If you're 45 to 54 years old, you may be at the midpoint or second half of your career when your income is higher. Of course, your financial obligations for home and family may be higher, too. And that can make retirement planning tricky. Here are six tips to help keep (or get) your retirement savings on track.
Key Takeaways
- Although it's important to start your retirement planning and saving early, you can still fulfill your goals even if you're between 45 and 54.
- Small business owners may be able to stash extra savings by funding retirement accounts designed for small businesses and the self-employed.
- If you're age 50 or older, you can make catch-up contributions to your IRAs and employer-sponsored retirement plans.
- Consider other additional sources of retirement income such as Social Security benefits, employer pensions, or retirement savings or benefits based on your spouse’s income.
- You may want to shift to less risky investments as you get closer to retirement age.
The Challenge
The 45- to 54-year-old age range is probably one of the most challenging to plan for on a general scale. It includes people on all ends of the family spectrum, from childless individuals to new parents to empty nesters. It includes those who are just starting their careers and those who are nearing the end of theirs. While it's not uncommon for any age range to include individuals at varying stages of life, 45 to 54 appears to be the range within which people have the greatest differences.
Ideally, if you are within this age range, you are gaining traction on your retirement savings goals. But if you're not, there are opportunities to increase the pace at which you contribute to your retirement nest egg. These include starting your own business, adopting a retirement plan for the business, and making catch-up contributions.
1. Start Your Own Business
If you’ve always dreamed of starting your own business — or even if it's a newer goal — now might be a great time to pursue it. If you have a talent or skill that can be used to produce income, consider starting your own business while keeping your regular job. This will produce additional income and also allow you to establish and fund a retirement plan through your business.
Starting your own business can be an excellent way to generate additional income, contribute more to retirement, and even create passive income for yourself during retirement. However, make sure to run the numbers carefully. A business with high start-up costs in your 50s could actually detract from your retirement goals.
Depending on the type of retirement plan you establish, you could contribute as much as $66,000 for the 2023 tax year (increasing to $69,000 for 2024) to your retirement account, according to theInternal Revenue Service (IRS). If you’re 50 or older, you may also make a catch-up contribution of up to $7,500 in 2023 and 2024. That's in addition to any contributions made to your account under your employer's retirement plan.
You Can Have an Employer-Sponsored 401(k) and a Self-Employed Retirement Plan
The IRS allows you to contribute to your employer’s 401(k) plan and a self-employed retirement plan simultaneously. The amount you’re able to contribute depends on the type of plan you choose and the amount you contribute to your employer’s plan.
Solo 401(k)
This type of plan, also called a one-participant 401(k), is available to businesses with no other employees other than a spouse. This plan has the same contribution limits as a regular 401(k). You can defer the lesser of 100% of your income or $22,500 in 2023 ($23,000 in 2024). If you’re 50 or older, you may also make a catch-up contribution of $7,500 in both years.
In addition to your contribution, your business can make an employer nonelective contribution of up to 25% of your compensation. The maximum combined contribution for both your employee and employer contribution is $66,000 in 2023 ($73,500 if you’re 50 or older) or $69,000 in 2024 ($76,500 if you’re 50 or older).
The same 401(k) contribution limit applies to all plans. So if you have an employer 401(k) and a solo 401(k) plan, you may only contribute a total of $22,500 across both accounts in 2023, not $22,500 to each.
However, you may still max out your employer nonelective contribution in your solo 401(k) if you contribute to your employer’s 401(k). In fact, this arrangement would allow you to get the best of both worlds if your employer offers a matching contribution.
SEP IRA
A SEP IRA — short for Simplified Employee Pension Plan — is another type of tax-advantaged retirement plan designed for self-employed individuals. In a SEP IRA, you can contribute up to 25% of your income of $66,000, whichever is lower.
There’s no catch-up contribution for a SEP IRA like there is for a 401(k). This is because the catch-up contribution is an employee contribution and SEP IRAs are funded solely by employer contributions.
Compensation allowing, JP's contributions to his employer's 401(k) plan can be up to $22,500 in 2023 (or $23,000 for 2024), plus a $7,500 catch-up contribution (remaining at $7,500 in 2024), for individuals aged 50 and over. He can also contribute 25% of his net earnings from self-employment for a total of $66,000 in 2023, or $69,000 in 2024.
Additional income from your own business or a second job allows you to add more to your tax-deferred retirement accounts. Of course, it also creates more disposable income, which allows you to add more to your other accounts in your nest egg, including your after-tax accounts.
Before starting a business, you may want to consult with an attorney about the different legal structures to help you decide which one would be most suitable for your business. These include sole proprietorships, partnerships, limited liability companies (LLCs), and corporations.
2. Take Advantage of Catch-up Contributions
If you start your retirement savings program later in life, don't be disheartened. The adage, "better late than never," certainly applies. In fact, there are special provisions for individuals who are of a certain age to play catch-up by contributing an extra amount.
If you are at least age 50 by the end of the year, you have an opportunity to play catch-up by funding your retirement nest egg if you contribute to an individual retirement account (IRA) or make salary deferral contributions to a 401(k), 403(b), and/or 457 plan:
- IRAs: For tax year 2023, you can contribute the lesser of $6,500 or 100% of compensation to an IRA, or $7,500 if you're age 50 or older. This increases to $7,000 and $8,000, respectively, for tax year 2024.
- Employer-Sponsored Plans: If you have a SIMPLE IRA, you can defer 100% of compensation up to $15,500 for 2023 ($16,000 for 2024), plus a catch-up contribution of $3,500 in 2023 (remains at $3,500 in 2024) if you are age 50 or older. With 401(k), 403(b), and 457 plans, you can defer up to $22,500 for 2023 ($23,000 for 2024), plus the catch-up contribution of $7,500 (remains at $7,500 for 2024) if you're age 50 or older.
In general, if you participate in multiple employer-sponsored plans with salary deferral features, your aggregate salary deferral contributions cannot exceed the dollar limit that applies for the year.
3. Know Your State's Laws if You Get Married or Divorced
Getting married or divorced can have a significant effect on your retirement nest egg. If you are getting married, this could affect your retirement nest egg in several ways. From a beneficial perspective, your financial projections can include your spouse's assets and income as well as projected shared expenses.
However, while projections may show that the amount you need to save on a regular basis is less than the amount you would save if you were not married, it may be wise to continue saving at the higher rate if you can afford to do so.
If your spouse dies and you do not remarry, you would be solely responsible for funding your retirement nest egg. Should you get a divorce, you may be required to share your retirement assets with your spouse. Alternatively, you could be on the receiving end as your spouse may be required to share their retirement assets with you.
If you had IRA assets before you were married, consider whether you want to keep those assets in a separate IRA and add new contributions during your marriage to a new IRA. If state law determines that marital or community property is defined as that which is accumulated during the marriage, you may not be required to include your premarital IRA assets in the property settlement. Consult with a local attorney regarding the rules that apply to your state.
4. Consider Other Sources of Retirement Income
Depending on your situation, the money in your 401(k) or IRA may not be the only funds available to you during retirement. Here are some other funding sources to consider:
Social Security
Assuming you’ve worked at least 10 years (or have a spouse who has), you can collect Social Security retirement benefits starting at age 62. And you can receive even more if you defer collecting benefits until age 67 or 70.
Many people fear that Social Security benefits won’t be around to help them during retirement. And it’s true that starting in 2035, the program is only expected to be able to fund roughly 75% of benefits. However, there’s been no serious discussion of eliminating Social Security benefits and if you’re only a decade or so away from being able to collect benefits, you can assume they’ll be there when you need them.
Employer pension plan
Pension plans, also known as defined benefit plans, are a type of employer-sponsored plan that guarantees a certain income during retirement.
Unlike 401(k) plans, these plans are funded by employer contributions. While these plans have lost popularity — only 15% of private industry workers had access to one in 2022 — some companies still offer them. If you currently work for or have previously worked for a company with a defined benefit plan, you may have some guaranteed income coming to you during retirement.
Your spouse’s income or work record
If you’re married and have no income of your own you can still contribute to a retirement account. You can use your spouse’s income to fund your own traditional or Roth IRA through a spousal IRA. Additionally, you may be able to qualify for Social Security benefits based on your current or former spouse’s work history.
5. Balance (or Rebalance) Your Portfolio
Your asset allocation for your retirement nest egg should be reassessed periodically. This process is known as rebalancing and will give you the opportunity to determine whether you need to change your asset allocation.
As you get closer to your retirement age, you may want to choose less risky investments, as there is less time to recover investment losses. However, this rule does not apply to everyone. You may want to consider consulting with a competent financial advisor for assistance with choosing an asset allocation model that is right for you.
6. Think About Other Retirement Costs
You may be faced with several issues that affect your retirement planning. For example, you may have to choose whether to pay for your child's college or provide for adult children who still live at home alongside putting much-needed funds into your nest egg.
If you can’t afford to save for retirement and save for your child’s education, prioritize your retirement. There are other options available to help your children pay for college, including loans and scholarships. However, no such programs exist to help you pay for retirement.
While it may seem like you’re doing your child a favor by prioritizing their future, it increases the chances that they’ll have to financially support you during your retirement years (or prevent you from retiring altogether).
Consider also whether it would be wise to purchase long-term care insurance (LTC). This can help prevent your retirement savings from being used to cover expenses from a long-term illness instead of being used to finance the retirement lifestyle you have planned.
Frequently Asked Questions (FAQs)
How much money should a 45-year-old have saved for retirement?
The amount you should have saved for retirement at age 45 depends on a number of factors, including the age at which you plan to retire and your desired income during retirement. For example, according to data from Edward Jones, if you’re 45 and have a $100,000 salary that you wish to maintain during retirement, you should have between $330,000 and $450,000 saved.
How much should a 54-year-old have saved for retirement?
A 54-year-old should ideally have more saved for retirement than a 45-year-old since they are closer to retirement. According to data from Edward Jones, a 54-year-old who has an income of $100,000 and wishes to maintain that during retirement should have between $585,000 and $735,000 saved.
What is the best way to invest for retirement at age 45?
A 401(k) is often the best retirement investment tool because of its high contribution limit and the potential for an employer match. Additionally, starting at age 50, you’ll be able to make a catch-up contribution of $7,500 — and that’s on top of the normal contribution limit, which is $22,500 in 2023 and $23,000 in 2024.
The Bottom Line
The 45- to 54-year-old age range is the time to get on track and kick your retirement savings into high gear. Whether you are just starting a career—or your own business—or you've been saving for years, these retirement planning tips can be helpful.
