So you're 50. It's better than you feared. It's better still if you're serious about your retirement savings. Indeed, pre-retirees are often positioned to fund their nest eggs as never before.
Why? One or more of your kids may be out of the house, which frees up disposable income; your take-home pay may be at its peak; and you're now eligible to supersize your savings with higher tax-deferred contribution limits.
"There's a lot you can do in your 50s to build up that war chest," said Christopher Olsen, a certified financial planner with Ameriprise Platinum Financial Services.
The Internal Revenue Service allows those over age 50 to make additional catch-up contributions of $5,500 to their 401(k), 403(b), SARSEP or governmental 457(b), above and beyond the $17,500 annual limit for all taxpayers. Married couples who filed jointly and are both older than 50 may put a combined $11,000 extra into their accounts.
Those with a traditional Individual Retirement Account may contribute an extra $1,000 ($2,000 for married filers) beyond the standard $5,500 annual limit ($11,000 for married filers), but you may not be able to deduct all of your contribution if you also participate in a retirement plan at work.
Additionally, those with a Savings Incentive Match Plan for Employees IRA or SIMPLE 401(k) plan may contribute an extra $2,500 a year. Married filers over age 50 may contribute an extra $5,000.
Higher Tax Bracket, Bigger Benefit
"If you're married and you and your spouse both make catch-up contributions to your 401(k)s or IRAs, you can save a good chunk of money," Olsen said.
For example, assuming you start catch-up contributions to your 401(k) at age 50, with an 8 percent annual rate of return, you would have amassed a savings of $667,661 by age 65. By comparison, if you make only the standard $17,500 contribution per year starting at age 50, you would have $508,003-about $160,000 less.
Another upside to being 50 and at the top of your earnings game is that your contributions to a tax-deferred account will likely benefit you more now than they did when you were 20, says certified financial planner Ken Waltzer, founder and president of Kenfield Capital Strategies.
"Many of my clients in their 50s are in the highest tax rate, which makes retirement saving even more attractive," he said, noting independent contractors and small-business owners can significantly reduce their taxable income.
Self-employed individuals and small-business owners over age 50, for example, who defer the maximum $57,500 per year to their Solo 401(k) ($17,500 in employee contributions, $5,500 for catch-up contributions, and $34,500 in employer contributions) can save $20,125 in federal taxes, he said.
When you reach your 50s, of course, there are plenty of financial landmines that could dent your savings. You may, for example, find yourself part of the "sandwich generation," providing often costly care to aging parents while still supporting your children.
A recent MetLife study found the proportion of adult children providing personal care and/or financial assistance to a parent has more than tripled over the past 15 years, with a quarter of adult children, mainly baby boomers, providing care to a parent.
For those age 50 and older who leave the labor force early to care for an aging parent, the cost of providing that care averages $303,880 when you factor in lost wages, lost Social Security benefits and the negative impact on pensions, according to the study.
That's some serious coin.
Your Parents' Finances, Plans
Thus, it's important to talk openly with your parents about their financial position and plans, said Matthew Saneholtz, a certified financial planner with Tobias Financial Advisors.
"Be sure your parents have an estate plan in place and long-term care coverage, or at least a picture of their final stages of life, because it might affect you," he said. "If you know your parents don't have the money to pay for care on their own, are you willing to use your own savings to help them? Will they rely on Medicaid? Will you take care of them in your own home? These are questions you need to think about, as they could become your dependents."
On the other end of the spectrum, a frank financial discussion with your parents is equally important if you expect to receive an inheritance, Saneholtz said. They may share details about the estate they plan to leave behind, including gifts to charity, which will impact you. Just be sure you continue to save for yourself.
"You don't want to put too much weight in any inheritance you expect to receive," Saneholtz said. "Anything can happen. There are so many different variables, and documents can be changed at the last minute."
As you prepare for retirement, consider, too, how your money is invested, said Olsen at Ameriprise.
On paper, you may appear to have all the money you need, but if your portfolio consists primarily of real estate, your ability to cover living expenses after the paychecks come to a halt may be compromised.
"A lot of retirement savers don't seem to get that if you have $200,000 in your IRA and a paid-off house that's worth $800,000, you're not positioned as well as someone else who has the same net worth but $500,000 in their investment account," Olsen said.
Now is also the time to determine with greater precision whether your savings are sufficient to meet your long-term needs. The disciplined few who are on track to meet their financial goals can breathe easy, continuing to feather their nest egg while planning ahead for their on-time retirement.
Olsen says one of his 50-something clients is so well prepared that he need only achieve a 5 percent average annual rate of return during his retirement years to maintain his standard of living. Statistically, though, you're more likely to have undersaved.
A 2013 survey by TD Ameritrade (AMTD) found the average baby boomer has saved $200,000 for retirement but believes he or she will need a median of $750,000 to retire comfortably. That's a huge shortfall. If you're among those who have not saved enough, it's time to make some tough choices.
That may mean downsizing your vision for retirement, selling your home to minimize fixed expenses, working longer or adopting a more aggressive stance with your investment portfolio.
As you look ahead to your golden years, says Saneholtz, it's also important to ensure your home, health, life and auto insurance coverage is sufficient to protect your savings and your family in the event of an unexpected medical emergency or legal claim.
The most important thing to remember, though, is that it's never too late to save.
"Many in their 50s have more money coming in and less going out, which could equal more funds available for savings," Saneholtz said. "With retirement coming in your 60s, you need to review everything to make sure you are taking advantage of all employee benefit programs as well as tax-savings strategies."
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