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Retirement planning gets real after age 50. People realize they no longer have the luxury of time to make up for financial mistakes. Making smart money moves in your 50s to achieve financial independence is essential.
Here are three financial moves for people in their 50s:
1. Control your housing expense.
Develop a plan to keep your fixed expenses low so your money will go further in retirement. Housing is many people’s most significant expense, so tackle this first. Owning a home free and clear is ideal. Without a mortgage, your cost of housing consists mainly of recurring expenses such as property taxes, insurance, utilities, and repairs. If possible, time your mortgage payoff to your retirement date.
If you own a home, have a variable-rate mortgage, and don’t plan on paying off the mortgage, refinance to a fixed rate when interest rates drop. An advantage of a fixed rate is you can plan your budget around it. While this seems simplistic, having a handle on your retirement expenses is important.
If you have a low-interest loan, consider staying put. With interest rates rising from below 3% during the pandemic to mid-6 % points today, people feel locked into their current homes. According to Redfin analysis of data from the Federal Housing Finance Agency’s National Mortgage Database, as of the first quarter of 2024, 57.4% of homeowners have a rate below 4%.
Downsizing and paying cash for a home can be a good option for you, too. If you are a renter, consider moving to a rent-controlled home or apartment.
Financial Planner tip: Plan to make and pay for any capital improvements to your home before you retire. The timing of the expense reduces the number of more considerable expenses when you don’t have a steady paycheck.
2. Save more.
The IRS grants unique savings benefits to investors over 50.
The year you turn 50, you get to save more every year in your retirement plans. You are allowed to make additional contributions — catch-up contributions. The maximum you can personally contribute to a 401(k) for 2024 is $23,000. For 401(k)s in 2024, the catch-up amount is $7,500, which brings the age 50 and over maximum to $30,500.
In 2024, the maximum you can contribute to an IRA or Roth IRA (if you qualify and satisfy the income requirements) is $7,000. The catch-up contribution for Roth and traditional IRAs is $1,000, which brings the contribution of those aged 50 and over up to $8,000.
Financial Planner Tip: To reach the maximum savings amount in your 401(k) plan, use the automatic escalation feature if available. Many companies allow you to bump up your savings percentage automatically each year. You may not even notice an additional 1% taken out of your paycheck, but it will add up over time.
3. Analyze your cost of living.
Sometimes, moving to a city or state with a lower cost of living makes sense. If you plan on moving to another state in retirement, be sure to compare costs. Seven states do not levy a state income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming.
Other states have a fixed percentage or flat tax, which is more tax-friendly to high-income earners than a graduated tax. Some states have a state estate and/or asset tax. Be sure to consult a financial advisor before making a move.
There is more to the cost of living than state income taxes. See how one city compares to another using a variety of expenses such as food, housing, gas prices, health care, etc. A cost-of-living calculator can give you a general idea.
Financial Planner tip: Use a Cost of Living Calculator to help you determine overall costs. For example, the cost of living in Sacramento, CA is about 10% higher than Salt Lake City, UT. The cost of living in Chattanooga, TN is over 30% lower than Sacramento, CA.
By thinking ahead and making a few tweaks in your financial plan, you can set yourself up for retirement success. Better prepared for retirement, you’ll have more choices when that day comes.
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