If you're 45 to 54 years old, you may be at the midpoint of your career when your income is higher. Of course, your financial obligations for home and family may be higher, too—and that can make retirement planning tricky. Here are six tips to help keep (or get) your retirement savings on track.
- Small business owners may be able to stash extra savings by funding retirement accounts designed for small businesses and the self-employed.
- If you're age 50 or older, you can make "catch-up" contributions to your IRAs and employer-sponsored retirement plans.
- Married couples can use spousal IRAs to fund an IRA for a spouse who doesn't work for pay.
- As you get closer to retirement age, you may want to shift to less risky investments.
The 45- to 54-year-old age range is probably one of the most challenging to plan for on a general scale. After all, it includes people who just started a family, became parents, started a new career, or became empty-nesters.
While it's not uncommon for any age range to include individuals at varying stages of life, 45 to 54 appears to be the range within which people have the greatest differences.
Ideally, if you are within this age range, you are gaining traction on your retirement savings goals. But if you're 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.
1. Start Your Own Business
If you're starting your retirement nest egg late because you were pursuing academic qualifications, your MBA or Ph.D. may come in handy. 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 produce additional income and 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 $57,000 for the 2020 tax year ($56,000 for 2019) to your retirement account, according to the Internal Revenue Service (IRS). That's in addition to any contributions made to your account under your employer's retirement plan.
You Can Have an Employer-Sponsored 401(k) and a Solo 401(k)
Let's look at an example. Say 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 a Solo 401(k) for his consulting business.
Compensation allowing, JP's contributions to his employer's 401(k) plan can be up to $19,500 in 2020 ($19,000 for 2019), plus a $6,500 catch-up contribution. He can also contribute 25% of his net earnings from self-employment for a total of $57,000.
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 $57,000 for 2020 ($56,000 for 2019).
Additional income from your own business or a second job allows you to add more to your tax-deferred retirement accounts. Of course, it also creates more disposable income, which allows 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. Take Advantage of Catch-up Contributions
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 an extra amount.
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:
- IRAs: You can contribute the lesser of $6,000 or 100% of compensation to an IRA, or $7,000 if you're age 50 or older for 2019 and 2020.
- Employer-Sponsored Plans: If you have a SIMPLE IRA, you can defer 100% of compensation up to $13,500 for 2020 ($13,000 for 2019), or $16,500 if you're age 50 or older ($16,000 for 2019). With 401(k), 403(b) and 457 plans, you can defer up to $19,500 ($19,000 for 2019), or $26,000 ($25,000 for 2019) if you're age 50 or older.
In general, 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. Know Your State's Laws if You Get Married or Divorced
Getting married or divorced can have a significant effect 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 need to save on a regular basis is 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.
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 or her retirement assets with you.
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. Use Your Spouse's Income to Help 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 through a spousal IRA. This allows you to add to your own retirement nest egg—and boost your overall retirement savings as a couple.
5. 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 want 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.
6. Think About Other Retirement Costs
You may be faced with several issues that affect your retirement planning. For example, you may have to choose whether to pay for your child's college or provide for adult children who still live at home, instead of putting much-needed funds into your nest egg.
Consider also whether it would be wise to purchase long-term care (LTC) insurance. This can help prevent your retirement savings from being used to cover expenses from a long-term illness—instead of being used to finance the retirement lifestyle you have planned.
The Bottom Line
The 45- to 54-year-old age range is the time to get on track and kick your retirement savings into high gear. Whether you are just starting a career—or your own business—or you've been saving for years, these retirement planning tips can be helpful.