The 45- to 50-year-old age range is probably one of the most challenging to plan for on a general scale, as it includes individuals who are just starting a family, empty nesters, individuals who are starting new careers and pre-retirees. While it's not uncommon for any age range to include individuals at varying stages of life, 45 to 54 appears to be the age-range within which individuals have the greatest differences.
Ideally, if you are within this age range, you should be close to your retirement saving goals. But if you are not, there are opportunities to increase the pace at which you contribute to your retirement nest egg. These include starting your own business, adopting a retirement plan for the business, and making catch-up contributions. In this article, we'll provide some advice for those nearing retirement. (Not in this age bracket? See Savings Plans For Minors, Retirement Savings Tips For 18- To 24-Year-Olds, 25- To 34-Year-Olds, 35- To 44-Year-Olds, 55- To 64-Year-Olds and 65-Year-Olds And Over.)
1. If You're Starting Your Own Business
If you are starting your retirement nest egg late because you started working late as a result of pursuing academic qualifications, your MBA or Ph.D. may come in handy as the knowledge you gained can likely be used to start your own business. But whether or not you have an MBA or Ph.D., if you have a talent or skill that can be used to produce income, consider starting your own business while keeping your regular job. This will not only produce additional income, but may also allow you to establish and fund a retirement plan through your business.
Depending on the type of retirement plan you establish, you could contribute as much as $51,000 to your retirement account, in addition to any contributions made to your account under your employer's retirement plan. Compensation allowing, your contributions for the year could be as much as $102,000 for 2013 plus catch-up contributions of $5,500. Let's look at an example:
52-year-old JP works for a corporation and participates in its 401(k) plan. JP also runs a consulting business on the side. JP adopts an SBO 401(k) for his consulting business. (For details on the SBO 401(k) plan, see 401(k) Plans For The Small-Business Owner.)
Compensation allowing, JP\'s contributions to his employer\'s 401(k) plan can be up to $51,000 plus catch-up, and his contributions to his SBO 401(k) plan can be up to $51,000 plus catch-up contributions.
Caution: If common ownership or certain affiliation exists for multiple businesses, those businesses may be treated as one business for retirement plan contributions, limiting the aggregate contributions to $51,000. An ERISA attorney should be consulted for assistance with determining whether the businesses can be treated as separate entities for plan purposes unless it is 100% clear that no common ownership or affiliation exists. (Get some tips on starting and running a successful business in In Small Business, Success Is Spelled With 5 "C"s.)
Additional income from your own business or a second job not only allows you to add more to your tax-deferred retirement accounts, it could also create additional disposable income, allowing you to add more to your other accounts in your nest egg, including your after-tax accounts.
Before starting a business, you may want to consult with an attorney about the different legal structures to help you decide which one would be most suitable for your business. These include sole proprietorships, partnerships, limited liability companies and corporations.
2. If You're Playing Catch-up: Age 50 and Over
If you start your retirement savings program later in life, don't be disheartened. The old adage, "better late than never", certainly applies. In fact, there are special provisions for individuals who are of a certain age to play "catch-up", by contributing amounts in excess of the limit that applies to others. This catch-up feature works as follows:
If you are at least age 50 by the end of the year, you have an opportunity to play catch-up by funding your retirement nest egg if you contribute to an IRA or make salary deferral contributions to a 401(k), 403(b) and/or 457 plan.
Generally, an individual is eligible to contribute the lesser of $5,500 or 100% of compensation to an IRA. However, if the individual reaches age 50 by the end of the year, an additional amount of up to $1,000 can be made in IRA contributions for the year.
- Employer-Sponsored Plans
If you participate in an employer-sponsored plan and you are at least age 50 by the end of the year, you may also be allowed to make contributions in excess of the limits that apply to individuals who do not reach age 50 by year-end.
- For SIMPLE IRAs and 401(k) plans, where a participant may defer 100% of compensation up to $12,000, you may contribute an additional amount of $2,500.
- For 401(k), 403(b) and 457 plans, where a participant may defer $17,500, you may defer an additional $5,500.
- Contribution Limit for Multiple Retirement Plans
Generally, if you participate in multiple employer-sponsored plans with salary deferral features, your aggregate salary deferral contributions cannot exceed the dollar limit that applies for the year.
3. If You Get Married or Divorced
Getting married or divorced can have a significant impact on your retirement nest egg. If you are getting married, this could affect your retirement nest egg in several ways. From a beneficial perspective, your financial projections can include your spouse's assets and income as well as projected shared expenses.
However, while projections may show that the amount you save on a regular basis can be less than the amount you would save if you were not married, it may be wise to continue saving at the higher rate if you can afford to do so, as it's only practical to be ready for life-changing events, such as death and divorce. If your spouse dies and you do not remarry, you would be solely responsible for funding your retirement nest egg. Should you get a divorce, you may be required to share your retirement assets with your spouse. Alternatively, you could be on the receiving end as your spouse may be required to share his/her retirement assets with you.
Usually, retirement assets are included in property settlements when divorce occurs. (To continue reading about divorce and its impact on your finances, see Marriage, Divorce And The Dotted Line, Getting A Divorce? Understand the Rules Of Dividing Plan Assets.)
Tip: If you had IRA assets before you were married, consider whether you want to keep those assets in a separate IRA and add new contributions during your marriage to a new IRA. If state law determines that marital or community property is defined as that which is accumulated during the marriage, you may not be required to include your premarital IRA assets in the property settlement. Consult with a local attorney regarding the rules that apply to your state.
4. If You're Using Your Spouse's Income to Fund Your Retirement
If you have no income from employment, you may use your spouse's income to fund your own Traditional IRA or Roth IRA (or a Spousal IRA). This allows you to add to your own retirement nest egg. (To read more about spousal retirement benefits, see The Benefits Of Having A Spouse.)
5. If You Balance (or Rebalance) Your Portfolio
Your asset allocation for your retirement nest egg should be reassessed periodically. This will give you the opportunity to determine whether you need to change your asset allocation. As you get closer to your retirement age, you may need to choose investments that are less risky, as there is less time to recover investment losses. However, this rule does not apply to everyone. You may want to consider consulting with a competent financial advisor for assistance with choosing an asset allocation model that is right for you. (For more on asset allocation, see Achieving Optimal Asset Allocation, Asset Allocation Strategies and our Risk And Diversification tutorial.)
6. Other Factors
You may be faced with several issues that affect your retirement planning, such as choosing whether to pay for your child to go to college or providing for adult children who still live at home instead of putting much-needed funds into your nest egg. (This subject is also covered in the younger age bracket article, Tips For 35- To 44-Year-Olds.) Consider too whether it would be wise to purchase long-term care (LTC) insurance, which can help to prevent your retirement savings from being used to cover expenses from an unexpected long-term illness, instead of being used to finance the retirement lifestyle you have planned. (To learn more about long-term care insurance, see Long-Term Care Insurance: Who Needs It?)
Whether you are just starting a career or your retirement nest egg is on track and you are planning for retirement, we hope you find these tips helpful. For the 45- to 54-year-old age range, there is still time to get on track. The need to insure your retirement nest egg against unplanned incidental or significant expenses also increases, and may necessitate the need for insurance products that can be used to cover such expenses. See the entire series of age-related articles for other tips that may apply to you.