When you turn 60, the finish line is in sight in the race for retirement. In a few short years, it’s time to start drawing from your retirement accounts. Maybe even a pension account. While your retirement situation is largely determined by how you invested in your earlier years, it’s just as important to make wise money moves in these last few years to finish strong & afford the retirement you want.
Make Catchup Contributions
With your 401k or IRA accounts, you can start making “catchup” contributions every year once you turn 50. For IRAs, the current annual limit is $1,000 and $6,000 annually for 401k plans. You can also make similar contributions to your Health Savings Account and other retirement plans. Since you should hopefully be debt-free when you turn 60, catchup contributions are a good way to invest extra money tax-advantaged as you invest in your 50s and 60s.
You can continue to make catchup contributions until you turn age 70 ½ when you are required to take Required Minimum Distributions (RMDs) from your tax-deferred retirement accounts.
Become a Conservative Investor
Investing in the post-Great Recession hasn’t been the easiest for those relying on fixed income due to historically low interest rates. It can be really tempting to invest aggressively like when you were in your 30s or 40s to get a decent return.
To find the appropriate asset allocation, you should consider taking the risk tolerance questionnaire again. When you turn 60 and have a few working years remaining, your portfolio can consist of 55%-60% stocks (the remainder in bonds & cash). Once you retire, you might consider dropping your portfolio to 40% to 50% stock ownership. In today’s world, being closer to 50% is probably more realistic due to longer life expectancies.
You can use a managed portfolio from Betterment or Personal Capital to manage your wealth. Or, you can also use a brokerage like TD Ameritrade or TradeKing if you also want to trade individual stocks in addition to owning mutual funds and ETFs.
As a portion of your stock allocation, you can consider buying blue chip stocks with high dividend yields like AT&T, ADP, and Proctor & Gamble that are established companies with a long history of paying solid dividends. Owning individual stocks can be riskier than target date retirement funds, mutual funds, or ETFs, but, choosing the right stocks can improve potential portfolio yield without sacrificing security.
Avoid Expensive Investments
Fixed income investments tend to have higher expense ratios than the stock index funds you might currently invest in. To be fair, there are expense stock mutual funds too. As you know, high investing fees take away money from your portfolio that you would have been able to use for your retirement by choosing a cheaper fund.
Most robo-advisors like Betterment or Wealthfront will choose the most affordable funds with a strong performance history, but, do know what investments you will be investing in. Your portfolio holdings are likely to change significantly in your 60s and retirement years as you shift from an aggressive growth-focused portfolio to a conservative stability-focused portfolio largely consisting of fixed income assets.
Calculate Your Retirement Income
Before you can retire, you need to determine if you can afford to retire.
How much money you can withdraw in retirement each month depends on your net worth. Using a retirement calculator (Personal Capital has a good one) will help you visually see your projected net worth at retirement and how much you can withdraw each month without outliving your savings. Depending on how soon you plan to retire, you can also include or exclude Social Security payments from your monthly retirement income if you don’t want to rely on that benefit to pay the bills.
Prepare for Required Minimum Distributions
Whether you ready to start living off your retirement accounts or not, you need to start taking Retired Minimum Distributions (RMDs) from your tax-deferred retirement accounts when you turn 70 years and 6 months. These include your Traditional IRAs, 401ks, and pension plans that were funded with pre-tax income. Distributions from your Roth IRA or Roth 401k are not required until the account owner passes away.
You know what that means. Taxes that are due with each withdrawal made & the rate depends on your tax bracket. Your brokerage might be able to help you calculate your tax liability, but, it might be worth your time to talk to a tax professional to optimize your distributions. The last thing you need is to be surprised with an unexpected tax bill when you could have prevented it.
What If You Can’t Afford To Retire
Some people cannot afford to retire in their early to mid-60s for a variety of reasons. For some, it’s because they didn’t get to start saving for retirement until later years and need more time to boost their account balances. Others need to keep working because their health insurance benefits will skyrocket until they can vest with their current employer to receive a better benefits package.
If you can’t afford to retire at your target age, you can work longer full-time or partially retire by working part-time. Of course, this is all health permitting. While you are still working put away as much cash in your retirement accounts and put the rest in a taxable investment account, CDs, or an interest-bearing bank account once you “max out” your retirement accounts for the year.
Try to reduce your monthly expenses as much as possible too. If your retirement income won’t be as high as your present active income, this might be an easy way to afford retirement sooner if you can’t delay retirement until your 70s.
Retirement is an exciting moment in your career. You can finally leave your 9-5 job and live the life of leisure and activity that we all dream of. But, it requires planning & consistent investments until your final working month. Also, you don’t want to risk losing everything you worked for, so, remember to shift to more conservative assets once you turn 60 and another time when you retire a few years early.
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