Much has been written about decade-based retirement savings targets. T. Rowe Price, for example, suggests having three to six times your annual salary saved for retirement by age 50.
But what about the amount of liquid cash in your savings account?
Turning 50 is an important milestone for retirement planning. It marks the age at which you can start making catch-up contributions to your tax-advantaged accounts. However, it’s also a year that can come with increased expenses due to various factors like taking care of children, aging parents, and rising healthcare costs. In such cases, it’s crucial not to deplete your savings excessively and incur early withdrawal penalties on your retirement plans.
If you’re approaching your 50s, here’s how to determine the optimal amount to save.
Most 50-Somethings Have Either Tiny or Large Savings
According to a recent survey by FinanceMaster.org, people in their 50s tend to have savings accounts that are either very small or quite substantial.
Approximately 45% of individuals aged 45-54 and 32% of those aged 55-64 have $100 or less in their savings accounts, indicating the highest percentages within their respective age groups. On the other end of the spectrum, about 11% of the younger group and 25% of the older group have $10,000 or more.
The remaining individuals in both groups have savings amounts distributed fairly evenly between these extremes.
The Evolution of the Middle-Age Emergency Fund
There is no universal magic number that works for everyone when it comes to determining the ideal amount of cash to keep in savings as middle-aged individuals enter their 50s.
Gabriel Lalonde, CFP and president of MDL Financial Group, highlights the importance of having a solid emergency fund as you approach 50. However, the concept of a “solid” fund changes at this age.
Previous Advice Expires at 49
At age 50, the IRS allows individuals to start maximizing their contributions to retirement accounts like 401(k)s and IRAs, as they are nearing the retirement finish line. This means time becomes more precious, and insufficient savings could be detrimental in the event of a major setback.
The survey results emphasize the wisdom of the individuals who have saved five figures for emergencies. Lalonde suggests that a standard emergency fund should cover three to six months’ worth of expenses and be kept in a liquid savings account that offers easy access in case of unexpected expenses or job loss.
However, by age 50, this may no longer be enough.
Lalonde advises setting aside additional cash reserves to provide stability and security during periods of market volatility.
Determining the Adequate Amount
Fulton Bank recommends that 50-year-olds adjust their savings accounts from the standard three to six months’ worth of expenses to two to three years’ worth. This adjustment is necessary to account for potential major setbacks that could occur just as individuals are planning to catch up on their retirement savings.
While the thought of having that much cash may seem counterproductive due to inflation and missed opportunities for stock market gains, the alternative could be even worse. Selling off investments at a low point could result in losses, especially during market downturns. Withdrawing from tax-sheltered accounts like 401(k)s may also lead to penalties.
Hence, the worst-case scenario of facing financial setbacks while nearing retirement should be the driving force behind determining the appropriate savings amount. If two to three years’ worth is unrealistic, Lalonde suggests allocating 5%-20% of the portfolio as cash reserves, depending on risk tolerance and investment strategy.
Methodology: FinanceMaster.org surveyed 1,000 Americans aged 18 and older from across the country between December 7 and 12, 2022. The survey consisted of nineteen different questions covering various financial aspects. FinanceMaster.org used PureSpectrum’s survey platform to conduct the poll.
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