Because of increasing life expectancies, the decade between ages 50-60 is sometimes referred to as the “new 30s.” Your 50s is like a pause between different chapters of your life. It’s a place to catch your breath before thinking about what your 60s, 70s and 80s might look like. For better or worse, the actions you take, (or those you avoid), during the decade after your 50th birthday will likely set a course for the future that can become increasingly difficult to change.
Your 50s is also when you begin to look out into the future and think about where you want to live once the kids are out of the house and your working life slows down. The city, the house, the place that you eventually want to retire is an incredibly important visual to keep focused on as you begin to transition into the next chapter of life.
Determine Your Income Needs
Perhaps the single most important thing to do in your 50s is to determine the amount of annual income needed in today’s dollars to sustain your lifestyle. Don’t play games with this by assuming you’ll have no unplanned expenses after retirement. A starting place is to realistically estimate your current living expenses and assume 80% of that figure as a beginning working amount to use for planning purposes. Your actual income need may end up a little below or above 80% but this provides a realistic target.
Financial planning in your 50s is totally action-oriented because time, while still an ally, will become eventually become a foe. If you are underprepared for your future retirement at age 50, this equation likely becomes much more acute by age 60 unless you make specific planning adjustments.
Trust the Stock Market
In my fairly educated opinion, one of the main planning obstacles for investors in their 50s originates from a lack of trust in the stock market. Let’s look a bit closer at the actual evidence to see if this perspective is warranted. Someone born in 1969, now age 50, has witnessed a total of 13 negative calendar years in the U.S. stock market (even if one year was witnessed while still in diapers). This means 74% of the years were positive and 26% negative, exactly what should be expected over long periods of market history. Worthy of note, the S&P 500 reflects a return of 9.8% per year for the period 1969-2018.
Despite providing returns well above the inflation rate of 4% per year for that 50-year period, many investors in their 50s search for a path forward that is less risky and more dependable. Maybe it’s real estate; Maybe it’s gold; Maybe not. The most reliable way to maintain purchasing power, (beat inflation), over the long term is through the global stock market. You see, regardless of your stage in life, goal number one is to increase your income after considering inflation. At least for the past 92 years, nothing has satisfied that objective as well as stocks.
Save, Save, Save
While many in their 50s eschew stocks, they also tend to undersave. In our experience, overspending (the same as undersaving) is culprit number one for individuals in this age group. The single most important change many in this cohort need to make is to increase savings and, by extension, decrease spending. There simply is no shortcut around the destructive impact of undersaving.
By saving I am not referring to the 3% match in your 401(k) at work, but much more. Depending upon other investments already in place, savings rates in your 50s should likely be at least 15-20% of overall income. Since most individuals have their peak earnings during this decade, if you don’t save now, when will you save? The longer you delay saving enough, the more risk you will eventually need to take in order to slay the inflation dragon in retirement.
Have a Plan B
Finally, don’t fall into the trap of thinking you can work until you are 75 or 80 years old. This article, Planning to Work Into Your 70s Why You Need a Plan B Too, details the relatively sparse percentage of people who actually retire past age 70. Even if that is your desire, for a variety of reasons that may not be possible. As the author of the article puts it, have a plan B.
The decade of your 50s sets the stage for the remaining acts of the play that is your life. Spending time planning now lessens the likelihood of unexpected events steering you way off course. Start there. Ready for a real conversation?