Investing In Your Fifties and Beyond

I have recently joined the ranks of “the mature.” The point was hammered home (a bit reluctantly) a few weeks ago—I received a membership request from AARP. My mother tells me that moving into my fifties is really a mark of distinction. She is of the firm belief that “Older Americans command more authority and respect and their insight is highly valued.” Unfortunately, my fourteen-year-old daughter, while respectful of her elders, has yet to see the value of my insight.

While turning fifty has a number of personal implications, this milestone has quite a few financial advantages. The banks offer low minimum or free checking and services to the fifty-plus crowd. There are many retail discounts available with that AARP membership. Even Uncle Sam awards us a few opportunities to increase our tax-advantaged retirement savings. Reaching this magical age means you can start making “catch-up” contributions to many types of tax-advantaged retirement plans.

This year, workers can contribute up to $16,500 to 401(k), 403(b) and 457(b) retirement plans. If you are age fifty or older by the end of the year, you can also kick in an extra $5,500 for a total of $22,000 in 2010. Others can contribute up to $11,500 to a SIMPLE IRA or SIMPLE 401(k), along with an extra $2,500 if they are age fifty or older. An added bonus, which has nothing to do with your age, is that your employer may have a matching contribution formula for your plan.

And there’s more. You can also contribute up to $5,000 to an IRA ($6,000 if you are age fifty or older by the end of the year), even if you contribute to your employer’s plan. You or your spouse might even be able to deduct some or all of your contributions to a traditional IRA or you may be able to fully or partially fund a Roth IRA, which offers no up-front tax deduction but provides tax-free income in retirement. Deductions for traditional IRA contributions are phased out if (a) you or your spouse is an active participant in an employer retirement plan, and (b) your income exceeds certain thresholds. Roth contributions are phased out only if your income is too high.
While you are looking to increase your contributions, this is also a good time to review your investment strategy. As you approach retirement, your investment mindset may have to be modified. If you are in your thirties or forties, the goal is accumulation – investing and saving to amass as much as possible for your retirement years. If you’re younger than forty, you will almost always be encouraged to invest for growth for two reasons: one, you probably have a very long time horizon until retirement (maybe as long as forty years), and two, as your earnings increase, you can potentially defer greater and greater amounts of salary for retirement savings.
When people are in their late forties, they usually begin to approach their maximum earnings potential. This is when many portfolios start to shift toward a mix of growth-oriented and preservation-oriented investments. For many people, this shift toward asset preservation gets more pronounced the older they get, although some growth investments usually remain in their portfolios because their retirement capital may have to last for another thirty or forty years.
When you are older, the goal changes to wealth preservation – the objective of making assets last through a combination of conservative investing, sensible cash flow, risk management and tax reduction.  A good wealth preservation strategy should outline how retirement plan savings will be reinvested and managed (asset allocation, investment objectives). It should establish a schedule of sensible income withdrawals. It should provide measures for tax efficiency (in investing) and tax reduction to potentially increase the after-tax return. It should incorporate an estate plan, in order to permit the tax-efficient transfer of assets to heirs and/or favorite causes.

The strategy should not expose an individual, couple, or family to dangerous levels of risk with the mission of obsessively pursuing the best possible stock market returns.

So here is a bit of wisdom from a “mature” financial planner. Having a retirement savings plan is critical, and it is never too late to start. Remember, at age fifty and over, you can add even more to both your employer-sponsored retirement plan and your IRA. And when you review your contributions, start to look at your asset allocation as well. Now might be the right time to consider a shift in emphasis from wealth accumulation to wealth preservation.

Story by Loretta Hutchinson MA, NCC, CDFA

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