Prime earning years are generally thought to be late 40s to late 50s*. (Latest figures show women's peak between ages 35 and 54, men between 45 and 64.) After that, most people’s incomes typically level off. Promotions favor younger people with longer futures*. The children are probably either in their last years of high school or in college, in effect anchoring the paying parents to their longtime residence and discouraging moving far away for the sake of a new job with a new employer. But, on the positive side, the promotions and the raises have already been generously distributed by this time, so the income is at or near its peak. That means that important — but mostly pleasant — decisions are called for on what to do with these rewards for a long career well conducted. It’s time to take aim at building wealth to cushion the transition from hard work to soft retirement.
The first order of business is to ensure that your income is put toward that critical purpose. That means paying off debt as quickly as you can. If any of that mortgage is still casting its shadow, take the appropriate action to erase it. Consider dedicating some of that income to paying off the remainder of your house debt, or, at least, increasing the monthly payments to speed up the process. The same is true for college loans for which you may be responsible, auto, home improvement or any other kinds of loans you may have undertaken. You don’t want to run those final laps toward retirement carrying the weight of debt that will offset the assets for which you have waited for so long.
Some people long to take advantage of higher income and lower bills by buying a bigger house or a vacation cottage, taking expensive trips or purchasing a boat. Assess whether, in all honesty, fulfilling those yearnings is as important to your overall happiness as providing for your comfortable retirement. If it is, by all means set your course that way. But talk it over and make sure it won’t subtract too much from your later lifestyle.
According to the 2017 Retirement Confidence Survey by the Employee Benefit Research Institute and Greenwald & Associates, 28 percent of Americans age 55 and older have saved less than $10,000 for retirement; 35 percent have saved $250,000 or more**. According to advice compiled by Fidelity Investments, by age 30 you should have saved a sum equal to your current income; by 50, you should have saved six times your income; by 60, eight times***. Now is the time to make sure you don’t wind up short of the mark.
In fact, here’s a worthwhile exercise: Determine what your retirement income would be if you retired this very minute. Practice living on that income for a month or two and see how it goes. Some expenses would disappear — or, at least, be substantially reduced — upon retirement. Presumably, you’d spend less on gas or transportation to get to work, maybe you’d eliminate dry-cleaning bills altogether. Consider whether you could retire other expenses. Not only would this practice exercise give you a clearer idea of how financially prepared you are for retirement, it may enable you to put away still more money.
Here are some other steps to consider:
- Get rid of as much debt as possible. If you have a large credit-card debt, a medium car loan and a low-interest mortgage, tackle them in that order. Retire your most expensive debt first, since that is costing you the most in interest. But, by all means, don’t pay off your mortgage at the expense of your retirement savings. The goal is to have robust resources when the paycheck goes away.
- Consider ways to make use of your expertise in ways outside your job. A typical way to exploit your knowledge is to become an adjunct professor teaching classes at a local college. There are others, though: consulting, teaching, coaching, training. You can become known in the community for your authority on a subject by speaking at Rotary or Kiwanis clubs or participating on municipal boards or panels.
- One in four Americans age 44 to 70 has visions of one day becoming an entrepreneur, according to a study by Encore.org and funded by MetLife Foundation****. The time to move toward realizing that dream is while you’re still working and earning. Starting three to five years before retirement is recommended. Evenings and weekends will get you started and give you an idea whether this will be a lucrative and satisfying pursuit.
- Examine your life insurance and weigh whether you’ll want long-term-care insurance. Your life-insurance needs might have changed since you bought your policy.
- Consolidate your 401(k) plans if you have several because of having changed jobs. They'll be easier to keep track of — and you'll be better able to properly diversify.
- Consider investing some of your money in a Roth IRA, if your income permits. Your tax bracket and income earned will determine eligibility, but there might be advantages to having some of your money in a Roth. A Traditional IRA is tax-free until distributions are taken from the account. A Roth is the other way around: Contributions are taxed but not withdrawals, if certain requirements are met. Remember, too, that tax law requires IRA holders to begin taking out at least minimum amounts, known as required minimum distributions, or RMDs, from their accounts once they reach age 70½. Technically, that means the IRA money must start coming out in specific increments no later than April 1 following the year you reach that age. The exact distribution amount changes from year to year. It is calculated by dividing an account's year-end value by the distribution period determined by the Internal Revenue Service.
ALEC Investment Advisors, the retirement, investment and insurance planning program located at ALEC, can help you determine where you stand financially now, where you want to be in the future, and ways you can get there.
You’ll want to build as much wealth as quickly as you can. Don’t just wait until you’re on the verge of retirement to find out how much you have. Set your own course now.
Article created by John Kho Consulting. The views and opinions expressed in this article are those of the author, are for general education purposed only and should not be construed as investment advice of an investment recommendation. For a discussion of your specific needs and circumstances, please contact your financial advisor.
Representatives are not tax advisors nor attorneys. For information regarding your specific tax situation, please consult a tax professional. For legal questions, please consult your attorney.
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* United States Department of Labor, Bureau of Labor Statistics, Women’s and Men’s earnings by age in 2016 (accessed March 15, 2018). Available from https://www.bls.gov/opub/ted/2017/womens-and-mens-earnings-by-age-in-2016.htm
** Employee Benefit Research Institute and Greenwald & Associates, 2017 Retirement Confidence Survey (accessed March 15, 2018). Available from https://www.ebri.org/pdf/surveys/rcs/2017/RCS_17.FS-4_Age.Final.pdf
*** Fidelity Investments, How much do I need to save for retirement? (accessed March 15, 2018). Available from https://www.fidelity.com/viewpoints/retirement/how-much-money-do-i-need-to-retire
**** Halvorsen Cal, “Encore Entrepreneurs: Creating Jobs, Meeting Needs,” available from https://encore.org/blogs/encore-entrepreneurs-creating-jobs-meeting-needs/.
Study sponsor: Encore.org (formerly Civic Ventures), Nov. 8, 2011. Available from https://encore.org/wp-content/uploads/files/EntrepreneurshipFastFacts.pdf. Accessed March 15, 2018.