There are several steps you need to consider if you’re entering or in your 50s, especially if you’re looking ahead to retirement within the next 15 years or so. We discuss what are the best moves to start making now with Randy Dippell, owner and wealth advisor at Milestone Money based in Chicago.
Light: Why do you recommend one’s 50s as an important decade for financial planning?
Dippell: For many individuals, the decade when they reach their 50s is when they are moving into their peak earning years. It’s also prime time for making sure their retirement is fully funded. And though health concerns may not be an issue for many in their 50s, it’s also prime time for making sure plans are in place to protect retirement income against healthcare expenses and other costs typically associated with aging.
With that in mind, there are several steps you need to consider especially if you’re looking ahead to retirement within the next 15 years or so. Let’s look at what you can do to make sure you’ve covered the most important bases to put you on track for a satisfying, low-stress retirement.
Light: It’s recognized as a decade when you can increase your retirement contributions, using so-called the catch-up feature. What are the implications of these rules for anyone 50 or over?
Dippell: Correct, the IRS has done a big favor for persons 50 and over to help them become better prepared for retirement. When you reach age 50, you are eligible to make catch-up contributions to your IRA, 401(k) or 403(b) retirement plan. For IRAs, you can contribute an additional $1,000 per year, plus the regular annual contribution limit of $6,500 in 2023. You can put an extra $7,500 in your 401(k) in 2023, added to the regular limit of $22,500 in 2023.
And if you’re an employee of a nonprofit or educational institution that offers a 403(b), your limits are the same as for a 401(k). This really matters, because you’ve still got a decade or more for your funds to compound and grow tax-free, so those extra contributions can really add up by the time you’re ready to start drawing retirement income.
Light: Why is it important to set up a Social Security account during this decade?
Dippell: People in their 50s should also set up their free online account at MySocialSecurity. For one thing, having your account set up makes it more difficult for identity thieves to falsely claim benefits that belong to you. But having your account set up also gives you access to lots of free online tools and calculators that you can use to estimate the most advantageous time to begin claiming benefits.
Under current rules, you can begin claiming as early as age 62, but you won’t receive full benefits until you reach full retirement age: 67 for those born after 1960. On the other hand, if you decide to wait until past full retirement age to begin claiming benefits, you’ll get an 8% raise for each year you wait. So, if you wait until age 70, you’ll receive 124% of the benefit you would have gotten at your full retirement age.
One final reason for having your account set up is that it will allow you to review your Social Security earnings record for each year you and your employers have paid into the system. It’s a good idea to make sure your record is accurate, since that affects the benefit you’ll be able to qualify for.
Light: How do you work out how much retirement income you will need?
Dippell: Depending on whom you ask, most estimates for the percentage of pre-retirement income you’ll need to live comfortably in retirement range between 70% and 80%. But these are rules of thumb only, and a lot depends on what kind of retirement lifestyle you’re planning. In other words, don’t wait until you retire to start deciding about your retirement budget.
You’ll want to factor in costs for healthcare, including Medicare and Medigap premiums; housing costs, factoring in whether you stay in your present home, downsize or re-locate; regular household expenses, and any extras that are important to you, such as more travel, hobbies, recreation, etc.. Total these up at present-day costs and see how they stack up against what you’re earning now. Then, factor in 10 or 15 years’ worth of inflation to get an estimate of what you’ll be looking at when you retire.
Light: What about provision for long-term care, such as in a nursing home?
Dippell: Because people are living longer and longer in retirement, the chance that a given retiree will require long-term care at some point during retirement is increasing. According to a study conducted by the U.S. Department of Health and Human Services and the Urban Institute, 70% of Americans reaching age 65 will need long-term care. Long-term care becomes necessary when you cannot perform one or more of the activities of daily living without assistance: dressing, using the toilet, getting in or out of bed or a chair or eating.
The cost of long-term care can easily run into tens of thousands of dollars per year, but it is not covered by Medicare. For that reason, many people consider long-term care insurance, or LTCI. The reason this is important to know while you’re in your 50s is that, like life insurance, the premiums for LTCI are lower the younger and healthier you are when you purchase it. Many experts consider that the optimal time to buy LTCI is between the ages of 50 and 65.
Light: Do you have any further advice for Gen X?
Dippell: I would really recommend that one of the most important ways you can be sure of having a sound plan in place for retirement is by talking with a professional, fiduciary financial advisor. A fiduciary planner is professionally and ethically bound to provide advice and recommendations that place your best interests foremost.
In other words, their counsel is not focused on making a sale; rather, it’s focused on what is best for you and those you care about. With access to state-of-the-art planning and forecasting tools, a qualified financial planner can help you design a strategy that is custom-built for your particular needs, goals, resources and priorities.
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