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A Retirement Guide for 50-Year-Olds With No Retirement Savings

Retirement often seems like a faraway goal. By age 50, however, retirement is often within shouting distance.

The Social Security Administration allows workers to draw retirement as early as age 62.

The Internal Revenue Service allows retirement plan account holders to take withdrawals without penalty as early as 59 ½.

If you want to retire this early, you’ll need to have significant savings in place.

But what if you reach 50 and don’t have any savings at all?

The good news is there’s always time to start. Even at age 50, retirement may still be 10 or even 20 years away.

Examine your options and funnel as much money as you can into your retirement savings. You might be able to build up a sizeable nest egg by the time you retire.

How Much Should You Have at 50?

There is no definitive amount that every person should have saved by age 50, because retirement needs vary.

No magic number works for everyone while in retirement.

Retirees just looking to scrape by might only need a solid Social Security check. Those wanting to travel the world and spend extravagantly may need millions.

However, there are guideposts.

Fidelity Investments recommends that a typical 50-year old have 7 times their annual income saved for retirement.

According to the Bureau of Labor Statistics, median weekly earnings of full-time workers were $881 in the first quarter or 2018.

Annualized, this translates to a median salary of $45,812. Using the Fidelity suggestion, the median worker should have $320,684 saved by age 50.

Fidelity also suggests that workers have 10 times their annual salary saved by age 67. At the median salary, this translates to $458,120 saved by retirement.

So, how can you get from $0 at age 50 to $458,120 or more at age 67?

Nothing is guaranteed, but there are some concrete steps you can take to improve your chances.

The Practice Retirement Strategy

The most encouraging thing we’ve seen from the financial-planning community in a long time is the concept of “practice retirement.”

The idea comes from the folks at T. Rowe Price, the mutual fund company. 

The core of the practice-retirement concept is to postpone full retirement.

Rather than working until 65 or 67 or whatever and then living off of what you’ve saved, practice retirement involves working longer in life, but doing the fun things you planned for retirement sooner.

T. Rowe Price suggests practice retirement for people who have put aside considerable savings by the time they are 60-years of age.

But the beauty of the system, it seems to us, is that it can also be the core of last-minute planning for people without adequate savings.

First, let’s look at how it’s supposed to work:

For example, a couple with $75,000 in joint household income who want to retire at 62 and have 75 percent of their preretirement income would need $975,000 in savings by age 60.

But if they're willing to keep working until age 67, T. Rowe Price estimates they'd need $675,000.

Those five extra years on the job cut the amount needed at age 60 by almost one-third.

And if the couple don't touch their savings until 70, they need to set aside an even lower amount — $525,000.

The difference comes from two factors. First, the longer you can put off full retirement, the longer your savings have to grow.

Second, the longer you put off full retirement, the more you’ll eventually collect from Social Security.

Last-Minute and Practice Retirement

So let’s look at how this might work for someone who hasn’t saved.

Imagine that same couple with that same $75,000 in joint income and zero savings at age 55. Let’s call them Mr. and Mrs. Latestart.

If they could commit to putting away $5,000 a year starting right now, it would mean investing just $416.66 a month.

If we assume a 3% return, then in 10 years when the Latestarts turned 65, they’d have $58,370.21.

If they stopped saving right then, but didn’t touch their investments until they were 72 years old, they’d have $71,991.20 in savings.

That’s not what anyone would ever call an adequate amount in retirement savings.

But let’s think about that for a bit.

If the Latestarts are the type of folks with modest retirement dreams, then Practice Retirement winds up making sense.

Were they dreaming of trips to Disney with grandkids? Do they love golf? Hiking? Staying at Bed and Breakfast Inns in Vermont when the leaves turn?

During those last seven years -- from age 65 to 72 -- the Latestarts aren’t saving any longer. So that $416 a month suddenly becomes their retirement “play” money.

And although $416 a month won’t pay for a trip around the world, it will pay for some weekends at Disney, lots of golf, a good tent, and many a night at a B&B during those seven years.

But the real beauty of practice retirement for folks who have to do last-minute retirement planning is in Social Security.

Remember the Latestarts? They’re 55 years old today, which means they were born in the late 1950s.

For Social Security purposes, that means they have a Normal Retirement Age (the time when the government sort of expects you to stop working) of just shy of 67-years old.

But the longer you postpone collecting Social Security beyond your NRA, the higher your monthly benefit will be. 

For people like the Latestarts, postponing the Social Security check until they are 70-years old will boost their benefits by 76 percent!.

Without knowing more about the Latestarts, we can’t calculate their exact Social Security benefits.

But a quick look at the government’s estimating tool suggests that if they wait to collect until they are 70, they’d have somewhere between $2300 and $2500 coming every month from the Feds.

It’s not much, but it’s probably enough for them to get by.

Plus they still have that roughly $72,000 for emergencies and birthday presents for the grandkids.

Most importantly, they have seven years of memories of “practice retirement” weekends at Disney. Myrtle Beach and New England.

If you think “practice retirement” might be for you, take a look at T. Rowe Price’s tools, and then find out what your Social Security benefits will look like if you work beyond your Normal Retirement Age.

Other Steps to Take

1. Contribute to your 401(k) plan

A 401(k) plan can be your best friend when it comes to retirement savings.

As of 2018, you can contribute up to $18,500 per year into a 401(k) plan. Additionally, you won’t typically pay tax on the money you contribute.

Best of all, many 401(k) plans have employer matching contributions. A typical match might be 50 percent of your contributions up to a certain amount, such as 6 percent.

Say you earn $50,000. If you contribute 6 percent of your salary, you’ll put in $3,000. With a 50 percent match, your employer would contribute another $1,500.

At age 50, you get another break.

The IRS allows those 50 or older to make a “catch-up” contribution to their retirement plans.

For 2018, this additional amount is $6,000.

This means you can put in $24,500. If you start at age 50, by the time you’re 67 you could theoretically contribute $416,500 to your 401(k).

With matching contributions of just $1,500 per year from your employer, your total contributions could reach $442,000.

Of course, not everyone can contribute $24,500 per year to a retirement plan.

From a regulatory perspective, you can’t contribute more than you earn.

From a budgeting perspective, you might not have enough excess capital to make such sizeable contributions. But with some planning and diligent saving, you can reach the Fidelity savings recommendations.

And that’s without even factoring in the potential investment growth of your account.

2. Start an IRA

If you don’t have access to a retirement plan at work, consider an individual retirement plan.

In many ways, an IRA functions like a 401(k).

With both accounts, your contributions are made before tax, and your earnings grow tax-deferred. However, IRAs have smaller contribution limits, and they don’t offer employer matches.

For 2018, you can put up to $5,500 into an IRA. Catch-up contributions do apply. If you’re age 50 or older, you can contribute an additional $1,000 to an IRA, for a $6,500 total limit.

Even if you are covered by a retirement plan at work, you can make an IRA contribution. However, your contribution might not be eligible for a tax deduction.

After-tax contributions such as these can be withdrawn tax-free at retirement. You can still benefit from the tax-deferred growth that an IRA offers on your earnings.

There are two types of IRAs available:

Traditional IRA Vs. Roth IRA

Traditional IRA Roth IRA
Contributions may be tax-deductible. Contributions are not tax-deductible.
Pay taxes upon withdrawal. Earnings can be withdrawn tax-free and without penalties if the funds were in the Roth IRA for 5 years and you've reached age 59 1/2.
You must be under age 70 1/2 to contribute. You can contribute at any age.
Required minimum distributions (RMDs) are required starting at age 70 1/2. No RMDs required.

Generally, if your income is not too high, a Roth IRA is a common choice because you pay less taxes now and your earnings are tax-free.

If your income is high and you'd benefit by deducting your taxable income, a traditional IRA is the way to go.

3. Open a Regular, Taxable Investment Account

Ordinary savings accounts don’t carry the tax benefits of retirement accounts such as IRAs and 401(k) plans.

One of the main benefits a regular account does have over a retirement account is liquidity. With limited exceptions, you’ll face a 10 percent early withdrawal penalty if you take money out of a 401(k) or IRA before age 59 ½.

With a regular investment account, you can draw on the money as needed.

One factor to consider is annual taxation.

You can avoid paying tax on income and capital gains in a retirement account. In a regular investment account, you’ll owe tax every year.

You can minimize this drawback by investing in tax-free or tax-deferred securities, such as municipal bonds or annuities.

Investment Options

Contributing the maximum amounts to your retirement accounts is a great way to build your retirement savings.

Successfully choosing investments within those accounts can help even more.

If you contribute $10,000 per year to your retirement accounts and keep that money in cash, you’ll have $170,000 after 17 years. If you earn 7 percent per year on those contributions, you’ll end up with nearly $330,000 instead, or almost double the amount of your contributions.

When choosing an investment, you’ll have to balance out the risk and reward. Taking on too much risk close to retirement could devastate your nest egg if there’s a sharp market downturn.

Target-Date Funds

Target-date funds invest in a mix of stocks and bonds. The funds mature at a specific date.

As the maturity date approaches, the fund’s investments become more conservative.

The concept behind TDF’s is that they maximize returns early in their lifecycle and protect principal as the maturity date approaches. This makes retirement planning easier, as the investment choices are handled for you.

Index Funds

Index funds track the performance of a market index.

The Standard & Poor’s 500 index, one of the most popular, is a collection of large U.S. stocks that is often used as a proxy for the market as a whole.

Over time, stocks have returned more than cash or bonds. However, since returns are volatile, the stock market should be used for long-term investments only.

If you have 17 years left until retirement, you can use stock market index funds to increase your chances for a higher return, although performance is not guaranteed.

ETFs

Exchange-traded funds are like mutual funds that trade like stocks.

You can buy or sell an ETF on a stock exchange any time the market is open. You can find an ETF for almost any investment style.

Some track stock market indices, like the S&P 500, while others are actively managed by professional stock pickers. With so many types of ETFs available, you can use them to cobble together a portfolio that balances risk and reward.

U.S. Treasuries

U.S. Treasuries are backed by the full faith and credit of the U.S. government.

If you hold Treasuries until they mature, you’ll get your money back from the government. Along the way, you’ll earn interest, although you’ll earn less with Treasuries than you could with some other assets.

Don’t Forget an Emergency Fund

While saving for retirement is important, most financial advisers recommend that you start with an emergency fund.

An ideal emergency fund holds 3 to 6 months of savings. You can keep this money in a high-paying savings account.

Ideal Size of an Emergency Fund

To start... Ideal goal... Super safe...
$1,000 3-6 months of essential expenses 12 months of expenses

Emergencies are a fact of life. If you don’t have liquid reserves to pay for these unexpected events, you might have to dip into your retirement savings to cover them.

Better to be prepared for short-term emergencies than to derail your long-term savings plans.

Other Financial Considerations

You’ve already got a lot on your plate if you’re funding both an emergency fund and retirement investments.

However, certain additional considerations can pay off for you in the long haul, or at least give you peace of mind.

Evaluate your financial advisors

It's very important to have a trusted team of financial advisors and wealth management experts all throughout the years of making contributions to a retirement account, but especially so when it's this late in the game.

Have a sit-down with your account managers, and visit with some competing teams. Be certain your advisors are committed and enthusiastic about your earning business and increasing the yield of your earnings.

Pay down debts

Don't end up at 65 with debt if you can avoid it. You can save a lot of money by getting other loans paid down and credit card bills you may have racked up in your 20's paid off.

No one wants to be bogged down with bills and high interest while taking the retirement vacation they've been working their whole life towards. 

Sit down, take a good hard look at your finances, and pay down your debts as quickly as possible, so you can start saving for that beach house in Boca.

Healthcare expenses

According to the U.S. Department of Health and Human Services, someone turning 65 has a nearly 70 percent chance of needing long-term care at some point.

Twenty percent will need long-term care lasting at least five years.

The costs range from a national median rate of $20 per hour for home health care to a national median rate of $240 a day for skilled nursing.

Long-term care, whether it’s for you or for a family member can wipe out a lifetime of retirement savings in only a few years.

Planning ahead by purchasing long-term care insurance can help safeguard your savings.

Another coverage to consider is disability insurance.

If you’re fortunate, your employer may provide this insurance for you, or at least offer a low-cost option. Wherever you obtain it, disability insurance can help protect your retirement savings in the event you have an accident.

Consider downsizing

Cutting down housing costs can help to reduce your total expenses and help to provide a better financial cushion -- especially if you want to build your retirement savings faster.

Moving to a smaller home is an option to thinking about.

It may also be preferable to live in a less-expensive area of the country if you happen to reside in more expensive cities such as San Francisco, Los Angeles or New York City.

Think tax breaks

If you’re considering downsizing and moving, don’t overlook the states with zero or minimum income tax rates.

Some states such as Texas, South Dakota and Nevada do not have any state income tax, which makes your hard-earned savings go that much further.

Get rid of the extras

Every little bit counts in retirement. If you are a two-car family, can you sell one and invest the proceeds while living with one car?

Can you go even farther and sell both and take public transportation?

Think about the rest of the things that you use.

Some of these things you may already be doing such as replace your landline with your cell phone, stream Netflix and Hulu instead of paying for expensive satellite or cable TV, go old school and borrow books and magazines from the library instead of visiting the bookstore.

Everywhere you’re able to cut spending allows you to reallocate that money toward your retirement — and will reduce your expenses once you do retire.

Delay retirement

Figure out a way to make more income by taking on a job, freelancing or leveraging your skills and experience to pad your savings.

“If someone has $50,000 in their retirement account and plans on retiring at age 65 and wants to receive an income of $50,000/yr (excluding Social Security), he or she will have to power save about $2,400 a month to meet that goal, assuming an interest rate of 8% growth," says Brent Leavitt, healthcare solutions adviser with Nevada Benefits.

"If they extend retirement to age 70, then he or she can decrease those savings down to $1,280 a month."

Barter or trade services

Are you a technology whiz or a handyman? Can you tutor, bake or create something beautiful?

Think about your hobbies and interests and whether you could barter your skills. Those types of trades can make a difference in how much you’re able to save and spend throughout retirement.

Even better, if you live in a popular destination, you can rent out your home (think Airbnb.com).

There are bartering trade associations to help match you up with others who could use your services.

Remember, however, that the IRS requires you to pay taxes on the value of the bartered services that you receive.

Avoid a new 30-year mortgage

This should seem obvious, but many people in their 50s still take out 30-year mortgages. Some do it with the idea that they will pay it off long before the retirement date, but will still end up paying a lot in interest.

If there are solid reasons to refinance, take a hard look at the numbers -- both monthly and what is paid or saved over the long-term, and go for a 15-year mortgage if possible.

Conclusion

You may still have 15 or more years to save for retirement once you reach age 50.

This gives you time to funnel as much money as possible into savings accounts. Take advantage of the tax deferral and employer match of a 401(k) plan, or fund an IRA or taxable investment account on your own.

Choose appropriate investments, but don’t overlook your emergency fund or other necessary coverages. Prioritizing your savings over current needs can help you reach your long-term goals.