How should my wife and I begin saving for retirement at 51 years old?
I'm 51 years old and my wife and I are without a retirement plan. Now that our son is through college, we're thinking about our financial future. We don't have a retirement plan but have three life insurance policies with a total cash value of approximately $60,000. Should we remove some or all of that cash and invest in a Roth IRA? How should we begin saving for retirement?
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Congratulations on getting your son through college and on moving forward toward your retirement. You definitely need to hit the gas on your retirement savings and it seems like you are well poised to do this. Fortunately, the money which was dedicated toward your son's college can now be focused on your retirement.
Begin Investing in Retirement Accounts
At this stage you will want to invest as much as you can every year into your retirement plans. If you are under the ROTH IRA income limit, you can (and should) invest $7,000 into a ROTH IRA for yourself. And your wife can also invest $7,000 into her own ROTH IRA ($6,000 if she is under age 50) even if she doesn’t have a job.
If you have workplace retirement plans, you should invest at least enough to get any company match. And if you can afford to, continue investing into the workplace plans up to the maximum of $25,000 or $19,000 for your wife if she is under age 50.
What to Investments to Choose
Within the retirement accounts, you will need to choose investments that have high enough expected returns to meet your retirement needs. While an age-based Target-Date fund is an obvious option, it may not provide the returns you will need to hit your needed retirement goal. The best path would be to create a target portfolio which can provide an expected return necessary to accumulate the money you need. Calculate how much you will need in your retirement accounts upon retirement to provide the needed monthly income based on the lifestyle you want. Then, use a Time Value of Money calculator to determine the return you will need to hit that goal.
This all, of course, assumes you are comfortable with the risk that might be required in the portfolio, including potentially watching your retirement fund drop by a third along the way to your goal. Many clients think they can tolerate higher risk, but actually need a lot of reassurance from me during down periods in order to stay the course. Dealing with a market crash dropping your retirement accounts by hundreds of thousands of dollars is like raising a child, you never really understand the emotions until you experience it for yourself.
Life Insurance Cash Out
For the life insurance, I would not recommend cashing the policies out until you get a financial adviser to review both your life insurance needs and the policies to advise you if cashing them out would benefit you or would actually cost you more. But make sure you don't have a person who sells life insurance do this analysis (many financial advisers are also life insurance sales reps). Strangely enough, life insurance agents commonly recommend (1) you need more life insurance and (2) you should cash out the old policies and buy new ones. And both recommendations happen to generate a commission for the ‘adviser.’
Get Professional Advice
For the retirement investing and the life insurance analysis, you should talk with a fee-only and fiduciary adviser. At this stage you really will need professional guidance and doing it on your own can create a major risk for you and your wife's retirement. A good adviser will be able to help you maximize the money you can put into tax-advantaged retirement accounts and can also do the needed analysis to lower your multi-decade tax liability (so there is more money to put toward retirement).
Interview two to three potential advisers to determine the one you feel comfortable with (I’d love to be one of them). Most advisers, like myself, will offer a free initial consultation as a get-to-know you meeting.
When you talk with the adviser, explain your situation and then ask them how they can help. Ask them to describe in some detail how they are going to analyze your needs to come to their recommendations. Their answers should include the following:
Exploring your retirement goals.
Establishing an estimated annual retirement income need.
Analyzing your expected Social Security income and offering a claiming strategy.
Give push back if they say “delay until 70” as there are over 700 claiming options and I rarely see the optimal option be both people to delay until 70.
Projecting pre-retirement period and post-retirement tax rates.
Reviewing your income and budget to determine (and maximize) how much you need to and can invest each month.
Analyzing your workplace retirement plan [such as a 401(k) or 403(b)] and recommending an investment strategy within that plan.
Looking at additional retirement investing options including HSAs and taxable accounts; among others.
If the advice centers on you buying annuities, whole life insurance, or other life insurance products you should find another adviser. Similarly, if the adviser only wants to talk about an IRA but does not provide detailed advice on your workplace retirement plans, Social Security, or other options, they likely aren't the right person for you.