How should my wife and I begin saving for retirement at 51 years old?
I'm 51 years old and my wife and I are without a retirement plan. Now that our son is through college, we're thinking about our financial future. We don't have a retirement plan but have three life insurance policies with a total cash value of approximately $60,000. Should we remove some or all of that cash and invest in a Roth IRA? How should we begin saving for retirement?
Congratulations on helping your son through college! Now as “empty nester’s” the task of saving for retirement. Without knowing much about your situation, here is a simple 3 point guide to get you started.
1- Establish a goal of how much income you need to have in retirement. This could be established by a percentage of your current budget. This helps you determine four things, (1) how much you need to accumulate, (2) the withdraw rate, (3) when and for (4) how long it could last.
2- Have a good understanding of your budget and what other goals would come in to play. Your budget would help maintain your lifestyle and also protect you if an unexpected event occurred. Do you have adequate protection for premature death, disability, high medical expenses and an emergency fund. What other activities will require a consistent savings program, such as travel, or a big purchase/expense, i.e., travel, second home or your son’s wedding (haha).
3- Lastly, where to fund your retirement in the most effective manner. Do you have access to an employer plan and do they match a percentage. This is the fastest way to boost your retirement savings program. Next, consider the various individual retirement account options such as an IRA or ROTH IRA to name a few. This point ties back to your goal because you need a running start to fund as much as possible and need to consider the risk you are willing to take.
You should be careful in reviewing the options with your existing life insurance policies, in terms of how or what to do with them. Things to consider, when did you purchase your policies and has your health changed? The cost of that same policy might cost more now and are you still insurable? Is there enough cash value that the policy would sustain it self or for how long? What does the cost of life insurance premium schedule look like in the later years and will the funding keep pace to sustain it.
Consider working with a financial advisor that you feel comfortable either on an annual or on an ongoing basis to help you get organized.
Now that your son is out of college, ask yourself if you need all three or any of those life insurance policies. If your wife depends on your income or vice versa, have one life insurance policy for the breadwinner. This policy should be strictly a term life insurance policy for which monthly premium is typically very low especially for someone with a good health condition. I think it does make sense to terminate some of all of the cash value life insurance and put the money in two Roth IRAs if you qualify. If you have money left over still, you should open a brokerage account and start saving in equities intelligently.
If you need further help, you can request a consultation.
Congratulations on getting your son through college - a nice financial milestone.
To start saving for retirement, first, you should figure out how much you need to live on in retirement. Then, you can determine the amount you would need to save each year. Retirement calculators could help you with this. A financial planner probably could do a better job for you, taking into account taxes, Social Security, health care costs, etc.
Let's say you determine that you need to accumulate $500,000 by age 65. Assuming 5% returns, you would need to save about $25,512 per year. We will ignore taxes for now.
Knowing this amount (saving and investing $25,512 annually to get to $500,000 by age 65), you should look at the options available to you for investing. If you or your wife have a 401(k) plan at work, especially if there is a match from the employer, that is probably the best place to save money. The tax deferral at this stage of life might be valuable. But if not, many 401(k) plans offer Roth accounts, as well.
A separate question is what to do with three life insurance policies with a cash value of $60,000. We do not typically use cash value life insurance as part of our financial plans. We recommend term life insurance because the cost of term per $1,000 of death benefit is much less than the cost of cash value insurance. The commission paid to life insurance salespeople is much higher for cash value than term.
We believe a person should have sufficient term life insurance to cover an untimely death while he or she is building assets. Had you died before your son finished college, for example, your life insurance payout should have provided for his college. If people reach their savings goals, there is a point where they have sufficient assets and do not need life insurance. This should be part of the financial plan.
Life insurance policies. It is possible that the policies you have in place are OK and should be left alone. Another option available when people are insurable without being rated up for a health issue is to replace cash value insurance with term insurance. A 15 year term policy might be appropriate for someone who is 51. In that case, the cash value could be freed up for investment.
How to access the cash value? Tax rules allow the conversion of cash value into an annuity without paying taxes. This is called a 1035 tax free exchange. For life insurance, the principal can be withdrawn before the gains. So, some people take out the principal (tax free amount) from their cash value and then roll the taxable portion to an annuity. Up to $6,500 per spouse of tax free withdrawals could be put into a Roth IRA, assuming both are eligible for Roth. Then, only the taxable portion could be exchanged into one or more annuities. I would caution against the high-fee annuities, which have long periods of surrender charges.
After money from life insurance is exchanged into an annuity, the gains (taxable) must be withdrawn before the principal. That is the opposite of a cash value life insurance policy (tax free money comes out first), which is why you want to plan any disbursements/exchanges from life insurance carefully. Last point is that once you exchange money from life insurance to an annuity, you cannot exchange it back to life insurance without being taxed on any gains.
I hope this discussion is helpful. We would need to know more about your situation to give you recommendations.
Hi, thank you for your question. Just on the surface, those policies can be extremely valuable. I would do a complete review of your policies first so that options can be discussed with you. Those policies can be a part of your long term outlook for retirement.
In regards to how to save - here are the key questions you are going to have to address to ensure you have the desired retirement outlook you are looking for long term:
1. What rate of return do I need on my savings and investments in order to retire at my current standard of living and have my money last to live expectancy?
2. How much do I need to put away on a monthly or annual basis in order to retire at my current standard of living and have my money last to live expectancy?
3. If I didn't change anything I am doing now, how long would I have to work and have my money last to live expectancy?
4. If I didn't change anything I am doing now, what would be my potential lifestyle reduction at retirement in order for my money to last til life expectancy?
If you don't know the answers to these questions, reach out to me and I would be honored to share how these questions affect your overall retirement picture.
Best wishes! - Roger
Congratulations on getting your son through college. Although you are late in 'beginning' you should absolutely start saving for retirement. What kind of account you use partly depends on your current tax bracket.
First, if your employer has a company retirement plan, you should max that out to get the employer matching contributions. Now that you are over 50 years old, you can defer up to $24,500 into employer provided 401k, 403b, 457b and Roth 401k plan. That includes a solo 401k if you are self-employed.
If your employer does not offer a company plan, use a traditional IRA or Roth IRA depending on your tax bracket. The higher brackets means you are able to lower your current income by the amount of the contribution (up to $6,500/year for ages over 50). More information would help with that decision.
If only one of your is employed, you may make an equal 'spousal' contribution to a spousal IRA or Roth as long as you make at least $13,000 in earned income.
If your cash flow allows, you also need a taxable brokerage account for savings over the IRA contribution limits. Since you are late to the game, you need to sock away as much as possible. In a taxable account you invest with tax consequences in mind. Meaning you use long-term equity investments (over 365 days), tax-free investments (municipal bonds) and qualified dividend paying equity investments.
If those terms are Greek to you I suggest you find a CERTIFIED FINANCIAL PLANNER (TM) to help you. You can also learn on Investopedia. I also recommend BetterInvesting, a non-profit organization that teaches people how to research companies and maintain a portfolio. See www.betterinvesting.com for a free trial.
Until you have a overall picture of your financial situation I would not make any recommendations on your life insurance. You need to have your options analyzed to see if that would help you.
Keep learning and investing,
Christi Powell, CFP, RICP