If you're between 55 and 64 years old, you still have time to boost your retirement savings. Whether you plan to retire early, late, or never ever, having an adequate amount of money saved can make all the difference, both financially and psychologically. Your focus should be on building out—or catching up, if necessary.
It’s never too early to start saving, of course, but the last decade or so before you retire can be especially crucial. By then you’ll probably have a pretty good idea of when (or if) you want to retire and, even more important, you'll still have time to make adjustments if you need to.
If you discover that you need to put more money away, consider these six time-honored retirement savings tips.
- If you're between 55 and 64, you still have time to boost your retirement savings.
- Start by increasing your 401(k) or other retirement plan contributions if you aren't already maxed out.
- Consider whether a bigger pension or a higher Social Security benefit is worth working a little longer.
1. Fund Your 401(k) to the Max
If your workplace offers a 401(k)—or a similar plan, such as a 403(b) or 457—and you aren’t already funding yours to the max, now is a good time to rev up your contributions. Not only are such plans an easy and automatic way to invest, but you’ll be able to defer paying taxes on that income until you withdraw it in retirement.
Because your 50s and early 60s are likely to be your peak earning years, you may also be in a higher marginal tax bracket now than you will be during retirement, meaning that you’ll face a smaller tax bill when that time comes.
This applies, of course, to traditional 401(k)s and other tax-advantaged plans. If your employer offers a Roth 401(k) and you choose that option, you’ll pay taxes on the income now but be able to make tax-free withdrawals later.
The maximum amount you can contribute to your plan is adjusted each year to reflect inflation. In 2023, it’s $22,500 for anyone under age 50. But if you’re age 50 or older you can make an additional catch-up contribution of $7,500 for a grand total of $30,000.
2. Rethink Your 401(k) Allocations
Conventional financial wisdom says that you should invest more conservatively as you get older, putting more money into bonds and less into stocks. The reasoning is that if your stocks take a tumble in a prolonged bear market, you won’t have as many years for prices to recover and you may be forced to sell at a loss.
Just how conservative you should become is a matter of personal preference and risk tolerance, but few financial advisers would recommend selling all of your stock investments and moving entirely into bonds, regardless of your age. Stocks still provide growth potential that bonds do not. The point is that you should remain diversified in both stocks and bonds, but in an age-appropriate manner.
A conservative portfolio, for example, might consist of 70% to 75% bonds, 15% to 20% stocks, and 5% to 15% in cash or cash equivalents, such as money-market funds. A moderately conservative one might reduce the bond portion to 55% to 60% and boost the stock portion to 35% to 40%.
If you’re still putting your 401(k) money into the same mutual funds or other investments you chose back in your 20s, 30s, or 40s, now’s the time to take a close look and decide whether you’re comfortable with that allocation as you move toward retirement age.
One handy option that many plans now offer is target-date funds, which automatically adjust their asset allocations as the year you plan to retire draws closer. Target-date funds can have higher fees, so choose carefully.
3. Consider Adding an IRA
If you don’t have a 401(k) plan available at work—or if you’re already funding yours to the max—another retirement investing option is an individual retirement account (IRA). The maximum you can contribute to an IRA in 2023 is $6,500, plus another $1,000 if you’re 50 or older.
People who turn 50 at the end of the calendar year can make the entire annual catch-up contributions for that year, even if their birthday falls at the end of the year.
IRAs come in two varieties: traditional and Roth. With a traditional IRA, the money you contribute is pre-tax, meaning it's tax-deductible in that year. With a Roth IRA, you get your tax break at the other end in the form of tax-free withdrawals.
The two types also have different rules regarding contribution limits.
If neither you nor your spouse has a retirement plan at work, you can deduct your entire contribution from a traditional IRA. If one of you is covered by a retirement plan, your contribution may be at least partially deductible, depending on your income and filing status.
As mentioned, Roth contributions aren’t tax-deductible, regardless of your income or whether you have a retirement plan at work. The taxes on that money will be paid in that year.
However, your income determines whether you’re eligible to contribute to a Roth in the first place. The allowable contribution is reduced in steps through an income range, reaching zero at the top of the range. The numbers are adjusted yearly.
For the 2023 tax year, the income phase-out range for taxpayers making contributions to a Roth IRA is between $138,000 and $153,000 for singles and heads of household. For married couples filing jointly, the range is $218,000 to $228,000. For a married individual filing a separate return, it's $0 to $10,000.
Note, too, that married couples who file their taxes jointly can often fund two IRAs, even if only one spouse has a paid job, using what’s known as a spousal IRA. IRS Publication 590-A provides the rules.
4. Know What You Have Coming to You
How aggressive you need to be in saving also depends on what other sources of retirement income you can reasonably expect. Once you’ve reached your mid-50s or early 60s, you can get a much closer estimate than you could have had earlier in your career.
If you have a defined-benefit pension plan at your current employer or a previous one, you should be receiving an individual benefit statement at least once every three years. You can also request a copy from your plan’s administrator once a year. The statement should show the benefits you’ve earned and when they become vested (that is when they belong fully to you).
It’s also worth learning how your pension benefits are calculated. Many plans use formulas based on salary and years of service. So you might earn a bigger benefit by staying in the job longer if you’re in a position to.
Once you’ve contributed to Social Security for 10 years or more, you can get a personalized estimate of your future monthly benefits using the Social Security Retirement Estimator. Your benefits will be based on your 35 highest years of earnings, so they may rise if you continue working.
Your benefits will also vary depending on when you start collecting them. You can take benefits as early as age 62, although they will be permanently reduced from the amount you’ll receive if you wait until your “full” retirement age (currently 66 or 67 for anyone born after 1943). You can delay receiving Social Security up to age 70 to get the maximum benefit.
To put it in some perspective, the average monthly retirement benefit as of November 2022 is $1,691.53 while the highest possible benefit—for someone who paid in the maximum every year starting at age 22 and waited until age 70 to start collecting—is $4,194 in 2022. The maximum benefit in 2023 is $4,555.
And keep in mind that you'll lose some portion of your Social Security payment to income taxes if your total income is as little as $25,000 for an individual or $32,000 for a couple. Social Security is taxable, and it has been since 1984.
Although you can take penalty-free distributions from your retirement plans as early as age 50 or 55 in some cases, it's better to leave the money untouched and let it keep growing.
5. Leave Your Retirement Savings Alone
After age 59½ you can begin to make penalty-free withdrawals from your traditional retirement plans and IRAs. With a Roth IRA, you can withdraw your contributions—but not any earnings on them—penalty-free, at any age.
There is also an IRS exception, commonly known as the Rule of 55, that waives the early-withdrawal penalty on retirement plan distributions for workers 55 and over (50 and over for some government employees) who lose or leave their jobs. It's complex, so it's best to talk to a financial or tax advisor if you are considering using it.
But just because you can make withdrawals doesn’t mean you should—unless you absolutely need the cash. The longer you leave your retirement accounts untouched the better off you are likely to be; however, you must begin to take required minimum distributions starting at the age of 73 if you were born between 1951 and 1959, or 75 if you were born in 1960 or after. This is an increase from the previous age of 72.
6. Don’t Forget About Taxes
Finally, as you tote up your retirement savings, remember that not all of that money is yours to keep. When you make withdrawals from a traditional 401(k)-type plan or traditional IRA, the IRS will tax you at your rate for ordinary income (not the lower rate for capital gains).
So if you’re in the 22% bracket, for example, every $1,000 you withdraw will net you just $780. You may want to strategize to hold onto more of your retirement funds—for instance, by moving to a tax-friendly state.
What Is the Best Thing to Put Money in for Retirement?
There is no one "best thing" to put money in for retirement. Retirement investments will vary depending on the person's financial profile, family situation, and needs. Some good investments for retirement are defined contribution plans, such as 401(k)s and 403(b)s, traditional IRAs and Roth IRAs, cash-value life insurance plans, and guaranteed income annuities.
What Is the Most Important Thing When It Comes to Saving for Retirement?
The most important retirement strategy is to start saving early. Saving for retirement early is smart because of the compounding returns you receive over time in your investment accounts. It also ensures that you've saved over your entire working life as opposed to rushing to save towards the end of your working life, when it may be too late to build enough wealth for retirement.
What Are the Biggest Retirement Mistakes?
The biggest retirement mistakes include not saving early, not taking healthcare costs into consideration, taking Social Security benefits early, and spending too much money in your early retirement years.
The Bottom Line
Retirement should be an enjoyable period in life, yet it can be stressful for those who have to worry about money. Planning for your retirement early and understanding the available retirement plans and strategies can help make retirement a fulfilling time in your life.