How to prepare your finances for retirement
If you’re in your 50s, retirement is probably on the horizon, and you may be looking forward to being able to slow down and enjoy the fruits of your labor after years in the workforce. But before you sit back and relax, there are a few more financial steps you should take during this stage of life.
1. Increase your retirement contributions.
When you turn 50, most retirement funds allow you to increase your contributions. For instance, if you have an employer-sponsored 401(k), you can add an additional $6,000 a year to your account once you reach 50. If you have a Roth IRA, you can start contributing up to $6,500 a year at age 50, whereas the limit for younger people is $5,500.
Saving an extra couple thousand dollars per year may not seem like a lot, but thanks to compounding interest, it can make a huge difference in how much you are able to draw once you do retire a few years down the road.
2. Adjust the risk tolerance of your investments.
One of the key principles of investing is that as you grow older, you should take less risk. When you're young, your money has time to recover if you happen to lose a bit or make a bad investment. When you're older, you don't have as much time to recover, so you should be making investments you're more confident in, even though those typically come with a lower interest rate.
Check up where your money is invested. If you are currently invested mostly in stocks, like many people, moving some of your money into bonds may be a good way to reduce overall risk and balance things out.
3. Paint a picture of your retirement.
While you don't need to make any hard-and-fast decisions about retirement just yet, you do need to start thinking about what you want retirement to look like. Do you plan on staying in your current city, or do you plan on moving somewhere with a higher or lower cost of living? Do you plan on staying in your current home or selling it? Plans like these will affect when you can retire, since they affect how much you need to draw from your retirement accounts, which affects your financial goals.
4. Create a will.
What will happen to your money when you're gone? If you do not have a will, this is the perfect time to have one drafted. Work with an attorney to ensure everything is written in a way that will be legally binding. You need to make sure your assets go to the right people if something should happen to you. Make sure you bring your lawyer a complete list of your assets, so that nothing is overlooked.
5. Plan for your healthcare needs.
As you grow older, your healthcare needs are likely to increase. The way you pay for your healthcare may also change when you retire. If you have an employee-provided plan, find out whether you get to keep that plan in retirement. Most people end up signing up for Medicare to cover at least some of their medical costs in retirement. You may also need to purchase a gap insurance policy to cover the difference. Research plans and their prices, so you know how much you will need to set aside to reach your financial goals.
Even at age 50, you should continually be working towards your financial goals. If you start with the steps above, you'll be in great shape.