The Charles Schwab Guide to Finances After Fifty

1. Build a Solid Financial Foundation: Understand Your Net Worth and Cash Flow

"Knowing your net worth will help you decide next steps for saving, debt reduction, and budgeting."

Assess your financial health. Start by calculating your net worth: list and sum up your assets (what you own), then subtract your liabilities (what you owe). This gives you a clear picture of your financial standing and helps identify areas for improvement.

Track income and expenses. Create a detailed budget by listing all sources of income and categorizing expenses as essential or discretionary. Monitor your spending for 30 days to ensure your projections match reality. This exercise helps you prioritize spending, identify areas to cut back, and increase savings.

• Essential expenses: mortgage/rent, utilities, food, transportation, insurance
• Discretionary expenses: entertainment, dining out, travel, non-essential purchases
• Tip: Use online tools or apps to simplify budget tracking and analysis

2. Maximize Retirement Savings: Leverage Tax-Advantaged Accounts and Employer Benefits

"The earlier you start, the less you'll have to save each year."

Utilize employer-sponsored plans. Contribute enough to your 401(k) or similar plan to capture the full employer match – it's essentially free money. Consider increasing your contributions annually, especially with pay raises.

Explore Individual Retirement Accounts (IRAs). Supplement your employer plan with either a traditional or Roth IRA, depending on your current and expected future tax situation. If you're 50 or older, take advantage of catch-up contributions in both 401(k)s and IRAs.

• 401(k) contribution limits (2023): $22,500 ($30,000 if 50+)
• IRA contribution limits (2023): $6,500 ($7,500 if 50+)
• Consider a combination of pre-tax and Roth contributions for tax diversification

3. Create a Balanced Investment Strategy: Diversify Assets and Manage Risk

"As an investor, we shouldn't overestimate our ability to handle downturns."

Determine your risk tolerance. Assess your comfort level with market fluctuations and your investment time horizon. This helps guide your asset allocation – the mix of stocks, bonds, and cash in your portfolio.

Diversify across and within asset classes. Spread your investments across different types of assets (stocks, bonds, real estate) and within those categories (e.g., different sectors, company sizes, and geographic regions for stocks). This helps reduce overall portfolio risk.

• Consider low-cost index funds or ETFs for broad market exposure
• Rebalance your portfolio annually to maintain your target asset allocation
• As you near retirement, gradually shift to a more conservative allocation

4. Navigate Social Security and Medicare: Optimize Benefits and Coverage

"Before you file for Social Security benefits, be sure to calculate your benefits over your anticipated life span."

Understand Social Security strategies. Consider delaying benefits until age 70 to maximize your monthly payment, especially if you're in good health. For married couples, coordinate claiming strategies to optimize lifetime benefits.

Plan for Medicare enrollment. Sign up for Medicare during your Initial Enrollment Period (three months before to three months after your 65th birthday) to avoid penalties. Evaluate supplemental coverage options like Medigap or Medicare Advantage plans.

• Social Security benefit increase for delaying: 8% per year from Full Retirement Age to 70
• Medicare Parts: A (hospital), B (medical), C (Medicare Advantage), D (prescription drugs)
• Consider long-term care insurance to complement Medicare coverage

5. Plan Your Estate: Protect Assets and Provide for Loved Ones

"By the time you reach 50 or so, you have had decades of building relationships and building assets. Now is the time to honor that history and document your wishes."

Create essential documents. Work with an estate planning attorney to draft a will, advance healthcare directive, and durable power of attorney. These documents ensure your wishes are carried out and designate someone to make decisions on your behalf if needed.

Consider trusts for complex situations. For blended families, children with special needs, or large estates, trusts can provide more control over asset distribution and potential tax benefits.

• Review and update beneficiary designations on retirement accounts and life insurance policies
• Communicate your estate plan with family members to avoid future conflicts
• Regularly review and update your plan as life circumstances change

6. Manage Debt Wisely: Distinguish Between Good and Bad Debt

"Debt that creates opportunities can actually work for you."

Evaluate your debt. Categorize your debts as "good" (low-cost, potentially tax-deductible, used to acquire appreciating assets) or "bad" (high-interest, used for depreciating assets or consumption).

Prioritize debt repayment. Focus on eliminating high-interest consumer debt first, while maintaining payments on lower-interest, tax-deductible debt like mortgages. Consider refinancing high-interest debt to lower rates when possible.

• Good debt examples: mortgages, student loans (in moderation)
• Bad debt examples: credit card balances, auto loans
• Aim to keep total debt payments below 36% of your gross income

7. Adapt Financial Strategies for Life Changes: Marriage, Divorce, and Caregiving

"Every couple figures a way to divvy up responsibilities according to their skills and preferences. But when it comes to money, it's essential that both partners participate in some capacity—and that both are completely aware of what's going on."

Communicate openly about finances. Whether getting married, divorced, or caring for aging parents, have honest discussions about financial expectations, responsibilities, and concerns. Consider creating a prenuptial or cohabitation agreement to clarify financial arrangements.

Adjust your financial plan. Review and update your budget, insurance coverage, estate plan, and investment strategy to reflect your new circumstances. For caregivers, explore available benefits and support services to manage the financial impact.

• In divorce: Consider mediation to reduce costs and emotional stress
• For caregivers: Look into tax deductions and credits for dependent care
• When remarrying: Discuss how to blend finances and provide for children from previous marriages

8. Protect Your Financial Future: Insurance, Emergency Funds, and Long-Term Care

"Medicare doesn't cover long-term care insurance (LTCI). Nor do Medicare supplement policies."

Maintain adequate insurance coverage. Regularly review your health, life, disability, and property insurance to ensure you have appropriate protection as your needs change. Consider an umbrella liability policy for additional protection.

Build an emergency fund. Aim to save 3-6 months of living expenses in an easily accessible account. This provides a financial cushion for unexpected events and helps avoid tapping into retirement savings or accumulating debt.

Plan for long-term care. Evaluate long-term care insurance options in your 50s or early 60s when premiums are more affordable. Consider hybrid policies that combine life insurance with long-term care benefits.

• Emergency fund placement: high-yield savings account or money market fund
• Long-term care costs (2021 median): $54,000/year for assisted living, $108,000/year for nursing home care
• Insurance review: annually or with major life changes (marriage, divorce, new home, etc.)

9. Make Tax-Smart Decisions: Minimize Liabilities and Maximize Deductions

"It's not just what you make, but what you keep after taxes, that counts."

Understand tax implications of investments. Place tax-efficient investments (e.g., index funds, municipal bonds) in taxable accounts and less tax-efficient investments (e.g., REITs, high-yield bonds) in tax-advantaged accounts.

Utilize tax-saving strategies. Consider Roth conversions in lower-income years, tax-loss harvesting in taxable accounts, and bunching deductions to exceed the standard deduction threshold. Make charitable contributions directly from IRAs after age 70½ to satisfy required minimum distributions.

• Tax-efficient withdrawal strategy: taxable accounts first, then tax-deferred accounts, then Roth accounts
• Charitable giving options: donor-advised funds, qualified charitable distributions from IRAs
• State tax considerations: evaluate impact on retirement location decisions

10. Cultivate Financial Independence: Educate Yourself and Seek Professional Advice

"Even if you choose some type of professional money management, it's good to have ideas on how you may want to invest."

Continuously educate yourself. Stay informed about personal finance topics through reputable books, websites, and financial publications. This knowledge empowers you to make informed decisions and effectively communicate with financial professionals.

Work with trusted advisors. Consider partnering with a fee-only financial planner, tax professional, and estate planning attorney. Choose advisors who are fiduciaries, obligated to act in your best interest.

• Financial advisor credentials to look for: CFP®, CFA, CPA/PFS
• Questions to ask potential advisors: fee structure, investment philosophy, communication style
• Regularly review and reassess your financial plan, at least annually or with major life changes

Last updated: August 12, 2024