During your mid-year financial checkups during your 50s, determine if you can live comfortably on your retirement income sources. The process is much like creating a household budget in your early years. You first list your mandatory expenses, such as mortgage or rent, car payments, health insurance and average utility bills. Then list your discretionary expenses, like travel, entertainment, golf or tennis clubs and dining out. Your third list will be your sources of retirement income, which may include Social Security benefits, pensions, company-sponsored retirement plans, annuities, and your own investment or savings plans. Compare your spending needs to your desired withdrawal rate. Keep in mind, you may live 20 to 25 years in retirement.
If you see a point where your funds may fall short, you should still have time to adjust your plan. In your 50s, you can make additional catch-up contributions to your 401(k) and your IRA. In 2013, you are able to contribute an additional $5,500 to your 401(k), meaning you could save up to $22,500 this year alone. If you were able to save $22,500 for the next 10 years before you retire, assuming a 7 percent return, you could add more than $310,000 to your retirement nest egg. If you are working with a financial adviser, your adviser should be able to run multiple scenarios that take into consideration market performance and may suggest areas where you can trim your expenses.
While you may be keenly focused on saving since retirement is so imminent, you should also review your liquidity needs. Your first year of retirement may be less than 10 years away, so now may be the time to begin shifting some assets in your portfolio to fixed-income investments. This should provide you with the liquidity when you need the money. You may consider laddering bonds that mature close to your retirement date and the years thereafter. Many financial planners recommend planning for liquidity needs five to 10 years before you need the money to help minimize the risk of having to sell investments in a down market.
Your 50s is also the decade to evaluate your estate plan and insurance needs. Since you are already planning your retirement spending, you should consider how you would pay for nursing home or in-home care should you need it. Many insurers offer discounts to those in good health. Generally, those discounts are locked in for as long as you hold the policy. Your mid-50s may be an opportune time to purchase your long-term care insurance.
While you should already be reviewing your will and overall estate plan every two to five years, your 50s are a good time to make sure your affairs are in order. You may consider reviewing your health care directives and financial powers of attorney should you become incapacitated. You may have named your spouse in the past, but you may want to consider younger relatives. Next week we’ll focus on your 60s, when you make the transition from working to retirement.
William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.