, which automatically adjust their asset allocations as the year you plan to retire approaches. However, keep in mind that funds with a target date may have higher costs, so choose carefully.
3. Consider Adding an IRA
If you don’t have a 401(k) plan at work — or if you’re already maxing out yours — another retirement investment option is an individual retirement account, or IRA. The maximum you can contribute to an IRA in 2021 is $6,000, plus another $1,000 if you are age 50 or older.
IRAs come in two varieties: traditional and Roth. Right away traditional IRA, the money you contribute is generally tax-deductible up front. Right away Roth IRAOn the other hand, you get your tax benefit in the form of tax-free withdrawals.
The two types also have different rules regarding premium limits.
If neither you nor your spouse, if you are married, have an occupational retirement plan, you can deduct your entire contribution to a traditional IRA. If one of you is under a retirement plan, your contribution may be at least partially deductible, depending on your income and submission status.️️️️️️️️️️️️️️️️️️
As mentioned, Roth contributions are not tax deductible, regardless of your income or whether you have a retirement plan at work. However, your income and tax filing status do play a role in determining your eligibility to contribute to a Roth in the first place. Those limits are also detailed in IRS Publication 590-A.
Also note that married couples filing their tax returns together can often fund two IRAs, even if only one spouse is in paid employment, using what is known as a wife IRA. IRS Publication 590-A provides those rules as well.
4. Know what to expect
How aggressive you should be when saving also depends on what other sources of retirement income you can reasonably expect. If you’re in your mid-50s or early 60s, you can get a much better estimate than earlier in your career.
If you have a… promised pension pension scheme with your current or previous employer, you must receive an individual benefit statement at least once every three years. You can also request a copy from the administrator of your subscription once a year. The statement must show the benefits you have earned and when they will be established (when they are completely yours).
It’s also worth learning how your retirement benefits are calculated. Many plans use formulas based on your salary and years of service. So you can earn a bigger advantage by staying on the job longer if you are able to.
Once you have contributed to Social Security for 10 years or more, you can get a personal estimate of your future monthly benefits using the Social Security Pension Estimator. Your benefit is based on your 35 highest income years and can therefore increase if you continue to work.
Your benefits will also vary depending on when you start collecting them. You can take benefits from age 62, although it is permanently reduced from what you receive if you wait until your “full” retirement age (currently between 66 and 67 for anyone born after 1943). You can also delay receiving Social Security until age 70 in exchange for a larger benefit.
While these estimates may not be perfect, they’re better than guessing blindly — or too optimistically. A 2019 study by two University of Michigan researchers found that people tend to overestimate how much Social Security they are likely to receive.
To put it in some perspective, the average monthly retirement benefit in June 2021 is $1,555.25, while the highest possible benefit – for someone who has paid the maximum every year from age 22 and waited until age 70 to start with collect – $3,895 is in 2021.
While in some cases you can take penalty-free benefits from your retirement plans as early as age 50 or 55, it’s better to leave them untouched and let them grow.
5. Leave your retirement savings alone
After age 59½, you can begin penalty-free withdrawals from your traditional retirement plans and IRAs. With a Roth IRA, you can withdraw your contributions, but not their earnings, penalty-free, at any age.
There is also an IRS exception, commonly known as the Rule of 55, which waives the early retirement penalty on retirement plan benefits for employees 55 and older (50 and older for some government officials) who lose or leave their jobs. It’s complex, so check with a financial or tax advisor if you’re considering using it.
But just because you can withdraw money doesn’t mean you should, unless you absolutely need the money. The longer you leave your retirement accounts undisturbed (until age 72, when you should start required minimum distributions (RMDs) of some of them), the better off you are likely to be.
6. Don’t forget taxes
Finally, as you hoard your retirement savings, remember that not all of that money is yours to keep. When you make withdrawals from a traditional 401(k)-type plan or traditional IRA, the IRS will tax you at your ordinary income rate (not the lower capital gains rate).
So, for example, if you’re in the 22% band, every $1,000 you withdraw will only yield $780. You may want strategize to hold more of your retirement funds— for example, by moving to a tax-friendly state.