By Tom Rasmussen, CFP®
To make sure you’re set for retirement, you could go to your local convenience store, purchase a lottery ticket, and hope you win the jackpot. (Disclosure: We do not recommend doing this.) If you are wondering how to save for retirement in your 50s, it is important to know that there is still time and opportunities that you can take advantage of.
You may not have had the opportunity to save as much as you need for retirement. Or perhaps you delayed saving because you had other priorities. Regardless of your situation, start to improve it by having a discussion with your partner or spouse, and to be realistic about where you’re at. This conversation can be daunting and uncomfortable. However, to know what you need to do and what steps to take, you both need to understand where you’re at.
Because people in their 50s are typically earning the most in their careers, you may have many opportunities to save a lot for retirement during these years.
Retirement Savings Options
When it comes to saving for retirement, there are a variety of accounts to utilize. They are listed below and broken out between workplace-sponsored accounts and personal accounts. Keep in mind that this is not a comprehensive list, and a talk with a financial advisor may turn up more opportunities for your unique situation.
- 401(k)/403(b): Your employer sponsors these types of accounts. Your employer will set up a plan with a broker-dealer and allow you to be a “participant” in the plan. You will have your account with your funds, but it will be under the umbrella of your employer’s plan. Most employers these days offer a matching contribution. For example, an employer may offer to match your contribution dollar for dollar up to 4%. If you are not already doing so, contribute at least your company’s match to your 401(k); otherwise, you are leaving “free” money on the table. For 2020, you can contribute $19,500, with a $6,500 catch-up contribution if you are 50 or older, into your 401(k). If you are 50 or older and just starting to save for retirement, it would be wise to “max out” your 401(k), which means to contribute the full $26,000 (cash flow permitting). The total amount allowed into your 401(k) in a year is $63,500. In most plans, your contributions can either be pre-tax or after-tax Roth contributions. Your tax situation will largely dictate what selection you make.
- The big difference between a 401(k) and 403(b) is that 403(b)s can only be established by nonprofit organizations, such as hospitals and schools. Also, the investment options in 403(b)s are often much more limited than in 401(k)s.
- Individual 401(k): For those who are self-employed, you can set up an individual 401(k) for much less than the typical plan would cost. An individual 401(k) allows you to save into a 401(k) as if you were employed by a company. The contribution limits are the same. Also, as with any 401(k), the plan may have a profit-sharing aspect in addition to standard limits.
- Mega backdoor Roth: This is a type of 401(k) that some employers offer. Right now, it is offered primarily by larger employers; however, we are seeing more and more companies offering this option. This plan allows you to get more than the allowable $26,000 ($19,500 plus $6,500 catch-up) into your 401(k) plan. This setup has pre-tax, Roth, and after-tax buckets, and some minor differences exist in the tax treatment of Roth and after-tax contributions. How this works is that you contribute the $26,000 to either the pre-tax or Roth portion of the 401(k). You then contribute the remainder after your contributions and your employer’s match to the after-tax portion of the 401(k), subsequently converting that money to the Roth portion. As an example: You are 50 years old and make $200,000 per year. You contribute the full $26,000 to your 401(k). Your employer matches 4%, or $8,000. A total of $34,000 has been contributed so far. The remaining $29,500 ($63,500 – $34,000 = $29,500) can be contributed to the after-tax portion of your account. This effectively allows you to save $63,500 per year for retirement (income and cash flow permitting).
- Health savings accounts: HSAs are another great option to save for retirement. Although they are primarily used to cover medical costs, they can become a quasi-retirement account. What you can do is pay for medical costs out of pocket and save all the receipts; then, once you’re retired, you can use those funds under the pretense of reimbursing yourself. There is no limit on how far back you can go. Like an IRA, you will pay income taxes on the amount withdrawn, but you will avoid the penalty for not using the funds for medical expenses. You must have a high-deductible health plan to open an HSA, and the annual contribution limit is $7,100 for a family or $3,550 for an individual.
- IRA/Roth IRA: An IRA is an individual retirement account (officially an individual retirement arrangement). IRAs allow you to save for retirement independent of your 401(k). The contribution limits on your 401(k) are separate from the rules of an IRA or Roth IRA. You and your spouse can contribute up to $6,000, with a $1,000 catch-up for being 50 or older, to your IRA or Roth IRA each year. Income limitations do apply; please visit IRS.gov for more information. The contribution limit is an aggregate total for all IRAs and Roth IRAs. For example, you can’t contribute $7,000 to two different IRAs; the $7,000 would need to be split between the two.
If you are just beginning to save for retirement in your 50s, you need to make it a priority and realize that saving for retirement needs to be one of your top priorities. Although it may feel scary to not be prepared up to this point, you have options to improve your situation.
Schedule a complimentary meeting with a wealth advisor to discuss your personal situation.