OK, it’s your last prime money earning year before retirement, but how to you tackle your last ten full earning years when it comes to investing? Usually the older you get, the more you make, so in theory, when you reach your 50s, you should be earning the most of your entire career. This is why you should always have a plan when heading into your 50s. While the idea of investing is the same, the strategy is going to be very different depending on how much you’ve actually invested up to this point in your life.
Your 50s are most likely going to be your last full decade of working as you finally reach retirement in your 60s. These are your peak earning years, so you have the opportunity to finish strong & also start making additional catch-up contributions as well. While you can still be aggressive, you will need to shift to a more conservative investment mix that you would not have considered when you invested in your 30s or even investing in your 40s. These tips can help make it easy to invest in your 50s.
Get Serious About Retirement
Even if you have been planning for retirement since your college days, it’s time to get serious. While you don’t have as many working years left, you can still quickly build your net worth if you have a high salary and very little (if any) debt.
Take some time to use a retirement planner from companies like Personal Capital or Betterment. They will analyze your current finances & retirement goals and make investment suggestions to help you reach them.
Realistically Determine Your Retirement Date
The investment strategy of your 50s will largely depend on two factors, how much you invested in the past & how soon you plan on retiring. To determine how soon you can retire, you need to calculate three different financial factors:
- What Are Your Basic Living Expenses?
You still have property taxes and insurance premiums to pay. Not to mention your utility bills and groceries. Calculate your existing expenses as a good guideline.
- How Expensive Will Your Hobbies Be?
Do you plan to own a second house or travel extensively with all your new free time? If so, your expenses will be higher than a homebody.
- What Will Your Income Sources Be?
You won’t be holding down a regular job, but, you still need to pay for your expenses. Write down all your income streams in retirement. You can include investments, pensions and/or Social Security, and any part-time jobs you might work to help pay for your hobbies (i.e. being a campground host/resident).
Once you have these calculations, plug the data into your retirement planner (you can start at Personal Capital for free!) and see if you are on track. If so, great! If you need to increase your contributions, don’t fret.
One benefit of turning 50 is that you can contribute an extra $1,000 each year to your traditional or Roth IRA. And, you can contribute an extra $6,000 to your employer 401k.
This is a great incentive if you didn’t save enough in your younger years due to being in debt. These extra contributions can also reduce your tax burden as your peak earning years might have bumped you into a higher tax bracket than you paid during your 20s, 30s, or 40s.
For your taxable & tax-deferred investment accounts, you might consider looking into tax-loss harvesting. Your investments portfolios currently have their highest value and that means you are paying a lot in capital gains taxes each year.
While you or an adviser can perform this tax reduction strategy, a robo-adviser platform like Betterment or Wealthfront will perform this task for you too. And, they might be able to find some additional savings that you overlooked.
Invest 50% to 70% in Stocks
Your investment risk tolerance and asset allocation are also very important in determining your retirement goals. Investing in your 40s, you can get by with having 80% to 100% of your portfolio investing in stocks. In your 50’s, you should gradually shift to owning somewhere between 50% and 70% in stocks
Deciding how aggressive to invest largely depends on your risk tolerance, projected retirement age, and life expectancy. Since the average life expectancy for most Americans is near 80, a common suggestion is to subtract your current age from 120. The answer is how much you should invest in stocks. If you are 50 years old, you would subtract 50 from 120 and invest 70% into stocks. You would invest 60% of your portfolio in stocks when you turn 60 using the “120 formula.”
If you plan to retire early, are within 5 years of retirement, or have a low-risk tolerance, the lowest percentage of stocks you own is 50%. This is because you still have time to earn a very good return from the market with stock investments and switching to a bond-heavy portfolio too soon can delay your retirement goals.
Where to Invest
Even if you have been a DIY investor for your entire life, you might decide it’s time to put some extra eyes on your portfolio as you transition into the Wealth Management side of investing. Many brokerages offer consulting services with large investment portfolios. As you have been investing for nearly 40 years, chances are you easily qualify for these services.
You can go with a traditional low-cost broker like Vanguard offers access to a personal advisor once you have $50,000 in investments for a management fee of 0.30%. Another suggestion is TD Ameritrade which provides personal access at only $5,000.
If you want a managed “robo-adviser” portfolio, Betterment provides access to a Certified Financial Planner once you have $100,000 in investments with a 0.40% management fee. Additional benefits for using Betterment is that they will automatically re-balance & make tax-optimized investments to keep your portfolio from become too risky & keeping your tax rate as low as possible.
Investing in your 50s isn’t much different from investing in your 40s. You will primarily hold stocks, 70% is a good recommendation for most people. As you approach your 60s, you will need to make a mental note to slowly acquire more bonds, unless you have a managed portfolio or target date fund that will automatically re-balance your portfolio. Finally, use any additional disposable income you have to invest. Even with a 70/30 stock-bond portfolio, you can still earn healthy returns to boost your retirement income.
Do You Know Your Credit Score?
Even if you don’t plan on getting a loan, a good credit score can affect your ability to get a job, a place to live, and will save you money whenever you need to borrow. If you don’t know your credit score, you can get yours free at Credit Sesame. It’s 100% free with no credit card required to signup. I’ve been using it for years to monitor my credit score.