By Sarah Desormiers
If you are over 50 and have less than $250,000 saved for retirement, don’t panic! According to the Employee Benefit Research Institute, you are in good company (78 percent of Americans aged 55-plus have less than $250,000 squirreled away). Now that your biggest non-retirement cash outlays are behind you – mortgage(s), college tuition, family vacations, business start-up costs, your own student loans, etc. – you can focus your funds on retirement. There are a number of ways to think creatively about your retirement plan.
1. Take advantage of catch-up contributions. Individuals with a 401(k), aged 50 or older can contribute thousands more to their retirement plans than their younger counterparts. For 2015, that equals an additional $6,000 over the $18,000 annual 401(k) employee limit, for a total of $24,000. This limit doesn’t apply to your employer’s match.
No need to stop with an employer-sponsored plan. With the $1,000 catch-up provision for individuals 50 and older, you can contribute up to $6,500 to a traditional or Roth IRA. While the contributions to a Roth are made with post-tax dollars, Roths have some distinct advantages: Earnings grow tax-free, you aren’t subject to the annual minimum withdrawals when you reach 701?2, and you can usually make withdrawals penalty free after 591?2. Be aware that if your adjusted gross income is over $131,000 ($193,000 if married filing jointly), you are barred from contributing to a Roth.
Additionally, if you are eligible for a health savings account (HSA), consider maximizing your contributions (including the additional $1,000/year available for individuals aged 55-PLUS). Once you reach 65 or start receiving Medicare benefits, you are ineligible to make contributions, but you can still take distributions from your account. You could potentially sock away $4,350 ($7,650 if married filing jointly) a year during those 10 years for use well into retirement.
2. Consider downsizing the family estate. While having extra space is wonderful, the cost savings (lower taxes, utilities, insurance, and upkeep) can represent additional retirement savings. And up to $250,000 ($500,000 if married filing jointly) of gain on the sale is tax-free. Depending on what you have invested in your home and the selling price, that can be a lot of tax-exempt clams ready for reinvestment.
3. Consolidate prior-employers’ 401(k) plans into an IRA. Besides saving investment fees, you can get a better handle on your investment strategy, potentially have more investment choices, and may be able to convert to a Roth IRA (see benefits above) regardless of your adjusted gross income. Note that Roth roll-overs are subject to income tax; how much depends on your retirement plan mix.
4. Consider long-term care and disability insurance (if you don’t already have such plans). These plans provide additional assurance that your hard-earned, thoughtfully saved retirement dollars don’t evaporate in the event of injury or in the first months of in-home or nursing home care. Saving the decision on long-term care insurance until you are in your early 60s and selecting coverage specific to your needs and with a waiting period can save on premium costs.
5. Look at your options for Social Security. Delaying checks until age 66 can increase your monthly benefit by 33 percent or more. Additionally, since the payouts are based on your highest 35 years of earnings, working more at the tail end of your career (when hopefully your wages are higher) can displace some of your lower-earning years.
Note: The information contained in this article is general advice, given in a vacuum. To get the full value of these planning techniques, discuss your individual facts and circumstances with your tax and financial advisers.
Sarah Desormiers, a lawyer and CPA, owns Integrated Tax Consultants in Falmouth.