Rules for Building Wealth After 50

October 15, 2021

What does your wealth look like at age 50? If you’re like the average 45-to-55-year-old, your average savings balance is $15,589, and your average 401(k) balance is $160,000.

And unlike younger investors, retirement is now closer on the horizon. For many 50-year-old investors, retirement may only be 15 to 20 years away—not long at all, in the grand scheme of investing. You can still grow your wealth, but you have to be smart about it.

Here’s a look at the rules for building wealth after 50, along with some ideas to keep in mind.

How Investing Changes at 50

No matter how much money you earn each month or how much money you invest, your investment strategies do not remain static over time. If you’re approaching investment the right way, your strategies will evolve as you age.

By the time you reach 50, you’re likely at or near your peak lifetime earnings, with kids out of college and your home likely paid off (or close to it). But you’re also looking on the horizon at retirement, which is closer than it’s ever been. This means that on one hand, you have more resources to build your wealth than ever before, but on the other hand, you’re rapidly approaching the time when you’ll need those resources.

Because of this, smart investing at age 50 should continue to taper down on risk gradually. As you near retirement, your goal is to preserve as much capital as possible rather than risk losing it, since you don’t have time to earn the money back.

Before You Get to 50

Before you reach your 50th birthday, it helps to get your investment strategy in order.

Make a Plan (and a Budget)

First things first: make a plan. And a budget, if you don’t have one already.

The good news is that since you’re now closer to retirement than ever, it’s easier to plan for what your expenses will look like. You should have two budgets: your expected expenses in retirement, and your budget for right now that allows you to do as much catching up as you can.

While you do this, look for ways to cut down on your expenses. This is important at any age, but especially in the run-up to retirement, when you need to make the most of your incoming paychecks while you still have them.

Keep in mind that even small changes add up, like eating in instead of ordering takeout or switching to a cheaper car to save on your car payment.

Deal with Lingering Debt

Now comes the less fun part: dealing with lingering debt.

If you know your way around investing, you already know that debt is the inverse of investing. Investment grows your money. Debt eats away at it. This matters even more in retirement, when you don’t have new income to make up for compounding debt. Plus, if you’re still throwing money at old debts in the run-up to retirement, you’re throwing away money that you could be growing instead.

If you have the spare resources, throw them at your debt. Your retired self will thank you for it.

Building Wealth After 50

Once you’ve managed a bit of housekeeping, you’re ready to turn your attention to building your wealth. This is still quite possible at 50 (and even during retirement) but it will look quite different that it did when you were 20 (or even 40, for that matter).

Every investor is different, from risk preferences to available resources. That said, here are a few ideas that every investor can benefit from, regardless of your unique situation.

Adjust for Appropriate Risk

The number one thing when adjusting for retirement at 50 is to adjust your appropriate risk level.

Again, because your retirement is closer than most other age groups, you’re going to have to shift to lower-risk strategies. The closer you get to retirement, the more you care about capital preservation over growth (in other words, you want to preserve the money you already have).

That doesn’t mean you have to cut out risk altogether—you won’t see any growth if you do. However, you will shift to lower risk investment options than you used in the past, such as:

  • High-yield savings accounts
  • Treasury securities
  • Certificates of deposit
  • Preferred stocks
  • Money market funds
  • Fixed annuities

This does not mean that you need to pull all of your money out of the stock market. It just means that you should adjust the stock percentage of your portfolio to allow for growth without compromising what you already have.

The exact percentage depends on your situation and risk tolerance, but either way, it should taper down from your previous stock market exposure. For example, a highly aggressive portfolio in your early 40s (80% to 90% stocks) should taper down to 50% to 60% stocks by your late 50s.

Take Advantage of Catch-Up Contributions

A catch-up contribution is a type of retirement contribution available to those over 50. Since your retirement is increasingly close, you’re allowed to contribute a certain amount over the maximum contribution limit without getting hit by taxes, and it applies to 401(k) plans and IRAs.

If you’re not taking advantage of catch-up contributions as soon as you hit 50, now is the time to jump on the bandwagon. This is your best chance to sock away money for retirement, so take advantage of every leg up that’s available to you.

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