We all get older. It’s inevitable. And as you age, you’re likely to think more and more about your future. Maybe you have big plans to retire early and move to a tropical climate. Or perhaps you plan to stay firmly planted where you are and work for as long as possible. While it’s never too late (or too early) to start investing, when you reach your 50s, it’s an excellent time to review your investment portfolio and adjust accordingly.
The last decade or so before your retirement is a crucial time to maximize your investments to be where you want to be at retirement. Let’s look at what you can do in this critical time to meet your financial goals.
Max out your 401(k) contributions
If your employer offers a 401(k) retirement plan, make sure you max out your contributions, especially if they provide employer-matching contributions. Retirement plans such as a 401(k) are an easy way to save for retirement, and you defer on paying taxes on that income until you withdraw in retirement.
Since you’re likely in your peak earning years in your 50s and 60s, you may also be in a higher tax bracket than when you retire, which means a smaller tax bill you’ll face when that time comes.
The maximum you can contribute to your 401(k) changes every year to adjust for inflation. For 2022, you can put up to $20,500 in a traditional 401(k), up $1,000 from 2021. Age 50+ is allowed an extra $6,500 as a “catch-up” contribution, for a total of $27,000. Employer contributions don’t count toward these limits.
Review your portfolio allocations
It’s general knowledge that the older you get, the more conservative your investments should be. If your stocks take a tumble during a bear market, you’ll have fewer years for those prices to recover and may have to sell at a loss. How conservative someone should be in their 50s and beyond is a point of personal preference and comfort level.
Discussions with your financial advisor can help you determine what allocation mix is right for you and your retirement goals.
Consider adding an IRA
If you’re already maxing out your contributions to your 401(k) plan or your employer doesn’t offer one, adding an individual retirement account (IRA) is another investment option. In 2022, you can invest up to $7,000 if you’re 50 or older.
There are two types of IRAs: traditional and Roth.
With traditional IRAs, your contribution is tax-deductible, which means your pre-tax money can grow, and you are taxed upon withdrawal. A Roth IRA uses after-tax dollars and receives tax-free withdrawals.
Each type of IRA has its own rules regarding contributions.
Remember your taxes
As you tally up your retirement savings, keep in mind that not all of it will be yours to keep. If you withdraw from a traditional 401(k)-type plan or traditional IRA, the IRS will tax you at your ordinary income tax rate.
Working with a wealth manager and professional tax accountant can help you plan for your future by maximizing your investments and knowing what to expect regarding your taxes. If you’d like to discuss your investment options, give us a call!