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.
By the end of 2016, the average retirement savings of families headed by someone age 50 to 55 years old was just under $134,000, and half of all families in this group didn’t have any retirement savings at all, says the Economic Policy Institute Opens in new window.
If your finances aren’t where you want them to be, there’s still time to right the ship—if you know what to watch out for. Here are four common retirement mistakes you should try to avoid.
Retirement mistake #1: Failing to take advantage of savings opportunities
You know the mantra of retirement savings: Start early. For various reasons, not everyone can heed that advice in their 20s and 30s. But with a decade or more to go until retirement, saving more now can still make a big difference in your future.
There’s even a tax incentive to do this: After age 50—even if you won’t hit that number until Dec. 31—you can make extra, “catch-up” contributions to IRAs ($1,000 a year above the standard IRS limit, for up to $7,000 in 2021) and 401(k) and similar workplace plans ($6,500 more, for up to $26,000 in 2021).
Investing an additional $5,000 a year in your retirement account starting at age 50 could be worth more than $120,000 by the time you’re 65 Opens in new window, assuming 6% annual returns, which investment research firm Morningstar believes is a reasonable expectation (though it’s no guarantee). Imagine how many years of rent, food, or medical care you can get out of that alone.
Retirement 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 that 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. Indeed, the Employee Benefits Research Institute reports PDF opens in new window that while 80% of workers say they plan to work in retirement, only 28% of retirees actually do.
And working longer can make an enormous difference to retirement savings. Assuming your investments return 6% a year, an extra two years on the job could boost your savings by 12.7% Opens in new window; working four years longer could net you 27% more. And your savings will grow even more if you also add to them during that time.
Consider instead switching to a part-time schedule if your employer will allow it. This way you’ll be 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 plans. According to the Bureau of Labor Statistics, Americans 65 and older are expected to be the fastest-growing part of the nation’s labor force.
Retirement 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, last but 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 for travel back to the 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.
Retirement 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 (LTC) insurance is more affordable when you buy it in your 50s than your 60s—but policies are becoming harder to find, and insurers are nudging people toward “hybrid” life/LTC coverage or permanent life insurance policies with “living benefits” riders that can cover long-term care. Either way, premiums are based on your age and health status, so the younger and healthier you are, the cheaper the coverage usually is.
Medicare doesn’t 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 health care cost research firm HealthView Services, a healthy 65-year old couple who retired in 2019 can expect to spend about $606,000 on medical care throughout retirement.
A health savings account (or HSA, 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: You contribute tax-deductible dollars, your account—which can invest in things like mutual funds—can grow tax free, and you can withdraw your money 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 your health today to grow your HSA for tomorrow.