Investing after 50 is a challenge for many older adults in the United States – especially the nearly half who do not have retirement savings yet. Studies have shown the take-home pay may no longer be enough to cover the needed expenses by then. Future retirees, however, still have a number of years to build their fund as long as they do it now. Here are investment strategy options you can explore.
Investing after 50 | Key Strategies to Build Your Retirement Fund Even if You Are Late to the Party
1. Open an IRA
One of the most effective ways to start investing after 50 is to open an individual retirement account (IRA).
Although these accounts are common among the self-employed and those whose employer doesn’t offer a 401(k), they are just as beneficial to those who have access to an employer-sponsored retirement plan.
As of 2018, you can contribute up to $6,500 to your IRA per year if you are over the age of 50. You can also contribute on behalf of your non-working spouse.
One of the reasons to invest in an IRA is tax benefits. If you have a Traditional IRA, your contribution will not be taxed.
If you have access to an employer-sponsored retirement plan and your modified adjusted gross income is over $63,000 for a single person (or $101,000 for a couple married filing jointly), you may only receive a partial deduction.
IRA contributions can add up. Imagine you just have an IRA, and you start investing after 50. If your account were to earn a 7% rate of return, and if you invest $6,500 per year, you’d have over $200,000 in your account by the time you retire at age 67. Of course, those funds would continue to grow throughout your retirement as well.
You should note, however, that different types of IRAs have different age limits for contributions. A Traditional IRA, for example, allows contributions only until 70.5 years old unless your non-working spouse is younger than you. A Roth IRA does not have an age limit.
2. Make Catch-Up Contributions to Your 401(k)
To encourage investing after 50, the government allows you to make catch-up contributions to your 401(k).
Normally, you can contribute up to $18,500 annually. As of 2018, however, anyone 50 or older can make catch-up contributions worth up to $6,000 per year.
You should contribute as much as possible to your 401(k). If you can’t afford to contribute the entire $24,500, you should at least match your employer’s contribution. It doubles your investment straight off the bat.
Remember, 401(k) contributions reduce your income taxes. If your taxable income is $60,000 and you contribute $24,500 to your 401(k), you only get taxed on the remainder of your income.
You do not have to pay any income tax on the amount you contributed to your employer-sponsored retirement plans.
3. Cut Costs
Throwing money into your 401(k) or IRA isn’t always easy. First, you need to find the money.
Take some time to look through your finances and try to identify areas where you can cut costs. Often, it means cutting back on luxuries such as eating out, taking vacations, or paying for cable television.
You should also look for places where you can substitute cheaper options. Get quotes on your car insurance, see if you can find a better deal on Internet service, and look for ways to lower the interest rates on your debts.
You may also be almost done with your mortgage, or perhaps your children will soon be moving out, which can also result in big savings.
4. Focus on Home Ownership
Investing after 50 can be difficult for those who are thinking of buying a house, but there is a way.
When looking at loans, Bankrate suggests that you try to focus on mortgages with 15-year terms to ensure you will pay off the home before you retire. You just need to cover property taxes, utilities, and routine living expenses.
Often, you get a better interest rate if you opt for a 15-year term, and you pay a lot less over the lifetime of the loan. Your monthly mortgage payments will be a bit higher, however.
For instance, on a $250,000 mortgage with 3.94% interest rate, the monthly payments for a 30-year term are about $1,200 while the monthly payments on a 15-year term are about $1,800.
Another option you can explore is downsizing, by moving from a bigger home to a smaller one. It usually has much lower utility bills and a more affordable price.
5. Remember Your Home Equity
You can also build a retirement fund using your existing home. You can turn the asset into cash, and you do not necessarily need to sell it.
To start saving for retirement, consider some of the following options:
- Home Equity Line of Credit (HELOC) — Based on your home equity, this line of credit works like a credit card. You spend money as needed and make monthly repayments. However, you need to use this option carefully. If you cannot make your repayments, you may lose your home.
- Reverse Mortgage — Available to homeowners over the age of 62, a reverse mortgage is when you agree to let the bank buy the home from you. You receive monthly payments or a line of credit, and when you pass away or move out, the bank pays out any remaining equity and then owns your home. Note if you choose this option, you will not be able to pass your home to your heirs.
- Rentals — You may want to rent out part of your home to roommates or travelers. You can also open it for lease while you move to a less expensive apartment.
6. Delay Your Social Security Payments
If you were born in 1960 or later, you get full Social Security benefits at age 67, but you can opt to take benefits anytime after your 63rd birthday. If possible, plan to delay taking your benefits as long as possible.
As of 2018, your benefits are reduced by 25% if you take them early. In contrast, if you wait until age 71 or older, you get an extra 32%.
To illustrate, imagine your full benefits are $1,000 a month. If you take the benefits as early as possible, your monthly payment drops to $750 (permanently), but if you can wait much longer, you can get it up to $1,320 per month. Throughout your entire retirement, those amounts really add up.
The only exception to this rule is if you have a solid investment plan. If you think you can take your early Social Security payments and put them into investment options that will give you more money than waiting, you may want to explore that idea.
To be on the safe side, you should consult with a certified financial planner before making that kind of move.
7. Keep Your Risk Tolerance in Mind
If you are investing after 50, your risk tolerance should decrease as you get closer to retirement.
If you had started at age 30, you could have made relatively risky stock market investments because you had time to weather the ups and downs.
At this age, whether you are buying short-term bonds, mutual funds, or other investment choices, you probably want to consider low-risk investments. They are designed to grow steadily without a lot of disruptive ups and downs.
These may include a bond fund and treasury notes, which are backed by the government. If you are truly conservative, you can opt for money market.
8. Rethink Retirement
As you plan to delay Social Security, inevitably, you may consider working longer. In the process, you may want to rethink retirement completely.
Think about working part-time in the initial years of your retirement. You do not necessarily have to do the same job. Retirement can be a great time for a third act.
For instance, if you’re an empty nester but you still have lots of bedrooms, consider opening a bed and breakfast during your retirement.
Alternatively, you may want to become a travel writer, a tutor, a tax preparer, or one of a million other flexible and often part-time jobs.
Working is not the only thing you should consider. Perhaps you want to sell your home and move to a retirement community early. Maybe you want to take a note from the Golden Girls and invite roommates to move in.
If you want to travel but are not sure how to afford it, you can sell your house and move into a camper. Get creative — there are all kinds of possibilities.
9. Be Positive
Sometimes when people start investing over 50, they feel hopeless. They have read too much about the importance of investing young, and they start to believe it is not possible now. To be successful, you need to change that mindset.
Be positive. Tell yourself you can do it. Give yourself pep talks. Try to get excited about the fact you have 10 to 15 years or more to focus on saving and be grateful you have the money, knowledge, and skills to start now. You also have the gift of maturity and discipline, two elements that can really help.
What are your strategies for investing after 50? Let us know below!