Planning for your retirement at 50

Along with figuring out how you’re going to pay for your retirement, you also must work out your expenses when you retire. It’s good that you start planning your retirement sooner rather than later to avoid any nasty surprises down the line.

For example, one of the main expenses to budget for is health care. The longer you live, the more likely your health care costs will go up.

Any discussion of how to retire at 50 must start with good tips on how to plan wisely. Here are three steps to help you reach your goal.

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1. Save as much of your income as possible

It’s going to take a while to save enough money to live off during your extra-long retirement. But if you’re 45, haven't saved much and are thinking it would be great to retire in five years, you won’t accomplish much — saving-wise — within those five years.

Retiring at 50 means you must let your savings simmer for many years in a retirement account, earning more and more "compound interest" (returns that grow on top of returns) every year.

For example, let’s say you’re a 25-year old earning a 5% return on your $20,000 annual investment. By the time you reach 50, you will have close to $1 million saved for retirement. Your money grows, and the growth earns returns, too.

If you wait until 35 to start saving and put that same $20,000 away at the same return on investment, you’ll have only about $450,000 for your retirement by age 50. In fact, you’d have to save $45,000 a year to end up with the same amount as if you'd started at 25.

2. Avoid significant debt or major expenses

You could follow every saving tip in the world to the letter, but if you have a lot of money racked up in debt, all your efforts will be for nothing.

Any credit card debt or outstanding loans will eat into the money you should be saving for retirement.

If you can avoid it, avoid taking on any form of debt. If you do have any outstanding debts, the earlier you can pay them off — maybe with the help of a debt consolidation loan — the less interest you’ll pay the bank. It makes a huge difference over the long run.

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3. Invest your savings

To grow your savings and benefit from compounding, you'll need to invest the retirement money you're putting aside.

Your rates of return won’t be very high if you stuff your savings into your mattress — or pour it into low-risk government bonds, for that matter. You have to diversify your portfolio.

Here are few investment vehicles to research:

  • Stocks. They're securities that indicate you have proportionate ownership in the issuing company. Corporations sell stock to raise funds and operate the business.

  • Mutual funds. They consist of stocks, bonds and other securities. They provide access to professionally managed portfolios at a low price.

  • Index funds. These investments have portfolios that mimic the performance and composition of financial market indexes, like the S&P 500. They are generally cheaper than actively managed funds.

  • Exchange-traded funds (ETFs). They're similar to mutual funds, but they trade on exchanges. ETF share prices fluctuate throughout the day as they're bought and sold.

Protect your retirement savings and investments

You should consider putting some of your retirement money into a 401(k), IRA or Roth IRA. Why? Because of the tax benefits.

Take a standard 401(k), typically offered by employers. All contributions are tax-deductible and are funded with pretax dollars.

When you divert some of your pretax pay into a 401(k), you reduce your taxable income. The higher your income, the greater your tax savings.

For example, someone earning around $210,000 a year who contributes $10,000 a year to a 401(k) would drop down from the 35% tax bracket, which has a roughly $207,000 threshold, to the 32% top bracket.

The $10,000 won't face any taxes until you withdraw it in retirement — when you're likely to have a much smaller income and be taxed at a much lower rate than during your working years.

Look at side income sources

If you have specialized knowledge in a certain industry, look at ways to monetize it. People and businesses will pay handsomely if you can solve their problems.

You also could create and sell a new product. If you go down this route, investigate the different forms of intellectual property to see what you can copyright or trademark.

Consider brushing up on your selling skills, too.

Save windfalls

Some people can afford to retire because they come into a large windfall — maybe an inheritance, a huge stock gain after a corporate takeover, or a multimillion-dollar win in the lottery.

But even so, it’s important to have a plan in place. So many people who come into substantial amounts of money overnight find themselves completely broke just a few years later.

If you hope to retire at age 50, you can’t just pray that you'll come into a large windfall.

You must learn how to invest. You don’t have to be an expert, but the more you understand, the less likely you’ll become a target for fraudsters. Educate yourself and take any advice you receive with a pinch of salt.

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About the Author

Alex Denholm

Alex Denholm

Freelance Contributor

Alex Denholm was a freelance contributor to MoneyWise.

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