Financial Planning for your 50s - What to Consider
Author: Nick Prigitano
The financial planning considerations when entering your 50s can be quite extensive. Between retirement rapidly approaching, life changes, and estate planning issues, there's a lot on the to-do list! For many, this is their last full decade before retirement. It is one of the last chances to save, plan, and make sure you are on track to meeting your long-term financial planning goals. While there are many topics to review, some of the big ones are:
Overall retirement planning considerations
Big life changes
Reviewing your insurance
Updating and reviewing your estate plan
In life's earlier years retirement can feel like a lifetime away. Once they enter their 50s, many people come to the realization that retirement is right over the horizon. This is a good time to buckle down and review your overall financial plan to make sure you're on track for retirement and make any necessary adjustments sooner rather than later to reach your financial goals.
The IRS also realizes that when you enter your 50s, retirement is getting close. During the year in which you turn 50, you are able to contribute more to retirement accounts than you were allowed before. The type of retirement account will determine how much more you can contribute each year. Also, in addition to regular contributions increasing periodically to reflect inflation, catch-up contributions will increase from time to time as well. All the numbers referenced below refer to 2021 contribution limits:
401(k): An additional $6,500 ($26,000 total)
IRA: For both Roth and Traditional IRAs, an additional $1,000 ($7,000 total)
SIMPLE IRA: An additional $3,000 ($16,500 total)
Another account that has a catch-up contribution is an HSA. However, unlike these other retirement saving accounts, you need to be 55 or older to be allowed this extra contribution. If you are 55 or older you can contribute an extra $1,000 ($4,600 total for individual plans, $8,200 for family plans). Another wrinkle for HSA contributions is that both spouses are able to contribute the catch-up contribution if each are over 55. However, the spouse who is not carrying the insurance would have to contribute to their own HSA account. Since HSAs are one of the best tax-saving accounts available, we usually highly encourage maximizing every contribution to take advantage of it.
Ex: Mike and Mary are 58 and 59. They are on Mary's insurance, which is a family plan and is HSA eligible. Since they are both over 55 they are each allowed to make a catch-up contribution. Mary is able to contribute $8,200 to her HSA ($7,200 regular contribution and $1,000 catch-up). If Mike opens up his own HSA he can contribute $1,000 to his to take advantage of his catch-up amount.
Highest earning years
Generally speaking, your 50s are your highest-earning years. If you are behind on retirement savings this may be a great opportunity to catch-up before stopping work for good. In addition to being allowed larger contributions to certain retirement accounts, this may also be a good opportunity to save in other areas as well. It's a common misconception that the only place you can save for retirement is in your 401(k) or IRA. If you have extra money left over, it may make sense to invest in a taxable brokerage account to save for the future
Unlike retirement accounts where you get tax deferral benefits while your investments accumulate, in a taxable account you will pay taxes along the way. This means when your investments pay out any income (in the form of dividends and interest) or if you sell something for a profit (capital gains), you will need to include it in your income when you prepare your taxes the following year.
We sometimes find that higher-earning individuals in their 50s don't know what to do with this extra money and end up having a large amount of cash accumulating in their bank. While it's important to have a cash emergency fund set aside for any near-term or unexpected expenses, having too much cash can hinder your long-term financial planning goals. If you find yourself accumulating a large amount of cash in your highest earning years, this may be a good time to review if some of that money should be invested elsewhere.
We would suggest working with a fiduciary financial advisor who would review your personal unique situation to help determine how much cash you may want set aside and where to invest any extra money. A fiduciary advisor will provide unbiased advice and does not get compensated by any commissions or fees from any of the products or investments they recommend.
Plan for an earlier retirement
An unfortunate fact is that many people are not able to work as long as they intend to. This can be the result of an unexpected layoff where you are unable to find new work, an unexpected injury or illness that precludes you from continuing employment, or a life circumstance (such as a chronically ill family member or divorce) that requires your attention and financial resources. There are several reasons your financial plan for earning and saving throughout your 50s may be derailed. Unfortunately, this happens far too often. Following the advice below can prevent financial catastrophe from unexpected life events.
Identify whether you have enough long term disability insurance, and whether or not payments will be taxable to you (generally, in order for disability payments to be income-tax free, you must pay the premiums yourself after-tax)
Adjust your spending and save more today (additional savings now may provide financial flexibility in the future)
Reduce your fixed costs to protect yourself from a sudden drop in income
Mentally prepare yourself for this possibility
The difficulty with any plan is that things will inevitably change. Being prepared, and aware, of a scenario where you aren't able to work as long as intended (or earn as much as projected) can help you avoid some of these risks. Understanding that this is a possibility can help you weigh the pros and cons of taking certain actions today, and allow you to consider the risks of whatever choice you make.
Your 50s may come with some big life changes as well, often involving kids and aging parents. Your 50s are a good time to reflect and financially prepare for these possible changes in life.
Financial planning is both an art and a science. Yes, there are dollars and cents involved. There are budgets and spreadsheets and math used in order to help guide people to their financial goals. But money and finances are also personal. It's emotional. It's just as important to keep this in mind when discussing financial planning topics.
An enormous shift for many individuals in their 50s is that they become empty nesters for the first time in decades. During this time of life, children are often wrapping up college and starting lives of their own. There may certainly be a financial windfall when you no longer have extra mouths to feed (or are no longer supporting their cell phone plan!). The science side of financial planning can analyze what to do with that extra savings. But it's just as important to consider the personal side of this equation. What will you do with your extra time? How will you handle a quieter home? It's not uncommon for parents to feel a sense of loneliness when the hustle and bustle of their kids no longer echo through the house.
A qualified fee-only financial planner can help guide you with both of these issues. They can certainly direct and help allocate the extra savings to help you reach your long-term financial goals. They can also help get you thinking about what life might be like as an empty-nester since you're likely not their first client to experience this.
Another big life change, and financial considerations surrounding it, is aging parents. If you're lucky enough to still have your parents around, there is a good possibility that during this time they may need some extra care. Having the conversation and planning for the financial and emotional costs is important during this stage of life. Some questions may include:
Will you financially support your parents? Nursing homes and extra care are incredibly expensive. If your parents do not have the financial resources to pay for it themselves, is that something you, your spouse, or your siblings are ready to take on? Have you included this possibility in your own financial plan? Each family dynamic is going to be different. But if a goal of yours is to support your parents in their later years it is something you need to plan for, so that you don't derail your own retirement plans.
Will you stop working or reduce hours to care for them? - Another alternative is to reduce hours, or stop work altogether, to assist with the care of aging loved ones. This will have a direct financial impact on you with a lost, or reduced, income source while you’re taking care of them. Some individuals would prefer to have a close relative take care of aging parents instead of a stranger. But doing so may significantly impact your financial plan if it's not something you accounted for.
Although your parents may not need additional care yet, it's important to have that conversation in advance, especially with your spouse. If this is a goal of yours, you will want to be on the same page with your spouse.
Time to review your insurance
It is a good idea to review your current insurance coverage periodically, but your 50s is a time where it is especially important. With many life changes, it's a good idea to review your current life insurance needs and also consider long-term care insurance.
For the vast majority of people, life insurance isn't something that you need forever. The main purpose of life insurance for working people is to replace your income if you die before retirement age. Some of the main considerations when reviewing life insurance include:
Who is the main breadwinner, and how would the family financially get by without them?
Do you have a mortgage or other debts that need to be paid?
Do you want to help fund your children's college?
Once you reach your 50s, many of these considerations no longer apply. Your mortgage might be paid off or is very close to it. Your children may be done with college. You may also have enough retirement savings already, or both spouses are working, and additional money at an unexpected death is no longer necessary.
Depending on your situation it may make sense to drop, or reduce, the total life insurance you carry. Of course, depending on the type of policy, or who is paying for it, there may be certain tax implications of doing so. Before making any final decisions it's best to speak with a qualified financial professional to review your current policies and future insurance needs.
Long-term care insurance
As discussed before, this decade is a time where many individuals are helping to care for aging parents. However, by the time you need care it is too late to apply for long-term care insurance. If this was not purchased beforehand you will be paying out of pocket for these expenses, which can get quite costly. Your 50s is a good time to review if long-term care insurance is right for you and whether you should explore purchasing some. Some considerations include:
Can you, or do you want to, pay its cost? - Long-term care is expensive. Not only that but depending on the issue, these expenses may continue for years. That's why it's no surprise that this type of insurance is also quite costly. The first step is reviewing whether you are able to afford this type of insurance, and whether you want to pay the premium to begin with.
How is your health? - Being able to afford the insurance does not necessarily mean you will qualify for it. In order to get approved for the insurance you will need to go through a medical screening to determine your health. The insurer will also likely review your family history for other risk factors (ex: Dementia/ Alzheimers). If the insurance company does not approve of the health screening you won't be able to get the insurance. The longer you wait to apply the greater the possibility that something may happen with your health to disqualify you. That’s why at least exploring this option is a good idea in your 50s.
What is your family history? - The insurance company will look at your family history, but you should consider it too. Does your family tend to live a long time? The longer you live the more likely you may need long-term care.
How long, and what coverage may you need? - Not only are these policies expensive, but they can be complex too. You may need to determine how long the policy will last if you need care, how much it will pay per day, whether it will increase with inflation, among other things. Depending on the policy spouses may be able to split or share the coverage, or receive a discount if they are both insured. It's best to work with a qualified professional to determine if you need the insurance, and how it should be structured.
Update your estate plan
Just like insurance, your estate plan should be reviewed periodically, but this is especially true during your 50s. This includes making sure your documents are updated to reflect your wishes; that your bank and investment accounts and any real estate are titled correctly to minimize legal fees, taxes and lengthy legal proceedings after death; and that your beneficiaries on your retirement plans and life insurance policies are aligned with these documents.
If you have kids who are done, or almost done with college, they might be old enough now for more responsibility. It may make sense to have them designated as your agents on both your financial and healthcare power of attorney. This would allow them to act on your behalf if you are unable to. These documents protect you without having to go through a court appointment process. If you don't have them, it's a good idea to work with an estate planning attorney to get these drafted.
Now that you're likely in your highest-earning years, and have been saving along the way, you have probably accumulated substantial assets. This may include significant equity in your home (and maybe vacation home or rental property) and additional investments and savings accounts. If this is the case, considering a revocable trust may be warranted. A revocable trust will help avoid the probate process and the cost and headache involved. This is especially true if you own property in more than one state. Each state has its own probate process, and you need to go through probate in each state where you own property. This can be avoided when using a trust, making things much easier on your heirs.
If you already have a trust, or decide to have an attorney draft one, you'll also want to make sure your property is titled appropriately. The trust is no use unless assets are titled in it. You'll have to have the deed to your property retitled to be owned by the trust in order to avoid the probable process. Double checking this can save your heirs a lot of aggravation.
One of the major benefits of a revocable trust is that it can be altered as long as you're alive. If you already have one, and your goals/wishes have changed you can update it. This is a good time to review what you want your estate plan to look like and make any changes necessary, especially with so many life changes occurring in a decade.
Lastly, you should double check who you have listed as your beneficiaries. These are the individuals or charities that will inherit your assets after you pass away (hopefully decades away from now). Your 50s are a good time to review who inherits and how they inherit. Your children are likely grown, and you may have grandchildren you want to help. Alternatively, you may be single or childless and wish to benefit friends or charities. This can be accomplished using beneficiary designations, or by updating the terms of your revocable trust.
Many changes occur in your 50s. Between additional retirement savings, reviewing your insurance coverage, and overall life changes there is a lot to consider! Being the last full decade before most retire there is much to do and plan for so that you can experience the retirement you want. If you need assistance with your overall financial plan, please reach out to one of our fee-only fiduciary advisors.
Nick Prigitano, CFP® is an advisor at Milestone Financial Planning, LLC, a fee-only financial planning firm in Bedford NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our clients’ interests first. If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisors.