When considering investing, the stock market likely comes to mind immediately. However, various investment opportunities, such as home ownership, educational investments, or allocating funds to an IRA, can be embraced at any point in life. Assets typically evolve along with life stages. For instance, those in their 20s often prioritize career growth and future planning. As individuals age, their investment priorities usually undergo a shift.
Upon reaching their 50s, people often start planning their financial strategy for their retirement years. Whether you’re aiming for early retirement or extending your working years to bolster your savings, here are a few investment routes you might consider.
Tax-advantaged accounts
Various tax-advantaged investment accounts exist and aren’t solely designed for retirement. The common feature among them is their potential to reduce tax liabilities and enhance investment growth. Here are some worth exploring.
401(k): A tax-deferred, employer-sponsored retirement plan where a portion of an employee’s pre-tax paycheck is automatically deducted and taxed only upon withdrawal. Employers often match a part of these contributions. Individual Retirement Account (IRA): This is akin to a 401(k) but without an employer’s involvement. Your donations can be tax-deferred, with taxes applicable upon withdrawal. Roth IRA: With a Roth IRA, taxes are paid upfront on contributions, allowing for tax-free withdrawals during retirement. Health Savings Account (HSA): This account, not primarily aimed at retirement, facilitates the donation of pre-tax dollars towards medical expenses and works alongside high-deductible health plans. You can make additional catch-up contributions to your 401(k) or IRA each year once you’re in your 50s, instrumental if your retirement savings are only partially on target.
Stocks, mutual funds, and ETFs
Regardless of age, the stock market is a reliable tool to outpace inflation and accumulate wealth over time. The market has historically generated impressive average returns for long-term investors. However, market volatility can sometimes lead to years of asset underperformance or even loss. Hence, the money needed immediately (say, within five years) might be better kept out of the market.
As retirement nears, you may decrease your equity holdings to minimize market volatility risks. Your risk tolerance, current savings, and retirement timeline should all factor into this decision.
You need not be a stock market expert to create a diversified portfolio. You can access a range of sectors and markets through an ETF, index fund, or mutual fund without picking individual stocks.
Remember, the tax-advantaged options mentioned above are vehicles for your investments. You can hold various assets in an IRA, similar to a brokerage account. A regular brokerage account can be a good option if you’ve hit the contribution limit on your IRA.
Bonds
Despite a rough 2022, bonds remain a valuable investment. Sealants provide a fixed income and are often considered less risky than the stock market, although they usually yield lower returns.
Holding bonds alongside stocks provides a diversification benefit. While not always the case, bonds often increase in value when the stock market declines. Some financial advisors recommend a 60% stock and 40% bond portfolio, especially for those in their 50s. Although this strategy has been recently critiqued due to inflation and high-interest rates, it’s still a reasonable benchmark.
Clearing high-interest debt
While not a direct investment, eliminating high-interest debt, such as credit card debt, can yield better returns than some investments, thanks to the interest saved. Moreover, this strategy offers a guaranteed return.
Consider this: The current average APR for a credit card is around 20%, while the S&P 500 has provided an average return of just over 10% over the past 30 years before inflation. There are also non-monetary benefits to being debt-free, including improved credit scores and reduced budget strain.
Most financial advice emphasizes the benefits of early investments. However, it’s never too late if you’re in your 50s and concerned about your financial standing. Focus on widening the gap between your earnings and expenses to free up more investment money. The more you can save now, the better you’ll be for retirement.
Investing in your 50s can help secure your financial future as you approach retirement. Whether it’s maximizing contributions to tax-advantaged accounts, diversifying your portfolio with stocks and bonds, or prioritizing the payment of high-interest debt, these strategies can help you achieve financial security. Remember, there is always time to start investing and taking proactive steps today can lead to significant benefits.
