The approach of a milestone birthday is a reminder that, as life changes, so do your needs and circumstances. With the Big Five-O the question is settled: You’re no longer a kid. And that’s a great thing: Maturity is much better than it’s cracked up to be. So instead of dreading it, update your financial life by hitting these targets and embrace the coming decades:
1. Debt tamed
Maybe it’s maturity, or maybe it’s the prospect of dragging debts through your so-called golden years, but you have paid off your debts or have them under control. You add new debt only when you can easily handle it. You pay credit card balances before interest is applied. Your total debt follows principles outlined in “The Charles Schwab Guide to Finances After 50”:
28 percent: An industry rule of thumb suggests that no more than 28 percent of your pretax household income should go to servicing home debt (principal, interest, taxes, and insurance).
36 percent: No more than 36 percent of your pretax income should go to all debt: your home debt plus credit card debt and auto loans.
2. Spending: Under control
With children possibly gone from the home and maybe out of school, you may have more money on hand now, and it’s tempting to spend it. After all, your friends may be living it up, and you’ve worked hard to get here. Have fun. But don’t shortchange retirement goals. If you are well-employed, your 50s are a gift — probably the best earning years of your life. Double down on savings, as retirement may last a long, long time.
Also, start thinking about how you’ll change your spending after retirement.
3. Retirement goals: Defined
Set a concrete goal for your retirement savings. Just do it. The kids will find a way to pay for college if it matters to them. They have years to get on their feet financially. You do not. Set a retirement income goal now so that, if you’re short financially, there’s time to improve things.
There are a couple of approaches. One is to shoot for saving six to nine times your annual household income by your mid-50s to early 60s, says Walter Updegrave, at Real Deal Retirement. Example: If you earn $60,000 a year, your IRA, 401(k) or other account should approach $360,000 to $540,000 as you near 60.
Another is to see how far your current retirement savings will take you. This KeyBank calculator shows that a nest egg of $1 million will last 21 years if you withdraw $50,000 a year (assuming inflation is 2.5 percent and investments earn 3 percent after tax and inflation). Only have $100,000 saved? It’ll buy you two years of retirement at the same rate of spending.
4. Retirement contributions: Inching up steadily
Now that you have a goal, keep increasing the percent of each paycheck saved for retirement. Make the increases so small they’re hardly noticeable. If you’re diverting 12 percent to savings now, bump it up to 13 percent, or 13.5 percent. Six months later, give your savings another tiny raise and keep it going until you’re at goal. Ditto if you’re saving 6 percent: Inch it up to 7 percent, and then onward.
Some experts recommend saving 15 percent to 20 percent or more of before-tax salary. Automate the deductions, so you’ll never see the money. Getting a bonus? Put a hefty chunk into retirement savings.
The rock-bottom line: Even in the worst times, save at least enough to earn your employer’s maximum matching contribution.
5. Social Security: On track for the max
You may be pessimistic about Social Security’s chances, and you could be right to expect cuts in payouts or a change in eligibility ages. But Social Security isn’t going bust. Before long, though, Congress must either find more funding or shrink benefits.
But don’t bet against this retirement lifeline. It still is likely to be one source of income in your retirement, and there are things you can do now to maximize your payout.
Go to SocialSecurity.gov and set up a “My Social Security” account. Use it to estimate your future benefits at various retirement ages. Social Security benefits are based on your best 35 years of earnings, so plan to work longer if you need to boost those earning years.
6. 401(k): Lowest fees possible
Fees paid to manage retirement savings may appear low. “What’s 3.5 percent but a drop in the bucket?” you think. Wrong!
Many savers unknowingly pay far too much in mutual fund fees, losing tens or hundreds of thousands of dollars they could have used in retirement. This chart offers an example, from an informative video by the U.S. Department of Labor, showing how fees affect two accounts that started with identical balances of $25,000 -- given no additional contributions. One pays 1 percent more in fees than the other -- but the resulting difference in balance after 35 years is $64,000.
Check your plan statements to see the fees you are charged. Time Magazine explains:
“… you can minimize fees by opting for the lowest-cost funds available — typically index funds, which tend to be less expensive than actively managed funds. And if your IRA is too pricey, move it elsewhere.”
7. Your will: Updated
You don’t need a will. If you don’t have one, a probate court will decide what to do with your assets.
If you want control over what happens to your money and property, though, you’ll need one. And your spouse should have a separate will.
A will gives voice to your decisions and requests after you’re gone. Use it to say what you want for your children and pets after you’re gone. Use it to determine what happens to possessions with financial or sentimental value. You can name an executor who will be in charge of following your directions and include provisions for your remains and a funeral, if you want one.
8. You: Giving back
Committing to doing good in the world is a part of maturing. With a small budget or a large one, philanthropy allows you to express your values and connects you to the world on new terms. There’s the personal satisfaction, and there’s also a helpful tax deduction.
9. Long-term care: A plan in mind
By our 50th birthday, it occurs to many of us that maybe -- just maybe -- we really will get old. Since many of us will end up needing skilled nursing care in old age, at least for a short time, managing your finances requires considering how to pay for it. Long-term care insurance can be an excellent tool. But whether it’s right for you depends on several things.
10. Mortgage: End in sight
Entering retirement with a paid-off mortgage is a smart goal. Tearing up the mortgage before retirement was commonplace a couple of generations ago. Not everyone can pull it off these days, but the rewards are great. You’ll require less income. If your mortgage eats a quarter or a third or more of your monthly pay, you’ll enjoy a raise of that much, just when your paychecks stop. What’s more, it’s a tax-free raise.
11. Insurance: Reviewed and adjusted accordingly
Life changes, and so should your insurance. If your children or spouse would be lost without your salary, get enough life insurance to carry them through if you die. Stick with cheaper term insurance (low-fee index funds, not life insurance products, are a cheaper way to save for retirement).
Likewise, if losing your salary would be financially devastating, cover the risk with disability insurance.
When children are launched in careers and you and your spouse are nearer retirement, you may be able to drop life insurance.
Take a look at your home and auto insurance limits, too. Is the coverage still appropriate?
As for heath insurance, enlist an insurance broker -- it should cost you nothing -- to review your health insurance needs and costs. If you have a high-deductible plan, total your most recent year’s out-of-pocket expenses to make certain that you still are coming out ahead.
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