Planning for the future for those in their 50’s may seem easy, but it isn’t! People in this general age group know they NEED to get really serious about their future, but they live in the “land of a 1000 obstacles” to borrow from the title of the 1960’s R&B/Hip-Hop song. There are family demands as children graduate, move into their first career, marry, and buy their first home. For many, this decade will bring their first grandchildren and oh the opportunities to spoil them! Health issues begin to make their presence known. There are often onerous demands at work, as individuals reach the zenith of their career with accompanying emotional pressures. What should people do in this decade of their 50’s to prepare for the future.
Here is the first step: Find any and every way possible to REDUCE your lifestyle. Yes, you read that correctly. This is the penultimate decade. All those preceding this have been prologue, and the next decade will be the time when changes will occur rapidly. This age decade is normally the time when we are tempted to begin to accumulate the “toys we think we will enjoy” in the later stages. We typically have the greatest income of our lifetimes, and it seems only right to begin to enjoy things. However, we propose reducing our lifestyle/spending now….in order to pave the way for a retirement that will be impossible if we as we have been.
Doing so will allow us to focus on two powerful projects! We need to focus as never before on eliminating every debt we have and save as we have never saved before. One of life’s greatest retirement challenges is still having to deal with monthly interest payments. Think of the freedom that may be enjoyed with no house payment, car loan, or credit card bills. This is the decade to make that happen. Saving in our 50’s will never produce the same growth of capital as saving between the ages of 25-40. We simply do not have time on our side. However, we want to present a challenge to consider. If we were to save an extra 15% of our income beginning at age fifty, this would create an emergency fund of nearly three times our annual income by the age of 65! How much financial freedom would we have with three years cash available on top of what we have saved for retirement? How much cushion would this provide if our first year in retirement were to be a negative year for investments? We encourage everyone to consider this challenge of reducing the current lifestyle in order to provide a retirement we never dreamed possible.
The next point we would suggest is, THIS is the time to reassess your plan for the future. We are not suggesting the same questions or issues we mentioned last week for those in their 60s. No, we believe people in their 50s need to spend time evaluating HOW they want their retirement savings to function. How will we provide the income needed to pursue our passions? This is the age when we truly shift from thinking about the size of the retirement nest egg to how much income will the nest egg provide!
There are two (of several) concepts of retirement income production that we would suggest everyone consider. We will not endorse one above the other, because the proper selection depends upon your family’s individual needs. One of the most popular methods of providing retirement income is simply to identify a monthly income amount and ask, “Will our retirement account be able to provide that monthly check and not run out of money?” In this scenario, your family reinvests all dividends and capital gains within your retirement account and shares of securities are sold monthly to provide the check requested. Typically, financial advisors recommend families withdraw no more than 4 to 4.5% of the account balance annually (adjusted for inflation). This limitation is suggested to protect you from running out of money. The other concept is to work with a financial planner or investment advisor or learn enough about investment on your own to invest for dividends and interest. These dividend and interest payments are held in your account in cash. Each month, a check is issued from the cash to provide your income. This plan is a bit more detailed. It will require more investment expertise as funds are divided between growth for the future, higher dividend paying stocks (utilities, REITs, preferred stocks, etc.), corporate and government bonds, certificates of deposit, immediate annuities, etc.
No matter which of these income approaches is adopted, everyone needs to begin learning about asset allocation. For decades, there has been a standard 60/40 portfolio mix that was the beginning point of allocation theory. With 60% invested in equities and 40% in fixed income, this was considered a balanced approach. However, with interest rates near zero, what is the correct amount that should be in fixed income? Should we have more invested in equities, since there is little to no current return in fixed income securities? There is also potential for capital loss in fixed income securities should interest rates rise in the future. Still, everyone should develop an understanding of balancing returns and risks. Simply turning things over to someone else without personally considering the risks is NOT a recommended strategy. For those in their 50s, this is the time to tackle this issue.
If you are approaching the age of 50 or you are comfortably in your 50s, it is time to begin seriously planning for your future retirement. You do not have to decide now where you will live, or what you will be doing, but there is no time better than the present to reduce your spending and understand how your family needs to allocate resources!