The decade before retirement is your last chance to bulk up your retirement fund and help set the stage for financial security in later years. Unfortunately, many people don’t take advantage of these years to plan ahead.
The average retirement savings of families headed by someone age 50 to 55 years old is just $124,831, and half of all families in this group don’t even have retirement savings, says the Economic Policy Institute.
If your finances aren’t where you want them to be, there’s still time to right the ship. Here are four retirement mistakes that many individuals often make that impacts their retirement prospects.
Mistake #1: Failing to take advantage of savings opportunities
You know the mantra of retirement savings: Start early. For various reasons, not everyone is able to heed that advice in their 20s and 30s. With a decade or more to go, increased savings now can still make a big difference at retirement.
There’s even a tax incentive to do this: After age 50, you can contribute an additional $1,000 per year to IRAs ($7,000 maximum for 2019 and $6,500 maximum for 2018) and $6,000 more to 401(k) plans ($19,000 maximum for 2019 – maximum for those over 50 is $25,000 in 2019).
Investing an additional $5,000 a year in your IRA at age 50 could be worth more than $120,000 by the time you’re 65, assuming a 6% annual rate of return, which investment research firm Morningstar believes is a reasonable expectation, though it is by no means a guarantee. Imagine how many years of rent, food or medical care you can get out of that.
Mistake #2: Leaving the workforce too soon
There are probably days when you feel like you can’t attend another meeting or start another project. At those times, the prospect of early retirement can seem incredibly appealing. But before you tell your boss to take the job and shove it, take a deep breath and consider the alternatives.
First, it can be difficult to find a new job should you realize you don’t have enough money to live in retirement. It takes older workers twice as long as young workers to land new jobs, according to the Urban Institute.
And working longer can make an enormous difference to retirement savings. An additional two years on the job could boost your savings by 12.7%, if your investments return 6%; working four years longer could increase your savings by 27%. Your savings will grow even more if you also add to your retirement accounts during that time.
Consider instead switching to a part-time schedule if your employer will allow it, so you are able to enjoy some of the perks of retirement, such as travel, spending time with family and volunteering, while still receiving a paycheck. People working in in-demand fields like engineering or health care might have an easier time convincing their employers to allow part-time work.
But work is increasingly becoming part of more people’s retirement plan. According to the Pew Research Center, 18.8% of Americans 65 and older are working, a marked uptick since 2000, when only 12.8% of people that age were.
Mistake #3: Thinking you’ll relocate to your favorite vacation spot
Who hasn’t had fantasies of retiring to a tropical beach and filling their days with sailing and margaritas? It might be fun to go to such spots for a week or two of vacation, but they may not work out as places where you want to spend your retirement.
The decision about where to live in retirement is complicated. It’s driven in part by the lifestyle you want, but also by your desire to be near your loved ones and, not least, your finances.
You may be able to lower your cost of living by decamping to exotic, sunny destinations like Mexico, Belize or Panama, but you’ll likely need to budget travel back to the United States to see family. And if your health deteriorates, you may need to be transported back home for treatment.
To decide whether you really want to move to a specific location in retirement, give it a trial run with an extended stay. And if you do move, consider starting out by renting, so that, if you change your mind, you can move back easily.
Mistake #4: Not planning for health care
At 55, it’s hard to know what your health will be in 20 or 30 years. Even so, this is the decade to do some smart planning around health care. Long-term care insurance is often most affordable when you buy it in your 50s then say your 60s. Premiums are based on your age and health care status, so the younger and healthier you are, the cheaper the coverage usually is.
Medicare does not cover long-term care, so long-term care insurance can provide you with a daily benefit for a set number of years if you are no longer able to care for yourself.
This is also the time to save up for medical bills. According to HealthView Services, a company that publishes health care cost research for financial advisors, a healthy 65-year old couple retiring today can expect to pay $377,412 for medical care not covered by Medicare.
A health savings account (which is paired with a high-deductible health insurance plan) allows you to grow your money triple tax free as long as it’s used for health care: The contributions are made with pre-tax dollars, they grow tax free and you can withdraw them to pay for health care without incurring taxes.
Remember, however, your first priority with an HSA must be to pay for medical care. Don’t sacrifice medical care today in order to grow your HSA for the future.
By the time you reach your 50s, you have a better sense of what your retirement might look like than you did in the decades prior. Take care to make adjustments to your plan so you can start your retirement in strong financial health. Please consult your tax and legal advisors for advice pertaining to your particular circumstances.
Ilana Polyak is a freelance writer who specializes in personal finance and the financial advisory industry. Her work has appeared in The New York Times, Barron's, Kiplinger's Personal Finance, Bloomberg BusinessWeek and CNBC.com.
This article was originally published on 7/21/2017, updated on 11/17/2017 and updated on 11/5/2018 to reflect updates to the IRS tax code.