If you’re between 55 and 64 years old, you still have time to boost your retirement savings. Whether you plan to retire early, late, or never ever, having an adequate amount of money saved can make all the difference, both financially and psychologically. Your focus should be on building out–or catching up, if necessary.
It’s never too early to start saving, of course, but the last decade or so before you reach retirement age can be especially crucial. By then you’ll probably have a pretty good idea of when (or if) you want to retire and, even more important, still have some time to make adjustments if you need to.
If you discover that you need to put more money away, consider these six time-honored retirement savings tips.
Start by increasing your 401(k) or other retirement plan contributions if you aren’t already maxed out.
Consider whether working a little longer might add to your pension or Social Security benefits.
1. Fund Your 401(k) to the Max
If your workplace offers a 401(k)–or a similar plan, such as a 403(b) or 457–and you aren’t already funding yours to the max, now is a good time to rev up your contributions. Not only are such plans an easy and automatic way to invest, but you’ll be able to defer paying taxes on that income until you withdraw it in retirement.
Because your 50s and early 60s are likely to be your peak earning years, you may also be in a higher marginal tax bracket now than you will be during retirement, meaning that you’ll face a smaller tax bill when that time comes. This applies, of course, to traditional 401(k)s and tax-advantaged other plans. If your employer offers a Roth 401(k) and you choose it, you’ll pay taxes on the income now but be able to make tax-free withdrawals later.
The maximum amount you can contribute to your plan is adjusted each year to reflect inflation. In 2021, it’s $19,500 for anyone under age 50, rising to $20,500 in 2022. But once you’re 50 or older you can make an additional catch-up contribution of $6,500 for a grand total of $27,000. If you have more than the maximum to sock away, either a traditional or Roth IRA could be a good option.
2. Rethink Your 401(k) Allocations
Conventional financial wisdom says that you should invest more conservatively as you get older, putting a greater amount of money into bonds and less into stocks. The reason is that if your stocks take a tumble in a prolonged bear market, you won’t have as many years for their prices to recover and you may be forced to sell at a loss.
Just how conservative you should become is a matter of personal preference, but few financial advisers would recommend selling all of your stock investments and moving entirely into bonds, regardless of your age. Stocks still provide growth potential and a hedge against inflation that bonds do not. The point is that you should remain diversified in both stocks and bonds, but in an age-appropriate manner.
A conservative portfolio, for example, might consist of 70% to 75% bonds, 15% to 20% stocks, and 5% to 15% in cash or cash equivalents, such as a money-market fund. A moderately conservative one might reduce the bond portion to 55% to 60% and boost the stock portion to 35% to 40%.
If you’re still putting your 401(k) money into the same mutual funds or other investments you chose back in your 20s, 30s, or 40s, now’s the time to take a close look and decide whether you’re comfortable with that allocation as you move toward retirement age. One handy option that many plans now offer is target-date funds, which automatically adjust their asset allocations as the year you plan to retire draws closer. Remember, however, that target-date funds may have higher fees, so choose carefully.
3. Consider Adding an IRA
If you don’t have a 401(k) plan available at work–or if you’re already funding yours to the max–another retirement investing option is an individual retirement account or IRA. The maximum you can contribute to an IRA in 2021 and 2022 is $6,000, plus another $1,000 if you’re 50 or older.
Individuals who turn 50 at the end of the calendar year can make their entire annual catch-up contributions for that year, even if your birthday falls at the end of the year.
IRAs come in two varieties: traditional and Roth. With a traditional IRA, the money you contribute is generally tax-deductible upfront. With a Roth IRA, you get your tax break at the other end in the form of tax-free withdrawals.
The two types also have different rules regarding contribution limits.
If neither you nor your spouse has a retirement plan at work, you can deduct your entire contribution to a traditional IRA. If one of you is covered by a retirement plan, your contribution may be at least partially deductible, depending on your income and filing status.
As mentioned, Roth contributions aren’t tax-deductible, regardless of your income or whether you have a retirement plan at work. However, your income and tax-filing status do come into play in determining whether you’re eligible to contribute to a Roth in the first place. Those limits are also detailed in IRS Publication 590-A.
Note, too, that married couples who file their taxes jointly can often fund two IRAs, even if only one spouse has a paid job, using what’s known as a spousal IRA. IRS Publication 590-A provides those rules, as well.
4. Know What You Have Coming to You
How aggressive you need to be in saving also depends on what other sources of retirement income you can reasonably expect. Once you’ve reached your mid-50s or early 60s, you can get a much closer estimate than you could have done earlier in your career.
If you have a defined-benefit pension plan at your current employer or a previous one, you should be receiving an individual benefit statement at least once every three years. You can also request a copy from your plan’s administrator once a year. The statement should show the benefits you’ve earned and when they become vested (that is, when they belong fully to you).
It’s also worth learning how your pension benefits are calculated. Many plans use formulas based on your salary and years of service. So you might earn a bigger benefit by staying in the job longer if you’re in a position to.
Once you’ve contributed to Social Security for 10 years or more, you can get a personalized estimate of your future monthly benefits using the Social Security Retirement Estimator. Your benefits will be based on your 35 highest years of earnings, so they may rise if you continue working.
Your benefits will also vary depending on when you start collecting them. You can take benefits as early as age 62, although they will be permanently reduced from what you’ll receive if you wait until your “full” retirement age (currently between 66 and 67 for anyone born after 1943). You can also delay receiving Social Security up to age 70, in return for a larger benefit.
While these estimates may not be perfect, they are better than guessing blindly–or too optimistically. A 2019 survey by two University of Michigan researchers found that people tend to overestimate how much in Social Security benefits they were likely to receive.
To put it in some perspective, the average monthly retirement benefit as of December 2021 is $1,610.69 while the highest possible benefit–for someone who paid in the maximum every year starting at age 22 and waited until age 70 to start collecting–is $4,194 in 2022.
Although you can take penalty-free distributions from your retirement plans as early as age 50 or 55 in some cases, it’s better to leave them untouched and let them keep growing.
5. Leave Your Retirement Savings Alone
After age 59 1/2 you can begin to make penalty-free withdrawals from your traditional retirement plans and IRAs. With a Roth IRA, you can withdraw your contributions–but not any earnings on them–penalty-free, at any age.
There is also an IRS exception, commonly known as the Rule of 55, that waives the early-withdrawal penalty on retirement plan distributions for workers 55 and over (50 and over for some government employees)who lose or leave their jobs. It’s complex, so speak with a financial or tax advisor if you are considering using it.
But just because you can make withdrawals doesn’t mean you should–unless you absolutely need the cash. The longer you leave your retirement accounts untouched (up to age 72, when you must begin to take required minimum distributions (RMDs) from some of them), the better off you are likely to be.
6. Don’t Forget About Taxes
Finally, as you tote up your retirement savings, remember that not all of that money is yours to keep. When you make withdrawals from a traditional 401(k)-type plan or traditional IRA, the IRS will tax you at your rate for ordinary income (not the lower rate for capital gains).
So if you’re in the 22% bracket, for example, every $1,000 you withdraw will net you just $780. You may want to strategize to hold onto more of your retirement funds–for instance, by moving to a tax-friendly state.