In your 50s, you start to see retirement on the horizon. Hopefully that’s exciting, but many middle-aged adults look at their retirement savings and feel more grim than giddy.
You still have enough time to build up that nest egg though — if you use it wisely.
How to Invest in Your 50s
You don’t need a six-figure salary to save enough money to retire by your 60s, or even later in your 50s. You do need a strategy and the discipline to follow it however.
That strategy can stay simple, but that doesn’t mean the discipline is always easy. Follow these basic steps to reach retirement with enough money to sail off into the sunset in your golden years. Or at least avoid running out of cash before you croak, if you’d rather keep it real.
1. Review Your Retirement Plan
First things first: when do you want to retire?
It’s not a trick question, and there’s no wrong answer. I’ve known people who retired at 30, and others who retired near 80. Check out some sample numbers for how long it takes to retire depending on how much you save. With a high enough savings rate, such as 70 or 80%, you can retire within five years of starting to invest.
But let’s be honest, not many of us are willing or able to live on 20% of our income.
Once you’ve set a target date for retirement, plan out your post-retirement budget. How much will you need to live on each month? You won’t need to buy work clothes anymore, or commute to the office. But you may have other expenses you don’t have now, such as more frequent travel.
With a target monthly budget, you can estimate how much you need to save for retirement. Based on the classic 4% Rule, you need around 25 times your projected annual spending. If you plan on living on around $40,000 per year, that means a target nest egg of $1 million.
Fortunately, you have a few options to “cheat” that rule. One of the easiest of those involves working a post-retirement job or gig: something fun, low-stress, and ideally meaningful. For example, my mother plans on ramping up her side gig of tutoring children after she leaves her full-time job. I’d like to take people on winery tours, or at least pour wine at a local vineyard.
By continuing to earn money in retirement, you don’t have to lean on your nest egg as much in the early years. That in turn means you can leave your money in higher-return, higher-volatility investments longer, which means you don’t have to save as much.
2. Continue to Max Out Your Retirement Savings
By now, you know to take full advantage of matching contributions from your employer. It’s free money, after all. Better than free money: it’s also tax-free.
But you also want to capitalize on every available opportunity to keep your hard-earned money out of Uncle Sam’s grasping paws. Fortunately, you have several options for tax-advantaged retirement investing.
Make Catch-Up Contributions
Starting at age 50, you can contribute more to your retirement accounts than younger adults can.
That includes an extra $6,500 in tax year 2022 for 401(k) and 403(b) accounts, on top of the standard $20,500. That means you can invest up to $27,000 per year in your employer-sponsored retirement account, tax-free.
Better yet, invest through a Roth 401(k) so your money can compound tax-free between now and retirement. Plus, you’ll need less money saved in retirement if the IRS isn’t siphoning off part of it for taxes.
Max Out Your IRA
Beyond employer retirement accounts, you can also invest in an IRA (individual retirement account) of your own, and make catch-up contributions to it as well. In 2022, that means an extra $1,000 for savers age 50 and over, on top of the standard $6,000 contribution limit.
Like your 401(k), consider investing through a Roth IRA rather than a traditional IRA. Roth accounts offer more flexibility in case you decide to retire before 59 ½, and they don’t come with required minimum distributions in your 70s either.
Consider an HSA
Health savings accounts (HSAs) offer the best tax advantages of any tax-sheltered account.
You get an immediate tax break, in deducting your contributions. Then the money compounds tax-free, and you pay no money on withdrawals in retirement either.
I can hear your objection now: “But doesn’t the money need to be spent on health care expenses?” Yes, it does — and in retirement, you’ll have plenty of those. Not that it’s a reason to celebrate, but you’ll have no shortage of qualified health-related expenses in retirement, which you can cover tax-free with your HSA.
Read more on how to use your HSA as another retirement account for a full breakdown of the strategy.
3. Rebalance Your Portfolio
That portfolio of 100% equities might have served you well in your younger years, but as you near retirement, you have to start taking volatility more seriously as a risk.
Start Thinking Defensively
In your 20s, 30s, and 40s, it made perfect sense to pursue higher returns, regardless of the volatility of the stock market. It paid to be aggressive and play hard-nose offense. Your nest egg had plenty of time to recover in the event of a stock market crash, after all.
In your 50s, you need to start playing a little defense too. If you plan on retiring in 10 years, you can still consider bonds optional in your portfolio. Go ahead and keep most or all of your long-term investments in stocks. But if you plan on retiring within the next five years, you need to start gradually moving a little money into lower-return, lower-volatility investments like bonds.
You can leave the bulk of your asset allocation in stocks. Many target-date funds leave 75% to 80% of the portfolio in stocks for investors in their 50s and planning to retire in 10 years or so.
Finally, consider shifting your balance within your stock holdings. Start moving away from volatile tech stocks and small-cap stocks in favor of blue-chip stocks paying reliable dividends. Go ahead and leave some money in these growth sectors, but start ever-so-slowly transitioning more of your stock holdings to large-cap stocks.
If you prefer, you can simply stop buying growth stocks rather than actively selling any, and putting all your new contributions into blue chips.
Consider Paying Off Your Mortgage
As you look at rebalancing your portfolio to shift toward lower-risk investments, consider one additional option: paying off your mortgage early.
It’s the ultimately safe investment. You get a guaranteed return equal to the interest rate on your loan.
By paying off your home mortgage, you lower your living expenses in retirement. That means you don’t need nearly as much saved in your nest egg to cover your expenses.
But if you follow this strategy, remember to classify it as a defensive investment, like buying bonds. Money put toward knocking out your mortgage before you retire counts toward the “defensive investment” portion of your portfolio. That means you can leave a higher percentage of your portfolio invested in stocks or other high-return investments.
As a final thought, pay off your car loan before tackling your home mortgage. Car loans come with higher interest rates, so prioritize them first.
4. Create Passive Income Streams
Bonds are one source of passive income for retirement. But they’re far from the only option on the table.
In many cases, you can earn higher returns on other investments that generate income — consider these options in addition to bonds.
Many exchange-traded funds (ETFs) pay high income yields. From large-cap stock ETFs to real estate investment trusts (REITs) to funds specifically optimized for dividend yield, you can often earn 3% to 6% yields on funds that own stable, established companies.
That means that if you follow the 4% Rule, you may not need to sell off any investments at all. You can leave them in place and just live off the dividend income.
Income-Oriented Real Estate Investments
You also have more options than ever before to invest in real estate.
Sure, you can buy rental properties. And they come with outstanding cash flow, if you know what you’re doing. But most investors don’t, and they require labor in addition to expertise.
If the headaches of landlording don’t float your boat, consider real estate crowdfunding platforms instead. Many offer stable dividend yields with low leverage, for a relatively safe investment.
For example, you can earn a fixed 5.5% yield from Concreit, and withdraw your money at any time with no principal penalty. Or take Streitwise, with its steady 8.4% dividend yield, high-end corporate tenants, and low mortgage balances.
5. Consider Taxes
As touched on above, the more of your nest egg that the government chips off for itself, the more money you need to save for retirement. It’s one of the many advantages of Roth accounts: with tax-free withdrawals, you don’t need as much total money saved. It may make sense to do a Roth conversion today, rather than paying taxes in retirement.
If your income exceeds the limit to contribute to a Roth IRA, consider a backdoor Roth contribution.
But Roth accounts aren’t the only way to lower your taxes in retirement. You can also move to a state with a lower tax burden, when combining income taxes, property taxes, and sales taxes. Seven states charge no income tax at all. Two other states don’t charge income taxes on wage income, but do charge it on dividends and other income from investments, which make up much of retirees’ income.
Even better, move to a country with a lower income tax rate, or no income taxes at all. And that says nothing of the lower cost of living — you can live a comfortable life on $2,000 per month in many countries. Living overseas, you can take advantage of the foreign earned income exclusion, which exempts you from paying taxes on your first $112,000 of income in 2022 ($224,000 for married couples).
Finally, research ways to reduce or avoid paying capital gains taxes in retirement. After all, you’ll be selling off stocks periodically to live on, and perhaps the occasional piece of real estate. Tricks like tax-loss harvesting can lower your tax bill and stretch your nest egg further.
Investing in Your 50s FAQs
The closer you get to retirement, the trickier investing gets.
Still, it’s hardly rocket science. Here are a few common questions among 50-somethings about investing.
Is It Too Late to Start Investing in Your 50s?
It certainly isn’t. Besides, what’s the alternative to investing — resigning yourself to homelessness in retirement?
Granted, if you have nothing saved at all for retirement by your 50s, you need to make some dramatic changes, and right now. As in, saving 50% of your salary each paycheck if you want to retire by your mid-60s.
I once calculated that at a 50% savings rate and a 10% return on your investments, it would take 13.2 years to save enough money to retire if you were following the 4% Rule. And a 10% annual return means forgoing bonds in favor of higher-risk, higher-return investments like stocks and real estate.
Keep in mind that the less you save for retirement, the poorer your lifestyle will be. You don’t want to be Chris Farley living in a van by the river, or that parent who has to move back in with their middle-aged children.
What Investment Strategy Is Best for 50-Somethings?
Stick with more stocks than bonds in your portfolio, leaning more toward established, large-cap companies. You don’t have to pick individual stocks, just stick with mutual funds and ETFs. That can be as simple as an index fund mirroring the S&P 500 if you like.
If you’re within five to 10 years of retiring, start transitioning to 15% to 30% of your portfolio in bonds. You can get more aggressive by replacing some of this portion of your portfolio with real estate investments if you wish, but it does add risk, depending on the type of investment and your experience level.
When in doubt, hire an investment advisor on an hourly basis to form a plan.
Do I Need a Financial Planner?
You don’t “need” a financial advisor, but it doesn’t hurt to get some expert advice.
Personally, I’d stick with paying by the hour or paying a flat fee, rather than paying a percentage of your portfolio to a money manager. You can also explore human-hybrid robo-advisors for the best of all worlds. I use Charles Schwab for example, which offers both a free robo-advisor service and a flat monthly fee hybrid service giving you access to human advisors.
Should I Pay Down My Mortgage or Auto Loan Early?
Paying off these loans early offers a no-risk investment. Think of it as another option in the “low risk” portion of your asset allocation, something you can do instead of putting more money toward bonds or real estate.
Personally, I would rather pay off my car or home loan early and save myself the 4% interest than buy Treasury bonds paying 4% interest. But you know yourself best, and do whatever helps you sleep soundly at night.
Prioritize paying off your car loan early over your home loan, given the higher interest rate. And if you still have any unsecured debts, such as credit card balances, personal loans, or (heaven forbid) student loans, prioritize those before secured debts.
What Role Will Social Security Play in My Retirement Plan?
I have no doubt that Social Security will still exist for the next 10 to 20 years. But rather than actually reforming it openly, the federal government will probably continue its quiet, cowardly strategy of just reducing real benefits.
You’ll get something from Social Security. But it won’t be anywhere near what you paid into it if you’re a middle- or high earner, and it will likely only cover 20% to 35% of your living expenses. The average monthly benefit in 2022 is $1,657.
If you don’t know how you can possibly retire on schedule, it’s time to talk to a professional.
Find either a human-hybrid robo-advisor service or a flat-fee financial advisor and sit down with them in person if possible. Ask probing questions, and press for details on anything that surprises you or makes you uncomfortable.
Don’t be afraid to think outside the box, either. My family and I spend most of the year overseas, and we know many Americans in their 50s doing the same to stash away more money before retirement. Many plan to retire overseas as well.
Finally, spend some time exploring post-retirement gigs. You can retire with a smaller nest egg — and keep more of it in higher-return investments like stocks and real estate — if you continue earning something after leaving your career job.