Preparing To Retire

Investing in Your 50s: 4 Practical Tips for Retirement Planning In your 50s, assess your retirement plan, lifestyle, earnings, and support for family. Practice goal-based investing to help meet your objectives. As you enter your 50s, you may feel like your long-term goals are coming within reach, and it’s up to you to make sure those objectives are realized. Now is also a perfect time to see how your investments and retirement savings are shaping up. If you’ve cut back on savings to meet big expenses, such as home repairs and (if you have children) college tuition, you now have an opportunity to make up lost ground. You might also think about how you want to live after you retire. Will you relocate? Will you downsize or stay put? If you have children, how much are you willing to support them as they enter adulthood? These decisions all matter when deciding how to strategize your investments for this important decade of your life. Four Goals for Your 50s Your 50s can be a truly productive and efficient time for your investments. Focus on achieving these four key goals to make these years truly count in retirement. Goal 1: Assess Your Retirement Accounts If you’ve put retirement savings on the back burner, or just want to make a push for greater financial security—the good news is that you can make larger contributions toward employer retirement accounts (401(k), 403(b), etc.) at age 50 and over, thanks to the IRS rules on catch-up contributions. If you’re already contributing the maximum to your employer plans and still want to save more for retirement, consider opening a traditional or Roth IRA. These are individual retirement accounts that are subject to their own contribution limits, but also allow for a catch-up contribution at age 50 or older. You may also wish to simplify your investments by consolidating your retirement accounts with IRA rollovers. Doing so can help you get more organized, streamline recordkeeping and make it easier to implement an overall retirement strategy. Plus, by consolidating now, you can help avoid complications after age 72, when you’ll have to make Required Minimum Distributions from all the tax-deferred retirement accounts you own. Goal 2: Evaluate Your Lifestyle and Pre-Retirement Finances When you’re in your 50s, you may still be a ways from retirement, however you’ll want to consider how to support yourself when you do begin that stage of your life. If you’ve just begun calculating how much you’ll need to save for a comfortable retirement, consider the following tips and tools. Tips and Tools for Estimating Income Needs Make a rough estimate of how much you spend on housing, food, utilities, health care, clothing, and incidentals. Nowadays, tools such as Mint® and Prosper include budgeting features that can help you see these expenditures. Subtract what you can expect to receive from Social Security. You can estimate your benefit with this calculator. Subtract any defined pension plan benefits or other sources of income you expect to receive in retirement. Subtract what you can safely withdraw each year from your retirement savings. Consider robust retirement planning tools, which can help you understand how much you’ll need to save for a comfortable retirement based on current and future income from all sources, and even your location. If there’s a gap between your income needs and your anticipated retirement income, you may need to make adjustments in the form of cutting expenses, working more years before retiring, increasing the current amounts you’re investing for retirement, and re-evaluating your investment strategy. Think About Taxes Your income may peak in your 50s, which can also push you into higher tax brackets. This makes tax-saving strategies like these potentially more valuable than ever: Putting more into tax-advantaged investing vehicles like 401(k)s or traditional IRAs. Donating appreciated assets to charities. Implementing tax-efficient investment strategies within your investments, such as tax loss harvesting* and asset location. Betterment automates both of these strategies and offers features to customers with no additional management fee. Define Your Lifestyle Your 50s are a great time to think about your current and desired lifestyle. As you near retirement, you’ll want to continue doing the things you love to do, or perhaps be able to start doing more and build on those passions. Perhaps you know you’ll be traveling more frequently. If you are socially active and enjoy entertainment activities such as dining out and going to the theater, those interests likely won’t change. Instead, you’ll want to enjoy doing all the things you love to do, but with the peace of mind knowing that you won’t be infringing on your retirement reserves. Say you want to start a new business when you leave your job. You’re not alone; more than a third of new entrepreneurs starting businesses in 2021 were between the ages of 55 and 64 according to research by the Kauffman Foundation. To get ready, you’ll want to start building or leveraging your contacts, creating a business plan, and setting up a workspace. You may also wish to consider relocating during retirement. Living in a warmer part of the country or moving closer to family is certainly appealing. Downsizing to a smaller home or even an apartment could cut down on utilities, property taxes, and maintenance. You might need one car instead of two—or none at all—if you relocate to a neighborhood surrounded by amenities within walking distance. If you sell your primary home, you can take advantage of a break on capital gains —even if you don’t use the money to buy another one. If you’ve lived in the same house for at least two out of the last five years, you can exclude capital gains of up to $250,000 per individual and $500,000 per married couple from your income taxes, according to the IRS. Goal 3: Chart Your Pre-Retirement Investment Strategy After you’ve determined how much you’ll need for a comfortable retirement, now’s also a good time to begin thinking about how you’ll use the assets you’ve accumulated to generate income after you retire. If you have shorter-term financial objectives over the next two to five years—such as paying for your kids’ college tuition, or a major home repair—you’ll have to plan accordingly. For these milestones, consider goal-based investing, where each goal will have different exposure to market risk depending on the time allocated for reaching that goal. Goal-based investing matches your time horizon to your asset allocation, which means you take on an appropriate amount of risk for your respective goals. Investments for short-term goals may be better allocated to less volatile assets such as bonds, while longer-term goals have the ability to absorb greater risks but also achieve greater returns. When you misallocate, it can lead to saving too much or too little, missing out on returns with too conservative an allocation, or missing your goal if you take on too much risk. Setting long investment goals shouldn’t be taken lightly. This is a moment of self-evaluation. In order to invest for the future, you must cut back on spending your wealth now. That means tomorrow’s goals in retirement must outweigh the pleasures of today’s spending. If you’re a Betterment customer, it’s easy to get started with goal-based investing. Simply set up a goal with your desired time horizon and target balance and Betterment will recommend an investment approach tailored to this information. Goal 4: Set Clear Expectations with Children If you have children, there’s nothing more satisfying than watching your kids turn into motivated adults with passions to pursue. As a parent, you’ll naturally want to prepare them with everything you can to help them succeed in the world. You may be wrapping up paying for their college tuition, which is no easy feat given that these costs – even at public in-state universities – now average in the tens of thousands of dollars per year. As your kids move through college, take the time to have a serious discussion with them about what they plan to do after graduation. If graduate school is on the horizon, talk to them about how they’ll pay for it and how much help from you, if any, they can expect. Unlike undergraduate programs, graduate programs assess financial aid requirements by looking at only the student’s assets and incomes, not the parents’, so your finances won't be considered. You’ll also want to set expectations about other kinds of support—such as any help in paying for their health insurance premiums up to a certain age, or their mobile phone plan, or even whether toward major purchases like a home or car. It’s great to help out your children, but you’ll want to make sure you’re not jeopardizing your own security. Your 50s may demand a lot from you, but taking the time to properly assess your investments, personal financial situation, lifestyle, and, if applicable, your support for children, can be truly rewarding in your retirement years. By tackling these four goals now, you can help set yourself up to meet your current responsibilities and increase your chances of a more financially secure and comfortable life in the decades to come.

What is a Required Minimum Distribution? In exchange for all of the tax advantages 401(k)s provided during your accumulation years, by law, you will need to start taking distributions from your account when you turn 72. 401(k) plans can help you save for retirement in a tax-advantaged way. However, the Internal Revenue Service (IRS) requires that you start taking withdrawals from their qualified retirement accounts when you reach the age 72. These withdrawals are called required minimum distributions (RMDs). Why do I have to take RMDs? In exchange for the tax advantages you enjoy by contributing to your 401(k) plan, the IRS requests collection of taxes on these amounts when you turn 72. The IRS taxes RMDs as ordinary income, meaning withdrawals will count towards your total taxable income for the year. Generally, the IRS collects taxes on the gains in retirement accounts such as 401(k)s. However, if Roth 401(k) account assets are held for at least 5 years, Roth 401(k) funds are not taxed. Because there are taxes being paid to the government, these distributions are NOT eligible for rollover to another account. How much do I have to withdraw? RMDs are calculated based on your age and your account balance as of the end of the previous year. To determine the required distribution amount, Betterment divides your previous year’s ending account balance by your life expectancy factor (based on your age) from the IRS’ uniform lifetime table. If you had no balance at the end of the previous year, then your first RMD will not occur until the following year. Additionally, if you have taken a cash distribution from your 401(k) account in any given year you are subject to an RMD, and that distribution amount is equal to or greater than the RMD amount, that distribution will qualify as the required amount and no additional distribution is required. Does everyone who turns 72 need to take an RMD? Turning 72 in a given year doesn’t mean that you have to take an RMD. Only those who turn 72 in a given year AND meet any of the following criteria must take an RMD: You have taken an RMD in previous years. If so, then you must take an RMD by December 31 of every year. You own more than 5% of the company sponsoring the 401(k) plan. If so, then you must take an RMD by December 31 every year. You have left the company (terminated or retired) in the year you turned 72. If so, then the first RMD does not need to occur until April 1 (otherwise known as the Required Beginning Date) of the following year, but must occur consecutively by December 31 for every year. Example: John turned 72 on June 1, 2022. John also decided to leave his company on August 1, 2022. He has been continuously contributing to his 401(k) account for the past 5 years. The first RMD must occur by April 1, 2023. The next RMD must occur by December 31, 2023 and every year thereafter. You are a beneficiary or alternate payee of an account holder who meets the above criteria. If you are 72 and still employed, you do NOT need to take an RMD. What are the consequences of not taking an RMD? Failure to take an RMD for a given year will result in a penalty of 50% of the amount not taken on time by the IRS. How do I take an RMD? Betterment will automatically process your RMD if we see that you are over age 72 and no longer actively employed with your employer. If you have the option to take an RMD - age 72 but still employed - your employer can provide you with a form to submit a request. If you have a linked bank account on file, the RMD will be deposited into that account; if we do not have a bank account on file, a check will be mailed to the address in your account.