Updated: Nov 29, 2021
If you missed out on becoming a multi-millionaire overnight with GameStop, chances are you may still need some investment advice. I specialize in preparing individuals for retirement. Throughout the month of March I am offering investment strategies and financial planning advice based on where you are at in your lifecycle. Last week's article focused on individuals in their 40’s while this article will be focusing on those who are in their 50's.
Am I on Track?
When you are in your 50’s, you have probably entered your peak earnings years. This means that your ongoing income should be significantly higher than your expenses, making this the time in your life you can continue to enjoy significant savings and investment capacity.
There are three important questions:
What are you saving for?
How should you invest your excess money each month or year?
Do you have sufficient funds saved for a comfortable retirement?
As an example, if you are age 50, saving for retirement and making $250,000 a year, ideally you should have $1.7 million saved toward retirement. If you know someone who needs a quick checkup, please share the chart below or link them to this document: Retirement: Am I On Track?
Pro Tip: If you have goals such as college savings, saving to start a business, or a vacation home, you should direct separate funds to those goals while also saving for retirement.
Stocks for the long haul
Having just turned 50, living into my 80’s seems like a reasonable goal. To that end, I’m working hard to eat more fruits and vegetables, drink less bourbon, and continue my regular exercise. Given that I plan to live at least another 30 years, I have a long investment time horizon. If you are 50, you likely have a long time horizon. This means your investments need to grow and earn a healthy enough return to overcome inflation. With bonds paying around 1 or 2% today, the best way to overcome inflation is to invest in appreciating assets such as stocks or real estate.
Even if you are risk averse, you should consider having 60% to 80% of your retirement portfolio invested in the stock market. If you are nervous about stock market fluctuations or whether GME trading will disrupt the markets, set aside 6 months of living expenses or more (maybe $100k) in a savings account. When the market drops 20 or 30% causing gut wrenching headlines, you will sleep well knowing you can make your SUV and house payments.
Drill down on diversification
Within the stock and bond portions of your retirement funds, your money should be further diversified across asset classes. For equities that means having exposure to large, small and mid-size companies, established and emerging international markets, and real estate. With bonds it’s allocating money in short-, mid- and long-term U.S. and international bonds. Below is one example of a diversified portfolio with 70% stocks and 30% bonds.
If you have company stock or you participate in an ESOP (employee stock ownership plan), find out when you can sell your ESOP shares or company stock. If your wealth has grown dramatically from this concentrated stock, it is a good idea to develop a plan to diversify those holdings. Diversification of concentrated stock holdings can protect your retirement nest egg. Before you sell ESOP shares, discuss the benefits of an IRA rollover with your financial advisor. If selling company stock grants or options, consult your CPA or financial advisor to determine whether you will owe capital gains tax.
Diversify your tax bill
With unprecedented recent stimulus spending by the US federal government to fight Covid 19, tax rates will likely be much higher in the future. If you have the option to save money in a Roth IRA, Roth 401k at work, or do a Roth conversion, this may be a good time to pre-pay the tax on your retirement nest egg. Once the tax is paid, you will enjoy tax free growth within your Roth account and enjoy withdrawals free from federal tax starting at age 59 1/2.
You may pay less total tax during retirement if you have retirement savings in a mix of tax deferred (IRA, 401k), taxable brokerage, and Roth IRA accounts instead of having all your savings in tax deferred accounts. Paying less tax during retirement leaves you more money to spend on travel and taking care of your family.
Review your debt
Mortgages, college loans, credit cards. They all add up. Have your financial advisor calculate your total outstanding debt and your monthly payments on that debt. If you are on track for retirement with your monthly investments and feel comfortable your nest egg will be adequate, then you may want to consider allocating excess cash flow to paying off your debt. Start with the highest interest rate payments first and work your way down from there. A good financial advisor can help you plan what to pay off and over what time period. Many folks sleep better at night knowing they have no debt during retirement.
Are you comfortable with your progress towards retirement? How about helping future generations meet their financial goals? If you have more than $1 million saved and need help from a wealth manager, the Peak Wealth Planning team can assist. Schedule a call to learn more today.
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About the Author
Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.
Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance and estate planning advice, Peak Wealth Planning is a fee only financial advisor based in Champaign, Illinois.