According to a recent study conducted by the Employee Benefits Research institution, 60% of respondents age 55 or more had less than $100,000 in retirement savings and 40% had less than $25,000. Of course, this is concerning to us considering the rising cost of medical and living expenses. However, those in their 50s can still plan for retirement.
Contribute to your retirement account
Whether your employer matches contributions or not, it’s generally recommended to contribute to your 401(k). Starting in 2013, employees that participate in a 401(k) or 403(b) plan, can contribute a maximum of $17,500, which is up from $17,000 in 2012. Unfortunately, the $5,500 “catch-up” contribution doesn’t increase in 2013 for employees that are 50 or older, but it still allows those account holders to contribute a total of $23,000. Let’s suppose that you start to contribute the maximum for the next 10 to 15 years or when you’re 60 to 65. At that point, you would have accumulated $230,000 to $345,000 in 401(k) assets which doesn’t include inflation adjustments or investment growth.
Should I I start to contribute to a Roth IRA too?
Yes. Please note that you can only contribute $5,000 to a Roth IRA ($5,500 in 2013) versus up to $17,000 to a 401(k) for 2012 (excluding catch-up contributions). Still, a Roth IRA provides certain benefits that aren’t present with a 401(k). First, contributions for a Roth IRA grow tax-free as opposed to tax-deferred for a 401(k). Therefore, the tax savings for a Roth IRA will be greatest with individuals that expect to be in a high tax bracket when they are age 59 1/2 or older. The opposite is true of a 401(k). Secondly, Roth IRA plans do not require minimum distributions during your lifetime as is the case with 401(k) and traditional IRA accounts. Specifically, those account holders must make withdrawals annually, by April 1st of the year after they turn 70 1/2. Subsequent distributions are due by December 31st each year. If they fail to take distributions, then they may face a stiff tax penalty of 50% of the amount that should have been withdrawn in addition to the ordinary income tax. By the way, required minimum distributions are also mandatory for Roth 401(k) plans. That’s not all. Distributions from a traditional IRA or 401(k) plan could result in higher taxes when taking social security distributions. For instance, married couples will face a 50% tax if the sum of their income and half of their Social Security distribution and any nontaxable interest income is between $32,000 and $44,000. If their income exceeds $44,000, up to 85 percent of the Social Security benefit becomes taxable.
Delay drawing from your social security benefits
Technically, you can begin collecting social security benefits when you reach the age of 62. But, you can also wait until you are 70 years old too. Of course, the amount of monthly benefits you receive will differ depending on which age you begin collecting. For instance, if you choose to begin collecting social security before your full retirement age, your monthly payment will be reduced by the number of months you elected benefits prior to retirement. Full retirement age is 65 years old if you were born in 1942 or earlier, 66 years old if you were born between 1943 and 1959, and 67 years old if you were born in 1960 or later. If your full retirement age is 67 years old and you began collecting your social security at the age of 62, your benefits would be reduced by 30%. It would be 25% if you began collecting at 63, 20% at 64, 13.3% at 65, and 6.7% at 66. At 67, you would receive the full amount of benefits. Let’s put this into real numbers with an example. Let’s say your current income is $100,000 and you were born on February 15, 1961, which means your full retirement age is 67 or in 2028. If you waited until your full retirement age of 67, your monthly social security benefits would be $2,341. At 66, it would be $2,171. At 65, it would be $2,005. At 64, it would be $1,840. At 63, it would be $1,712. At 62, it would be $1,588. Needless to say, you will likely receive the most benefits if you hold off on collecting social security until you reach the age of 70 which the payout would be $2,930 per month.
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