Welcome to your 50s! You’re officially halfway to age 100, and you’re starting to feel like it too! I always say that when everything starts to hurt, it’s a good time to reassess your finances. This week, let’s review some of the more important considerations for those of us in our 50s.
Your 50s is a unique time for investors. For starters, you’re probably making more money than you ever have. While this is a good thing, you want to be wary of lifestyle creep. This is where your expenses start to rise with your income, and before you know it, you don’t seem to have any more disposable income now than you did when you made significantly less money. You may be experiencing a lot of family changes such as kids graduating college, getting married, etc. These events may cause your expenses to fluctuate wildly for a few years. Your 50s is a time to really get a handle on your expenses so that you can maximize retirement savings, because before you know it, you’ll be facing retirement whether you are ready or not.
- Drop the debt. Start to get rid of any debt that doesn’t serve you, meaning anything that isn’t deductible or on assets rising in value. Think credit cards, personal loans, etc. Start with the highest interest rate debt first and throw all extra money towards that debt until it’s gone. Repeat with the next highest debt, etc. The less debt you have in retirement, the less income you’ll need to cover expenses, and that can translate to earlier retirement.
- Max out your retirement contributions. Age 50 is a magic number for retirement savers because people aged 50 and over can now make additional contributions to their retirement plans. This applies to almost every type of retirement account. Those extra contributions can go a long way to beefing up your retirement accounts.
- Start to envision what you might like retirement to look like. Retirement for someone in their 50s can be 5-15 years away. That isn’t as long as you think. Start thinking about what it looks like in your mind. Where do you want to live? Do you want to travel? Play golf 5 days a week? How much you need to have saved for retirement is extremely dependent on how you intend to spend your time. Staying home and going out to dinner 1 night a week costs a lot less than taking 3-5 big trips a year and buying a second home. Have an idea of what you imagine retirement like for yourself, and if applicable, discuss it with your spouse. Start to align your ideal retirement dreams together and start to build your plan based on that.
- Review your portfolio. If you are 15 years away from retirement, I’m not too concerned about having more risk in the portfolio. If you are closer to 5 years out, then it is time to begin to design your portfolio to match your time horizon. As you get closer to retirement, you may consider removing several years’ worth of expenses from the stock market in order to minimize the potential effect of sequence of return risk. This is the risk of the markets being down the year you retire, or soon after. By creating this buffer, you give the rest of your investments time to recover so that you aren’t withdrawing money from a falling portfolio, thereby creating the effect of negative compound interest.
Your 50s can be an exciting time in your life filled with a lot of change. Like the rest of your life up to this point, it will probably go by much faster than you expected. By following these steps, you can hopefully be better prepared heading into your future retirement.
Frequently Asked Questions About Your 50s
1. Why is my 50s considered such an important decade for retirement planning?
Your 50s are often your peak earning years, making this a critical time to maximize savings and prepare for retirement. With retirement potentially only 5–15 years away, it's important to control spending, avoid lifestyle creep, and create a clear financial strategy.
2. What debts should I focus on paying off before retirement?
Prioritize paying down high-interest, non-deductible debt such as credit cards and personal loans. Reducing debt before retirement can lower your future income needs and may provide greater flexibility when deciding when to retire.
3. Should I change my investment strategy as I get closer to retirement?
As retirement approaches, your investment portfolio should align with your time horizon and income needs. Those within five years of retirement may want to reduce risk and consider setting aside several years' worth of expenses outside the stock market to help manage sequence of returns risk.