Welcome to the Invest By The Decades series! Every Wednesday, I'll break down how members of each decade should be managing their money to set themselves up for sustained success with their cash. This week, we'll be looking at your 50's and how to re-prioritize and make up for any past mistakes. This article is for entertainment purposes and should not be interpreted as investment advice. Each situation is different, so please contact a professional for your own individual needs.
Welcome to your 50's! That's right: you're one step closer to retirement and that whole "over the hill" joke is getting easier to see now that you're at the top of it. Your 50's are a time where you may take a serious look at your priorities and realize you might not want to work forever. You may want to spend more time with a partner or your children. Maybe you want to start your own business or spend more time on the things that matter to you, and that's great! Your 50's are a perfect time to reflect on all you've achieved, and the things you have left to accomplish. Now, don't take that to mean that you're done. Far from it. Your 50's, like the decades now in your rear-view, are another time of transition, and potentially great expense. Today, let's lay out an easier road map for how to manage your money in your 50's to give yourself the best retirement possible once that dreaded AARP card comes in the mail.
1. Don't Stop Investing, and Make Up For Lost Time
At this point, you've been working for quite a while. You've job hopped, built up a career and accomplished a lot, which means you've also likely been investing for that time as well. Assuming you're one of the 32% of American workers that take advantage of their 401(k) (and you should be since you're on my site), then you've likely amassed some sort of nest egg. According to Personal Capital, the average 401(k) balance by age 55 is $197,322, but the median is only $69,047. That's worrying, especially considering that the median 55 year old's salary in the United States is $74,270. So essentially the median portion of our older generation has less than one year's salary saved for retirement.
So what are you supposed to do if you're in this predicament? Well, I have good news. The first item is that you're still totally free to invest, and you can continue doing that for the rest of your life if you'd like. Are you going to experience the massive compounding rate that a 20 year old in the same situation would? Of course not! But you still likely have 10-15 years of earning and investing left to do prior to retirement, so take advantage of those years! Keep investing. Speaking of which...
If you are short on retirement savings, then there's hope. Since you aren't alone in this boat, the IRS has noticed and has instituted something called "catch-up contributions." Essentially, they are giving you a higher contribution cap on what you can invest towards retirement each year after you turn 50. Here's a handy chart to see how much more you can invest:
Contribution Limit Before 50
Contribution Limit After 50
As you can see, you have a bit more of a window to make up for lost time if you slacked off in your younger days.
2. Take Stock of Stocks
In my piece on investing in your 40's, I discussed the idea of shifting your focus from a full array of stocks to a mixture of stocks and bonds. The short version is that you don't want the floor to fall out from under you in the event of a stock market crash, and you probably want to give yourself some fixed income options in retirement coming from your nest egg. In your 50's, all of that still remains true, but I want you to consider one more options: dividend stocks.
Dividend stocks are companies that take a portion of profits and redistribute them to shareholders via a payment, called a "dividend." Some companies, like Realty Income Corporation, offer monthly dividends. Some, like Manchester United, offer annual dividends, but most companies that pay a dividend offer them quarterly. So why am I bringing this up now? Because in your later years, you want to accomplish three things: wealth preservation, moderate wealth increases and income. Dividend stocks help accomplish all three of those targets.
According to a study done by SureDividend.com, dividend paying stocks actually outperformed growth stocks on a risk-adjusted basis. They analyzed a list of 65 dividend paying stocks that qualified as "dividend aristocrats," meaning they have increased their dividend payout every single year for the last 25 years. When compared to growth stocks that did not pay a dividend, the study found that the Dividend Aristocrat bucket outperformed by over 1% per year, with a lower beta (volatility).
The study chalks this overperformance up to three key factors:
The fundamentals of dividend paying (and increasing) stocks are better suited for long-term growth because they have the ability to transfer money from themselves to shareholders at a sustainable rate.
Higher dividends means less internal cash for the company to use, leading to "smarter" capital allocation decisions.
The values of a dividend paying company could affect the overall nature of the C-suite, affecting behavior.
Dividend paying stocks could play a superb role in your portfolio, as the potential dividend increases could essentially act like annual raises in which you get to pay yourself. It could also allow you to live just on the interest your investments produce, rather than have to withdraw from the investments themselves. Pretty sweet huh?
3. Evaluate Other Forms of Income
While the United States is dramatically behind the rest of the world in terms of social safety-net programs for their older citizens, we still have some programs that are worth considering. Does your company have a pension that they've been paying into on your behalf since you started there? Probably not, but it's worth checking into anyway. And then there's Social Security.
Social Security, in a nutshell, is a joke. Designed to replace about 40% of your income in retirement, many experts agree that this number is low. Really low. You realistically need between 70-80% of your annual income in retirement in order to live comfortably. That means the rest is up to you which, if you've been following my guides and investing properly, you should be clapping your retirement savings like you accidentally took the Viagra instead of the baby aspirin.
4. Identify Helping Hands
Trigger warning: we're about to talk about something very upsetting, which is the concept of student loans. No, not for you. Hopefully now that you're in your 50's, flirty and thriving, you've paid those off. I'm talking about for your kids.
I know, I know. Hear me out. Again, if you have been following the correct investing structure then you can skip right past this part. If you started a 529 plan for your kid early on and contributed to it like the advanced, big-brained member of society that you are, then you're good! For everyone else, listen up: student loans are occasionally necessary. Are they a blight on the American economic system that is preventing the prosperity of multiple generations at the moment? Yes, of course they are. But here's the thing: student loans exist, and retirement loans do not. You should not plunge yourself into debt to pay for your child's education, because you do not have the time to pay that number off. Grim, I know, but we need to lay it out here. You simply do not have the runway in front of you anymore to take on a long-term low-interest debt payment to fund your child's tuition. They do.
Call me whatever you want. This sucks, but it needs to be said. I don't want your kids to have student loans, and I'm really hopeful that, because you're here, you have this part covered. But we needed to review it. On to the next.
5. Evaluate Your Future Needs
Let's talk retirement! The fun part, right? You've worked FOREVER and now you can look at your 60's like it's the back nine at Pebble Beach with your partner holding a perfectly seared fillet at the end (or pressed vegan mushroom roll if that's your preference). But before you get to that point, you need to sit down and ask yourself:
What do I actually want or need?
Do you want that second home at the beach? Do you want to downsize your home and head into the city? Are you done paying for kids? What are your health costs going to look like in the future? The costs and needs associated with each of those are radically different, and will require different costs, different accounts and varying timelines. If you want that second house, are you going to pull from retirement savings? If so, maybe don't contribute quite as much to your 401(k) and put some cash in a high-yield savings account so you don't get dinged on taxes.
I can give you all of the advice in the world, but if you don't evaluate your goals and decide what's important, then you won't know which way you need to go and how you need to save. Digging into your future will only serve to help you in the present. Now go forth and enjoy those last few working years. You've earned it.
Are you in your 50's and making catch-up contributions? Let me know in the comments below, and don't forget to sign up for my email list so you never miss a post!