Once you reach the big 5-0, blowing out birthday candles can feel less like a celebration and more like fanning the flames on a pyre of financial obligations. This is the decade when the costs of kids, aging parents, cars and homes converge, and questions about retirement begin looming large.
Retirement saving benchmarks can put your portfolio’s value in perspective. For example, according to T. Rowe Price, by age 50 an individual should have six times their salary saved. That’s $420,000 for someone earning $70,000 a year.
But an even better check-in for midlife investors is to run a few different saving and investing scenarios through a good retirement calculator. The exercise will provide more accurate results than when you were younger and projected retirement expenses were a bit fuzzier.
Did the math and found you’re short of your goals? There’s still time to make headway. Here’s how.
1. Make up for lost time
The older, wiser and hopefully wealthier you (these are your peak earning years, after all) can overcome past savings shortcomings via catch-up contributions to tax-favored retirement accounts.
For tax year 2020, the IRS allows those age 50 and over to funnel an additional $6,500 a year to a 401(k), on top of the normal $19,500 contribution limit ($26,000 total). These savers can also contribute an extra $1,000 annually to an IRA, in addition to the usual $6,000 limit ($7,000 total).
This portfolio padding can significantly improve your retirement prospects. Saving $7,000 instead of $6,000 in an IRA from age 50 to 65 and earning a 6% average annual return can add nearly $24,000 to your savings by retirement. Max out your 401(k) at work with that extra $6,500 a year and you'll end up with about $160,000 more by retirement, versus what you'd have if you didn't make the catch-up contributions.
2. Stay with stocks
Investors of all ages experience blood-pressure spikes when the market gyrates, as it has done a few times lately. But now’s not the time to ratchet back your exposure to stocks.
You’ve got years — decades, even, if you’re in good health and have a family history of longevity — to ride out the stock market’s ups and downs. Consider that fund manager Vanguard has 78% of assets in its 2035 target-date retirement fund invested in stocks, with the remaining 22% in bonds.
3. Drill down on diversification
Within the stocks and bonds portions of your portfolio, your money should be further diversified across asset classes. For equities that means having exposure to large, small and mid-size companies, established and emerging international markets, and real estate. With bonds it’s allocating money in short-, mid- and long-term U.S. and international bonds.
For DIY investors, diversification can be done with individual stocks, index mutual funds or exchange-traded funds. The major brokerages have fund screeners to help parse the options based on fund type, performance, expense ratio and other factors. If managing a portfolio on your own sounds like a headache …
4. Consider taking an asset allocation shortcut
Purchasing a target-date mutual fund or using a robo-advisor makes the job of creating and managing an appropriately balanced portfolio a cinch.
Target-date funds automatically adjust the investment mix of stocks and bonds based on what’s appropriate for someone who plans to retire within a specified year. Robo-advisors, or computerized investment managers, create and manage a portfolio based on your goals and risk tolerance.
With both options, keep an eye on fees, which can have a corrosive effect on portfolio returns. A typical management fee at a robo-advisor starts at 0.25% of your assets per year. Hybrid fund expenses average 0.74% annually, according to the Investment Company Institute, although the best have expense ratios below one half of a percent.
» Read more: Find the right financial advisor for you
5. Use a Roth
The diversification exercise continues when it comes to the tax rules around your investments. Younger investors sometimes favor Roth IRAs (which offer tax-free withdrawals) over traditional IRAs (where withdrawals are taxed but contributions may be tax-deductible). That makes sense because they’re likely in a lower tax bracket now than they’ll be in retirement. But the Roth is still a valuable retirement investment tool for midlife savers.
Investing in a Roth IRA provides older savers flexibility down the road to withdraw from pools of money with different tax treatments. The Roth is also gentler, taxwise, when it comes to passing money to your heirs.
Don’t qualify to contribute to a Roth IRA? If your employer offers a Roth 401(k) option, there are no income limits on eligibility. Consider splitting your contributions between Roth and traditional accounts to retain a portion of the current-year tax break.