Managing Your 401k In Your 50s
by Gary Foreman
Here are some steps you should take once you reach 50 to maximize the benefits you’ll receive from your 401k when you retire. What you do now could make a big difference in your retirement.
You’re in your 50s and heading into the home stretch of your career. You’ve worked hard and saved for retirement. A large part of that savings is your 401k plan. But now you’re wondering about managing your 401k in your 50s. Are there steps you should be taking? Things that you should be doing differently?
The answer is ‘yes’ there are some things that you should be doing to maximize the benefits you expect from your 401k once you retire. Let’s see what those actions are.
Time to step on the gas!
This is the time to contribute as much as you can into your 401k. Chances are that your children have grown. Your expenses should be lower. And your income is probably higher than it’s ever been.
Add to that the fact that if you’re 50 or older, the contribution limit increases to $26,000 per year. And employees aged 50 or older can take advantage of catch-up contributions. In 2021, the IRS raised the limit on catch-up contributions to $6,500. Combined, that makes it possible for you to save more than ever before for your retirement.
There are also tax reasons for maximizing your contributions. If you’re contributing to a traditional 401k plan, any money you contribute is not included in your current year income for tax purposes. So you’re reducing the amount of income tax you’ll pay in your highest earnings (and tax) years.
So you’ll want to maximize your contribution. That’s true even if it means some temporary financial sacrifices. Small sacrifices today can pay big dividends once you retire.
You deserve a comfortable retirement.
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Don’t “borrow your own money.”
Too many people (and financial planners) think that it’s ok to borrow from your 401k. They argue that you’re borrowing from yourself and the interest you pay is going back into your own pocket. And, on the surface, that’s true. Plus, we’d like to think that we’re not really borrowing money. After all, it’s our money to begin with.
But, if you look beyond the surface, you’ll find that there are holes in that argument. Especially when you’re in your 50s.
The first problem is that your plan rules may prevent you from contributing to your 401k while you’re repaying a loan. Or that your employer won’t match contributions while you have an outstanding loan. That would mean that you’re missing valuable time to make contributions. Contributions that will grow and be worth much more when you retire.
Borrowing from your 401k will also put you in an awkward position. As the lender, you want the highest interest rate possible. After all, that’s what will provide growth for your 401k account. But as the borrower, you’ll want the lowest rate possible to reduce the cost of borrowing. Either way you choose, you hurt your finances.
Finally, if you should happen to want to leave your job, you’ll be expected to repay the entire loan. If that’s not possible, any unpaid balance will be considered a withdrawal. And, if you’re under age 59 1/2, it will also be considered an early withdrawal triggering a tax penalty. You’ll also have to pay federal income taxes on the amount that year.
Coordinate your 401k with your estate plan.
Every adult should have an estate plan. When you’re young and just starting out, a simple will might be sufficient. But by the time you reach age 50, your needs are more complicated. You may have multiple investments or investment accounts. You probably have some life insurance. There are children and grandchildren involved. And, if you’re married, divorced or on a 2nd marriage, that needs to be considered, too.
No one item should be managed without considering how it affects the other pieces of your estate plan. For instance, you might choose to list Junior as the beneficiary of your 401k and have Missy get an investment account of similar value. At least that’s true today. But what happens if one grows much faster than the other? It’s important to manage your 401k with the rest of your estate plan in mind.
Actively manage your investment choices.
Each plan sponsor allows for a different variety of investment choices. To further complicate your investment decision, some companies require that their contribution go to a specific investment choice.
Your plan administrator may emphasize a balanced investment approach within your 401k plan. Remember that they will not take into consideration your other investment accounts. But you should.
Your overall goal is a balance in all your investments. It could be that your 401k offers fairly conservative options. That’s fine if you balance it with more aggressive choices in your other investment accounts.
Don’t get overly cautious.
It’s natural to be concerned about stock market fluctuations. But don’t let them make you too conservative in your investment choices. In it’s long history, the stock market has had many corrections. But every time it’s taken a hit, a few years later it’s recovered and continued to rise.
That’s good news for you. You still have a number of years before you’ll want to access the funds in your 401k. Enough time to recover any stock market losses.
Have a 401k “exit strategy.”
Generally, you want to keep money in your 401k plan (or IRA rollover) as long as possible. You may have multiple investment accounts and various institutions.
When possible, you want to delay taking money from accounts that will add to your taxable income. For instance, if you have a general investment account or an emergency fund, you’d want to use that before you withdraw money from your 401k or IRA account.
You’ll also need to be aware of some rules on distributions. You’re probably aware that except for certain hardship situations, any 401k distribution before age 59 1/2 will incur a penalty for early withdrawal as well as add to your taxable income.
But you should also be aware of the ‘minimum distribution requirements’ that kick in when you’re aged 70 1/2. Each year you’re required to withdraw an amount based on the value of your account and your life expectancy. Failure to make the withdrawal will trigger a tax penalty.
Common 401k pitfalls in your 50s
While a 401k plan is an excellent way to save money for retirement, it’s not a panacea. A 401k alone will not solve all of your retirement income problems. Even if both you and your employer have been contributing regularly, you’ll probably still need additional income to live comfortably in retirement.
As we touched on earlier, your 401k is not a savings account or emergency fund. You shouldn’t be taking a 401k loan when your refrigerator or car breaks. You need an emergency fund for those types of expenses.
Since contributions are deducted from your paycheck, it’s easy to forget about your 401k. Don’t. Like any investment it requires active management. You might not adjust your investment choices often, but you should know how they’re performing and what options you have.
What happens if my 401k loses money?
When that happens, don’t panic. Remember that your employer has contributed to your 401k, too. And it’s unlikely that the loss is greater than your employer’s contribution. So you’re still ahead based on your 401k contributions.
That doesn’t mean that you shouldn’t manage your 401k. All investments should be evaluated regularly. Whether they’re doing well or not. You may find that a change is in order.
One thing to avoid is getting overly emotional in reacting to market performance. It’s easy to get over confident when the market is rising. Conversely you don’t want to overreact when markets take a hit. Overly emotional investors tend to buy and sell at the exact wrong time.
Managing your 401k in your 50s
For most of us, this is an exciting time of life. Many of our responsibilities and opportunities are changing. There are many important choices to be made. Among them are the various decisions we’ll make managing our 401k accounts.
Reviewed October 2021
About the Author
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. You can read Gary's full bio here. Gary shares his philosophy of money here. Gary is available for audio, video or print interviews.
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