In our 50s, we should strike a delicate balance of living well now while still planning for our future. For the most part, we can’t afford to make financial mistakes, and yet, we don’t want to put our lives on hold.
Here are five financial decisions many of us make in our 50s that may come back to haunt us in our 80s:
Taking on more debt. Historically, college tuition costs have outpaced inflation. Many parents are faced with tough decisions as to whether to take out their own loans to help their children complete college. But we typically counsel our clients to take care of their own retirement first, because college students usually have years to pay back those loans (and you can help them). Meanwhile, there are no grants, loans or scholarships for your retirement.
Consider that a 50-year-old who takes out a $25,000 loan at 7% for 10 years would have payments of $290 a month for 10 years, costing her about $35,000 in total. But if those funds could have been invested at 6% instead during the same time frame, they could have grown to over $45,000. In fact, if she left that money alone to grow for 20 years, only taking it out to live off of once she turned 80, there would be over $144,000 in her account. This lump sum, or the additional income it provides, could make a big difference in quality of life for an 80-year-old.
Deferring taxes. Unless you have a ROTH IRA or a ROTH 401k, you have a silent partner in your retirement plan—the I.R.S. With a traditional IRA or 401(k), your contributions are pre-tax and your earnings are tax deferred – meaning you don’t pay taxes until you take the money out. The I.R.S. is waiting patiently for you to cash in all or part of your retirement plan so they can get their “cut” in the form of income taxes. While many people assume that they will be in a lower tax bracket when they retire, it is easy to conceive that income taxes could increase in the future. If that is the case, you may regret not having invested in the ROTH and you just might kick yourself for not converting that IRA, paying the taxes upfront and getting it over with.
Thinking you’ll never grow old (and get sick). The problem with long-term care insurance is that you buy it when you don’t need it. Many people wait too long, and I for one can totally understand that. We don’t want to picture ourselves old and infirm, and we don’t want to take money out of our pockets to pay for something we don’t think we will ever need. There are several new “products” available in the industry to cover a long-term care need that might make it more palatable. Many planner like us think that the sweet spot for looking into long term care insurance is between 55-64 years of age. Rates are based on your age and your health, so the earlier you get the policy the better. This is definitely a decision fraught with regret if not considered carefully.
Thinking you’ll never grow old (and will always be able to manage your own money). People tend to see the future through today’s lens. In other words, we may assume we’ll always be as healthy as we are today and think just as clearly. But many people lose cognitive ability as they age. The problem is, just as the rest of our bodies age,our brain does too!
So, in planning our finances, it might be helpful to assume we won’t have the same ability to manage our finances later in life the way we can in our 50s and 60s. It may be best to work with a financial advisor to map out retirement income strategies for your 70’s and 80’s and beyond that won’t require constant analysis.
Thinking your health will always be the same. Staying physically active can make us feel better but being in good shape can also be a good financial decision. According to the Center for Disease Control, individuals who are physically active have significantly lower annual direct medical costs than those who are inactive. In fact, the CDC reports that getting people to become more active could cut yearly medical costs in the U.S. by more than $70 billion.
- I don’t know about you, but when I turn 80, I want to have no regrets. If you would like to discuss these financial decisions or any others, please reach out to Joan at jgilles@financialplanpartners.com or William wregenscheid@financialplanpartners.com.
A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.