We have heard so many times that the sooner you start saving for retirement the better off you will be in your old age. But when you are in your 20s and 30s you are not in a rush to save for retirement. It is easy to fall into a trap thinking you have plenty of time to do that later. Suddenly, you are in your 50s and have not saved enough for your golden years.
Life has presented you with some challenges. You were busy with kids, saving for their education, straightening out debts, and trying to pay off a home mortgage. In the end, there was never that much money left. But do not despair, because it is not too late. If you are in your 50’s and fell behind on your retirement goals, there are things you can do to boost your retirement savings.
Use these smart steps to find out how to catch up on planning for retirement in your 50s.
1. Retirement projection
Start with figuring out how much money you will need to retire. First, find out how much income you will need to cover your retirement expenses.
Financial experts suggest that you need about 80 percent of your pre-retirement income to maintain the same standard of living in retirement.
Suppose my current annual income is $70,000. Multiply that number by 80 percent ($70,000 X 0.8 = $56,000). So, I will need around $56,000 in retirement to live the way I do today. And if I have expensive hobbies like traveling, I will need a higher number.
Next, figure out how much income you will receive from Social Security. You can contact the Social Security Administration to find out how much will be your benefits at age 62, full retirement age, and at 70. For today, I use the estimated average Social Security retirement benefit in 2021 which is $1,543 a month or $18,516 a year.
Then, subtract your Social Security income from your projected retirement income and you will see how much you need to provide from your savings. $56,000 – $18,516 = $37,484 a year.
So, in our simple case, I will need $37,484 in annual income to cover the income gap. The money to cover that gap should come from 401(k), IRA, Roth IRA, and other retirement savings.
5 Easy Steps to Calculate Retirement Income Gap
Also, you can use an online retirement calculator for retirement projection. Take a few minutes to enter your personal information, see the numbers, and where you stand today.
AARP Online Retirement Calculator
But I think the best way to find out how much money you need to retire is to create a retirement budget based on your current and future expenses. You might have a general idea of what you spend now. But you will be better prepared if you have a clear picture of your expenses today and how that might change in the future.
If you do not know how to create a retirement budget or organize your finances for retirement, I recommend reading my posts:
- How to Prepare a Retirement Budget in 5 Simple Steps
- 6 Steps Guide to Organizing Your Finances for Retirement
2. Minimize your debt.
When you are in your 50s make it a goal to pay off your credit card debt, student loans, car loans, and any personal loans before your retirement date. Do everything you can to retire debt-free and even pay off your mortgage if possible.
When you stop working and start living on a fixed income you will need to stretch those retirement dollars as far as you can. How can you enjoy your retirement if you must spend a portion of your retirement income to make a mortgage or debt payments each month?
If you are carrying a high-rate credit card debt you are putting a lot of pressure on your finances. Those high-interest payments can eat away your ability to save. I recommend working on a debt payoff plan if you have more than one credit card.
There are two most popular debt payment strategies – the snowball method and the avalanche method.
The snowball strategy works by paying off the credit card with the smallest balance and then working your way up until all credit card debt is settled.
The avalanche strategy allows you to pay off your highest interest rate debt first and then work it down. I recommend focusing on your highest-interest debt first because the longer it takes you to pay it off, the more money you will pay towards interest.
And if you can help it, do not add any more debt to the pile while paying off old debt.
How to Pay off Debt Before Retirement
If you still making mortgage payments now it is time to figure out how to pay it off in full before you retire. You do not want to carry that financial burden while living on a fixed income. Look at your mortgage balance and try to figure out how much extra you can put toward your mortgage each month. Those extra payments can reduce your principal balance significantly.
Also, instead of sticking with the traditional monthly payments, you can start making bi-weekly mortgage payments. The whole idea of paying off your home loan earlier will help you eliminate debt faster and start saving more for retirement. In addition to that look into refinancing your mortgage to get a lower rate and to reduce your monthly payments.
When you plan for retirement in your 50s, getting out of debt should be your first priority. At this age, you have to make the most of your working years and build or increase your nest egg within the next 10 to 15 years.
3. Maximize your retirement savings.
Being in your 50s is an ideal time to look at your retirement plans and financial goals. You are close enough to retirement to have a realistic idea of how you want to spend your golden years. Yet you are far away to tweak your financial goals.
The closer you are to retirement, the less time you have for compound interest to kick in and start working its magic. That is why the ultimate goal in your 50s is to stash as much money as possible in your retirement savings.
Whenever possible, increase your retirement contributions up to the maximum allowed in retirement plans such as 401(k), IRA, and Roth IRA. The best advice is to start spending less so you can put more money into your retirement savings.
The 2021 contribution limits are:
- $19,500 for 401(k) retirement plans. And if you are age 50 or older, the catch-up contribution is an additional $6,500. So, you can save a total of $26,000.
- $6,000 combined contribution for traditional IRA and Roth IRA. And the catch-up contribution for people age 50 or older is $1,000. So, you can save up to $7,000 with your pre-tax money (IRA) and after-tax money (Roth IRA).
When you are getting closer to retirement, maximizing your traditional 401(k) and IRA accounts is important but not always enough. While you are still working you can make it a priority to save even more money in your Roth IRA account, emergency fund, and may be taxable investment funds if possible.
A Guide to Understanding a 401(k) Plan
Another way to increase your retirement savings is to work longer. The goal is to make the most of your working years. You need to maximize the time you have left. Earning an income for a few more years could improve your financial security in retirement.
4. Spend less and save more for retirement.
I am sure you may not like to hear this, but the fastest way to save more money for retirement is to cut your expenses. If you start practicing how to curb your spending and live on less money today, it will make your life easier in retirement.
Many people in their 50s enjoy the peak of their salaries. The kids are gone, parents become an empty nesters and start spending more on luxuries. It is easy to get used to a luxurious lifestyle. However, it will be tricky to save money and even to retire if you let your spending get out of control. After all, the less you spend the more you save.
15 Ways to Live on Less in Retirement
5. Think about where to live in retirement.
When you are only 10 to 15 years from retirement, you need to think about where you will live because it will affect your living expenses.
Housing is expensive. We all know that it takes a big chunk of our income to pay for property taxes, homeowner insurance, utilities, maintenance, and mortgage. Even with no mortgage payments, housing will be your biggest expense in retirement and it may eat up a big chunk of your retirement income.
I am sure you live in a lovely home. And I know that you love your home and have a lot of great memories of raising your family there. But if it is in a high cost of living neighborhood and expensive to maintain, you need to downsize and move to a place where you can afford it. Otherwise, you will run out of money fast.
There are a couple of housing options to consider before you retire:
- Sell your big house in an expensive location and move to a smaller house or condo in a low-tax state. In this case, your living expenses will be reduced, and you might have some extra income to pay for things you love to do in retirement.
- Stay in your town but move to a smaller home or condo. Having a smaller place to maintain will cost you less money.
- Sell your house and rent an apartment in a big city. But if you want to live closer to the museums, art galleries, concerts, and festivals you should be financially prepared to spend more money because retiring in a booming metropolis can be pricey.
If you want to learn more about housing options, relocating, and downsizing I recommend reading my posts:
- Where Will You Live in Retirement?
- 5 Tips on How to Downsize for Retirement
- Rent or Buy in Retirement?
- 5 Ways to Reorganize Life to Afford Retirement
6. Protect yourself and those you love.
Planning for retirement in your 50s when retirement is on the horizon, make sure you have insurance plans in place to protect yourself and your family. Have you thought about how to protect yourself as you age and how to help your family care for you if you need it? When the time comes that you need assistance who will manage your finances, your medical care, and your regular day-to-day life?
I understand that these are difficult topics to discuss. But it is a part of reality to grow old. And if you love your family you will plan for it. So your loved ones will not struggle and may have to scramble to care for you.
I write often in my articles about the cost of medical expenses in retirement. I want to remind my readers that healthcare is the second biggest expense in retirement after housing and you need to plan for it. Medicare is not free. It does not cover all your medical expenses and does not pay for long-term care.
Long-term care insurance is the most recommended way of planning for future expenses. It will cover nursing homes, assisted living facilities, and in-home care. It will help you not to be a financial burden on your family if that time comes. And you do not want to leave your husband or wife with nothing because the entire nest egg was used up taking care of you.
Putting It All Together
You are in your 50s and feeling the urgency of doing everything you can to have financial security in retirement. If you are behind on your savings and might be feeling the pressure, I want to remind you that it is never too late to start planning and saving for retirement.
The longer you put off dealing with your financial situation, the farther away you will be from your retirement dreams. So, do not delay planning for your next phase of life and take the first step today!
Related Article: Retirement Planning in 5 Simple Steps
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