Investing At 55: Choosing The Right Funds For You

If you're 55, you still have time to set yourself up for a comfortable retirement. It's important to build out your savings and investments, or catch up if you need to.

- Fund your 401(k) to the max

- Rethink your 401(k) allocations

- Consider adding an IRA

- Know all your income sources

- Leave your retirement savings alone

- Don't forget about taxes

It's recommended that you consult a financial advisor to help you make the right investment decisions.

Maximise your 401(k) contributions

If you're 55, you still have time to boost your retirement savings. Here are some tips to maximise your 401(k) contributions:

• Increase your contributions: Start by increasing your 401(k) or other retirement plan contributions if you aren't already maxed out. The maximum amount you can contribute to your plan is adjusted each year to reflect inflation. In 2024, it's $23,000 for anyone under 50. If you're 50 or older, you can make an additional catch-up contribution of $7,500, bringing the total to $30,500.
• Take advantage of employer matching: If your employer offers a 401(k) plan, there's a good chance you can get a matching contribution. Check with your company's human resources department to see if you're taking advantage of this benefit.
• Avoid high fees: When choosing funds for your 401(k), avoid those with high management fees and sales charges. Index funds generally have the lowest fees because they require little to no hands-on management.
• Diversify your investments: Diversifying your investments across different asset classes, such as stocks, bonds, cash, and real estate, can help reduce risk. A conservative portfolio might consist of 70-75% bonds, 15-20% stocks, and 5-15% cash or cash equivalents.
• Consider a Roth 401(k): If your employer offers a Roth 401(k), you can pay taxes on the income now and make tax-free withdrawals later. This can be a good option if you expect to be in a higher tax bracket during retirement.
• Make catch-up contributions: Starting at age 50, you can make additional catch-up contributions to your 401(k) and IRA. This allows you to save more for retirement and take advantage of tax benefits.
• Monitor and rebalance your portfolio: Periodically review the performance of your investments and rebalance as needed to maintain your desired asset allocation.

Diversify your portfolio

Diversifying your portfolio is a crucial aspect of investing, especially as you approach retirement age. Here are some detailed instructions on how to diversify your portfolio at 55:

Maintain a Mix of Stocks and Bonds:

The traditional approach to investing suggests that you should reduce your exposure to stocks and increase your bond allocation as you get older. While this strategy makes sense due to the generally lower risk associated with bonds, it is essential to remember that stocks still provide growth potential that bonds cannot match. Therefore, instead of completely abandoning stocks, consider maintaining a healthy mix of both stocks and bonds in your portfolio. The specific allocation will depend on your risk tolerance and investment goals.

Diversify Within Asset Classes:

Diversification is not just about allocating your investments between stocks and bonds but also about diversifying within these asset classes. For stocks, this means investing in a variety of companies of different sizes (large, mid, and small-cap) and across different industries and international markets. This diversification ensures that your portfolio is not overly exposed to the performance of a single company or industry.

For bonds, diversification means investing in short-, medium-, and long-term bonds, as well as considering US Treasury bonds and international bonds. This mix will ensure that your bond portfolio is not overly impacted by changes in interest rates or economic conditions in a specific region.

Consider Other Asset Classes:

While stocks and bonds are the traditional focus of investment portfolios, other asset classes can provide further diversification. These include:

• Real Estate: Investing in real estate can provide a hedge against inflation and offer stable, long-term returns.
• Commodities: Commodities like gold, silver, and other precious metals can act as a hedge against economic uncertainty and stock market volatility.
• Cash and Cash Equivalents: Having a portion of your portfolio in cash or cash equivalents, such as money market funds, provides liquidity and stability. This allocation can be particularly important as you approach retirement, as it allows you to cover unexpected expenses without touching your other investments.

Use Target-Date Funds:

Target-date funds are a great way to automate the process of diversifying your portfolio. These funds automatically adjust their asset allocation based on your planned retirement year, becoming more conservative as you get closer to retirement. While they may have higher fees, they offer a hands-off approach to diversification.

Seek Professional Advice:

Consulting a financial advisor can be invaluable when it comes to diversifying your portfolio. They can help you assess your risk tolerance, investment goals, and current financial situation to create a customized diversification strategy. Additionally, they can provide guidance on specific investments and help you navigate the complex world of investing.

Remember, diversification is a key component of successful investing, and it becomes increasingly important as you approach retirement age. By following these steps, you can ensure that your portfolio is well-diversified and positioned to meet your financial goals.

Consider a Roth IRA

A Roth IRA is a special type of individual retirement account (IRA) that allows certain distributions or withdrawals to be made on a tax-free basis, assuming specific conditions have been met. Unlike traditional IRAs, Roth IRAs are funded with after-tax dollars, meaning there is no immediate tax benefit. However, this also means that qualified withdrawals are not taxed, as you have already paid taxes on the contributions.

There is no age limit to opening a Roth IRA, but there are income and contribution limits to be aware of. For example, individuals with single tax-filing status cannot contribute to a Roth if their income exceeds $161,000, and contributions begin to get phased out if they earn between $146,000 and $161,000. For those who are married and file taxes jointly, the income phase-out range for 2024 is $230,000 to $240,000.

The annual contribution limit for Roth IRAs is $7,000 in 2024, with individuals aged 50 and over able to deposit an additional $1,000 as a catch-up contribution, for a total of $8,000. If you are married, and filing taxes jointly, each spouse can contribute up to the maximum for both spouses, for a total of $16,000.

One of the benefits of a Roth IRA is that there is no requirement for when you must begin withdrawing money, unlike traditional IRAs which mandate required minimum distributions (RMDs) beginning at age 73. This gives you more flexibility and control over your retirement funds.

Additionally, Roth IRAs can be a good option if you want to leave tax-free money to your heirs. There are currently no RMDs on Roth IRAs, so your money can continue to grow tax-free over a longer period.

However, it is important to note that there is a five-year rule for Roth IRAs. This means that the money you put into the account must stay there for five tax years if you want the earnings generated by your contributions to be tax-free when you withdraw them.

Overall, a Roth IRA can be a great option for those aged 55 and over who are looking for more flexibility in their retirement savings and want to take advantage of tax-free withdrawals.

Plan for taxes

When it comes to planning for taxes in your investment strategy, there are several things to consider, especially as you approach retirement age. Here are some key points to keep in mind:

• Tax-Friendly States: Consider your state of residence and its tax implications. Seven states in the US have no income taxes: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming. Moving to one of these states can help you save on taxes during retirement.
• Reassess Your Investments: Evaluate your investment holdings to make them more tax-efficient. Interest on municipal bonds, for example, is usually free from federal income tax. Qualified dividends from specific corporations are also taxed at more favourable rates than ordinary income.
• Postpone or Redirect RMDs: Required Minimum Distributions (RMDs) from traditional IRAs can be postponed if you transfer the funds to a charity. This strategy has an annual limit of $100,000 per person and only applies to IRAs, not similar accounts like SEP IRAs or SIMPLE IRAs.
• Consider a Deferred Annuity: Investing in a qualified longevity annuity contract (QLAC) within your retirement account can help postpone RMDs and ensure a steady income stream later in life. While there are some drawbacks, such as higher fees and lack of cash value, it can provide peace of mind for retirement.
• Strategise Social Security Benefits: Delaying Social Security benefits until age 70 can result in higher monthly benefits and reduce taxes now. Depending on your income, your benefits may be fully tax-free or included in your gross income at a lower rate.
• Traditional vs. Roth Accounts: While traditional 401(k)s allow you to defer taxes until withdrawal, Roth accounts allow tax-free withdrawals in retirement. Consider a mix of both to diversify your tax treatment and provide flexibility.
• Catch-up Contributions: Take advantage of catch-up contributions to maximise your retirement savings. For 2024, the limit for a 401(k) is $23,000 for anyone under 50, with an additional $7,500 catch-up contribution for those 50 and older. For IRAs, the limit is $7,000, with an extra $1,000 for those 50 and above.

Maintain emergency funds

Maintaining an emergency fund is an essential part of financial planning, especially for those aged 55 and above. Here are some instructive guidelines on how to effectively manage and maintain your emergency funds:

Understand the Purpose of an Emergency Fund:

Recognise that an emergency fund is a dedicated cash reserve specifically set aside for unplanned expenses or financial emergencies. These can include car repairs, home repairs, medical bills, or a loss of income. By having an emergency fund, you can quickly recover from unexpected costs and get back on track with your financial goals.

Determine the Amount to Save:

The recommended amount for an emergency fund is typically three to six months' worth of living expenses. However, this can vary depending on your personal situation and financial obligations. Consider your monthly fixed expenses, income, and risk tolerance when deciding on the size of your emergency fund. Some individuals may prefer to keep a larger cushion of 12 to 24 months' worth of expenses.

Choose an Appropriate Savings Vehicle:

Select a safe and accessible place to keep your emergency fund. Options include a savings account, money market account, or a liquid certificate of deposit (CD). Look for accounts that offer a reasonable interest rate while preserving liquidity. Avoid risky investments with your emergency funds, as you want to ensure easy access to your money when needed.

Set Up Automatic Contributions:

Making your savings automatic is a highly effective strategy. You can set up recurring transfers from your checking account to your chosen savings vehicle. Decide on an amount and frequency that works for you, ensuring that you don't incur overdraft fees. This way, you consistently build your emergency fund without having to remember to transfer funds manually.

Monitor and Adjust:

Regularly review your emergency fund balance and make adjustments as necessary. If your income or financial situation changes, you may need to increase or decrease your contributions. Additionally, keep track of your progress toward your savings goal and celebrate your successes along the way.

Know When to Use Your Emergency Fund:

Set clear guidelines for what constitutes an emergency or unplanned expense. Remember that an emergency fund is intended for unexpected financial shocks, such as medical bills, car repairs, or income loss. While not every unexpected expense is a dire emergency, try to stay consistent and only use the funds for their intended purpose.

By following these steps, you can effectively maintain your emergency funds and ensure that you have a financial cushion to fall back on when unexpected expenses arise.

Frequently asked questions