A person in there 50s is in a unique situation when it comes to planning for retirement. A person in their 50s most likely has established their career as well as their lifestyle, yet they still have 10-20 years before retirement. Having a relatively stable lifestyle with retirement in the not too distant future makes financial planning both important and fruitful for most people in their 50s for 5 reasons.
In a person’s 50s they have been likely working in their current career for multiple decades. Additional promotions can often happened, but they are more predictable and annual raises are probably expected. With income being predictable, savings rates can also be predicted with some accuracy such as contributions to retirement accounts (401K, IRA, etc…), figuring out if/when they can pay off their mortgage, and when they will eliminate any other debts. By using some sort of projection of asset growth a person in their 50s can accurately estimate what their assets will look like in retirement.
I have seen two schools of though when it comes to projecting retirement expenses. The first school of thought is to actually list all of a person’s current and expected expenses and adjust for inflation accordingly. The second school of thought (and my preferred method) is to start with current income, back out savings, and adjust for lifestyle changes and inflation from there. I like the second method, because I have found people are very good at underestimating what they spend. Either way, both these methods can work as accurate predictors for retirement.
Time to Change
Once a person knows what they will have as far assets and expenses in retirement it takes a little bit of algebra to figure out their withdrawal rate. Subtract any fixed income in retirement like social security or pension income from expenses. Divide this number by the total investible assets and you have the withdrawal rate. Walter Updegrave explains what a reasonable withdrawal rate is in his article for CNN Money when he says, “That’s a judgment call, but I’d say 3% to 4% is a decent place to start if you want your savings to be able to support you 30 or more years.” As explained in my previous post 4 Ways to Plan for Retirement in your 40s, a person in their 50s can look at a number of ways to alter their plan.
If insurance products like life insurance, long term care, annuities, etc… make sense in retirement it is worth it to start looking before retirement. Insurance starts getting expensive quickly into a person’s 60s for obvious reasons. I don’t suggest anybody just start going out and buying any or all of the above types of insurance in their 50s, but it is worth seeing if some insurance options make sense with an advisor. Many annuities in particular can be much more beneficial if purchased up to 10 years ahead of when a person needs the money. I could write a whole thesis on annuities, and I will most likely dedicate at least one whole blog post to annuities.
At some point everyone will hit the big one. When some one is in their 50s I would hope that they have accumulated enough assets that it is worth while to take a hard look at estate planning. For most people estate planning includes a health care directive, power of attorney, and adding beneficiaries to accounts. As the estate becomes more complex and real-estate and other larger assets become involved, a trust can make a lot of sense. Estate planning may not be the most fun discussion some one can have with their family, but by the time someone is in their 50s mortality starts becoming more of a reality and is important to plan for.