Here 5 smart financial moves to consider to if you want to retire in your 50’s.
• Max out contributions to your employer retirement plans and IRA’s
You should review your contributions to your retirement accounts like your 401k. If you haven’t made the maximum contribution, which is $23,000 for 2024, you can look to increase your contribution to the maximum. If you’re age 50 or over, you can also make an additional catch-up contribution of $7,500 for 2024.
Max out your IRA accounts (if eligible)
If your income falls into eligible ranges, you can consider making a maximum contribution of $7,000 to an IRA or Roth IRA, and a $1,000 catch-up contribution if you’re 50 or older.
• Max out your Health Savings Account (if eligible)
An often-overlooked way to increase your retirement savings in a tax-smart way is to maximize your Health Savings Account.
Health Savings Accounts (HSAs) are available only to those who choose high-deductible health insurance plans (HDHPs). If you participate in an HDHP and you have access to an HSA, this can be a powerful vehicle for building tax-advantaged savings for retirement.
To understand the benefits that an HSA provides for retirement, keep in mind:
• The money is not taxed before you pay it in.
• The interest and earnings on the money are not taxed.
• Withdrawals are not taxed if used for allowable medical expenses.
While many people use the balances in their HSA accounts for current medical costs, there is a significant benefit by saving these funds for retirement.
The balance in the HSA account grows tax-free and can be invested to provide higher rates of growth. Since the deposits, growth and withdrawals can be tax-free if done correctly, this is the most powerful tax-advantaged account.
Also, contribution limits for an HSA account are relatively high. Individuals can contribute up to $4,150 to an HSA for 2024, and up to $8,300 for a family plan. If you're 55 or older, you can make an extra "catch-up" contribution of $1,000 per year and a spouse who is 55 or older can do the same if each of you has your own HSA account.
You can also contribute to an HSA account regardless of your income.
To get the biggest impact from your HSA account for retirement, contribute the maximum each year and include catch-up’s if your 55 or older. Invest in line with your long-term retirement strategy. Wait until age 65 to use the funds, and then use withdrawals for qualified medical expenses.
This approach allows you to get the most tax-savings from your HSA, and allows your other retirement accounts to last longer, as you’ll be using the HSA account for medical costs rather than your 401k or IRA.
Keep in mind that withdrawals taken from an HSA for other expenses are subject to income tax and a 20% penalty if taken prior to age 65. It’s important to plan carefully and follow the rules to get the most benefit from your HSA account.
• Add More to your Bank and Brokerage accounts
There’s no limit on how much you can contribute to a bank savings or taxable brokerage account (albeit no tax deductions, either), so if you have more money available to save, consider adding to these accounts. Having 12-18 months of spending already in cash is a fantastic way to be ready to retire, as stock market changes won’t change your spending plans for your first year of retirement. Adding funds to your taxable investment accounts gives you more money to grow for your future.
• Look for more tax savings
One of the best ways to increase your take home wealth is to look for ways to save on taxes. Before the year-ends, review your taxable brokerage accounts for opportunities tax loss harvesting. You can consider selling securities that may be in a capital loss, and lock in those losses to offset other realized gains or hold the accumulated losses to offset future gains. You can also consider selling appreciated securities up to the level or realized losses, to rebalance your portfolio in a tax-neutral way.
The end of the year is a good time to review your charitable giving. If you normally give to charities that you value, you can look at optimizing the way you give. You may want to consider donating appreciated securities rather than cash, as this allows to remove the unrealized capital gains from your future tax liability. You could also consider using a Donor Advised Fund to allow you to bunch multiple years’ worth of donations into a single tax year. Simply being strategic with your giving can help you reap tax benefits as well.
• Cut your expenses
One of the best ways to be prepared to retire in your 50’s is to lower your living expenses before you retire. Paying off expensive debt is one of the most impactful ways to reduce your monthly budget. Getting rid of credit card debt, student or business loans, car payments, and potentially even paying off your home mortgage are effective ways to lower the most significant expenses in your budget.
You can also review all other areas of spending to see what you can reduce or eliminate. Typical candidates for reduction include online subscriptions, internet and cell phone plans, impulse purchases, travel costs, dining out, etc. Keep those items that allow you to enjoy your lifestyle, but you may be surprised how much you can save if you take a look.
If you really want to retire in your 50's, review the top 5 things you can do in 2024 to maximize your savings, save on taxes, cut your expenses and take action now. Schedule a call with us to see how we can help build your action plan.
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About the Author:
David Edmisten, CFP®, is the Founder of Next Phase Financial Planning, LLC, a financial advisor in Prescott, AZ. Next Phase Financial Planning provides retirement, investment and tax planning that helps corporate employees retire with both financial and lifestyle security.