Your 15-Year Financial Plan at 30, 40, 50, 60

A lot can happen in 15 years! Including a total makeover of your finances. Here, a user-friendly guide to managing your money—no matter your age 

by Liz Weston
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Photograph: Illustrated by Mark Smith

If you are in your 30s or 40s:

Concentrate on saving for retirement, getting rid of expensive debt and building an emergency fund—even if you’re juggling the expenses of raising children.

Be selfish with your savings. Your kids’ college funds need to take a backseat as you aim to put 15 percent of your pretax salary toward retirement, says Christine Fahlund, a Baltimore-based financial planner with T. Rowe Price. Can’t afford such a large chunk? You should still take advantage of any matching funds in a company-sponsored plan like a 401(k). Bump up your contribution every time you get a raise, or by 1 to 2 percent every year, until you’re getting the full match. Put any spare cash into a Roth IRA if you’re eligible (married couples making under $188,000 and singles making less than $127,000 can contribute up to $5,500 this year) or keep funding your workplace plan.

Pay off pricey debt fast. Mortgage and federal student loans are relatively low rate and often tax deductible; it’s the high-interest stuff that kills. Try to devote 5 to 10 percent of your income (or more if you can swing it) to paying off credit cards and other expensive debt.

Get your backup plan in order. Job loss and big bills can decimate your savings, so now’s the time to plump up your emergency fund. Once your high-rate debt is extinguished, funnel money into an FDIC-insured savings account until your cash fund is equal to three months’ worth of living expenses.

Protect yourself from financial ruin. Other big enemies of wealth accumulation: catastrophic medical bills and lawsuits from car accidents or injuries that occur on your property. Your best protection is umbrella liability coverage that extends the limits on your homeowners’ and auto policies to an amount that’s at least equal to your net worth, says Arkansas-based financial planner Sheryl Garrett. Make sure your health insurance covers hospitalizations and surgeries; some policies don’t.

Curb the big expenses. Manage your must-have costs (e.g., shelter, transportation, child care, insurance and minimum loan payments) so they constitute 50 percent or less of your after-tax income.

Take investment risks now. Over time, stocks have earned better returns than any other investment class (yes, even when the 2008 recession is taken into account). And women in particular need to think long term, since statistically we live longer than men. What percentage of your investments should be in stocks? The old guideline was to find that number by subtracting your age from 100—but that formula will leave you too conservatively invested, Fahlund says. To get the returns you need, the best plan is to put 80 to 100 percent of your portfolio into stocks, mutual funds and exchange-traded funds.

Now, consider college savings. Even though other goals take priority, if you can save for college, you should. Money invested in 529 college savings plans is tax free if you use it for education, and it won’t have much impact on financial-aid offers. Many 529 plans allow you to contribute as little as $25 a month.

If you are in your 50s:

Focus on creating a sustainable long-term financial plan, even if you’re coping with aging parents and older kids who have returned home.

Unify your accounts. If you have several smaller retirement plans from different jobs, consolidate them now. Find out if your current employer will allow you to transfer these accounts into its plan, or set up a rollover IRA at a discount brokerage.

Supercharge your savings. Your retirement goal should be about 10 times your income, so if you’re lagging, start to kick up your savings. Once you’re 50, you can add an extra $5,500 (known as a “catch up” contribution) to workplace retirement plans such as 401(k)s, for a total maximum annual contribution of $23,000 in 2013. In addition, you can put an extra $1,000 annually in an IRA or Roth IRA, for a total of $6,500 in 2013.

Consider a health savings account. More employers are offering high-deductible health insurance plans coupled with health savings accounts. If you have an HSA in 2013, you (or you and your employer combined) can contribute $3,250 for one person or $6,450 for a family, and an additional $1,000 if you’re 55 or older. These accounts are not for everyone, but if you’re in good health and don’t need all the money for medical expenses, HSA funds may help you reach your retirement goals, says Virginia-based financial planner Tracey Baker, coauthor of Navigating Your Health Benefits for Dummies. The money in your HSA can be rolled over from year to year and can be withdrawn in retirement with no penalty (you’ll pay ordinary income tax).

Don’t let divorce wreck your finances. The number of divorces among people 50 and over doubled from 1990 to 2010. If your marriage ends and you’re on your spouse’s health insurance policy, you can continue coverage through COBRA for up to three years after divorcing, says New Jersey divorce attorney Marlene Browne. Also, be aware that any spousal support you get could be reduced if your ex loses his job. So you may want to negotiate for a bigger portion of retirement funds or other assets in your property settlement rather than rely on your ex’s future income.

Consider life insurance. If anyone depends on you financially, you need this kind of coverage. A healthy 50-year-old woman who buys a 20-year level-term policy with a fixed annual premium might pay about $1,400 a year for a $500,000 policy. Visit the Life and Health Insurance Foundation for Education (lifehappens.org) for more information.

Dial down on risk. But don’t retreat too far. For now, consider stock exposure of 60 percent to 80 percent, with the rest in bonds and cash, Fahlund says.

Beware of looming health care costs. Premiums for an individual health care policy can run $1,500 to $2,000 a month, Browne says, assuming you can get coverage. The health care exchanges mandated by the Affordable Care Act (aka Obamacare), which are about to go live, may eventually make it easier to find a plan, but for now you should explore your options with an
insurance broker and factor in the extra costs before you give notice at your job. (Find broker referrals at nahu.org/consumer/findagent.cfm.)

Get a second (investment) opinion. A study by the Retirement Income Industry Association found that during a 10-year period, families with investable assets of at least $100,000 who always received advice before making major financial decisions had an average net worth after inflation of over $75,000 more than that of families who didn’t get help. Invest $500 to $1,000 in a session with a fee-only planner to make sure you’re on track.

If you are in your 60s:

Switch gears from growing your wealth to protecting what you’ve accumulated.

Start playing it safer. You still need the inflation-beating returns of stocks to avoid running out of money in old age, but now you have less time to recover from downturns. Rebalance your portfolio so stocks constitute 50 to 65 percent of it, Fahlund says.

Curb your withdrawals. Retirees used to be advised not to withdraw more than 4 percent of their portfolio’s value in the first year; thereafter, they could increase the withdrawal amount by the inflation rate. However, financial planners are now questioning the 4 percent withdrawal rate, because extended or repeated downturns at the beginning of retirement can cause people to run out of money. Some planners are telling clients to start withdrawals at the 3 percent level; others suggest freezing or even lowering withdrawal amounts in bad market years. Another option, according to researchers at Morningstar Inc.: Use tables I to III in IRS Publication 590 (irs.gov/pub/irs-pdf/p590.pdf) to determine your remaining life expectancy and divide that number into your nest egg to calculate your maximum annual withdrawal amount.

Don’t retire early. Your Social Security payment will increase by nearly 7 percent each year you delay cashing in between 62 and 65, plus an additional 5 percent for each year until your full retirement age (now 66 to 67). After that, deferring payments will earn you an additional 8 percent a year until you hit 70. Waiting until full retirement age also gives you the option to use the “claim now, claim more later” strategy to boost your Social Security payout by tens of thousands of dollars. You start benefits based on the earnings record of your spouse or ex-spouse (the “claim now” part), allowing your own benefit to continue to grow until it reaches its maximum when you turn 70. Then you switch to a payment based on your own earnings record. Learn more about maximizing your Social Security benefits at bit.ly/153Quvh.

Consider a lifetime immediate annuity. In simple terms, you give an insurer a chunk of cash, and in return you receive a steady income stream. Immediate annuities have downsides: You typically can’t get the money back if you change your mind, and the amount you receive is tied to interest rates—so if you were to receive annuity payments now, when interest rates are low, your checks would be smaller than at a time when rates were higher.

Weigh your pension decisions. If you’re among the one in five private sector workers who still have a pension, you may be offered the option of taking a lump sum rather than a stream of checks for life. If you’re a disciplined investor, you theoretically could do better by taking the lump sum and investing it, says David Blanchett, head of retirement research for Morningstar Investment Management, a subsidiary of Morningstar Inc. The lump sum might also be a smart call if your annual pension reports show the fund is seriously underfinanced or the company is in trouble. Opting for the stream of checks might be better if you’re not that good an investor or money manager, or if your family is long-lived, since the checks would continue for life. Get advice from a fee-only planner.

Liz Weston is a personal-finance columnist for MSN and the author of Deal with Your Debt.

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First Published Tue, 2013-08-06 10:27

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