Saving for Retirement at 55: How to Start a 401K and Catch Up with Your Savings

The US Census Bureau notes that 50% of women and 47% of men aged between 55 and 65 years old have no personal retirement savings. 

This is a wake-up call for the baby boomer and gen Z population. While it might seem a distant goal to start saving for retirement at 55, everything is possible, provided you have the will and determination. 

Remember, you can't change the past, but you can make a bright future for yourself and your dependents if you start saving for retirement as early as now. But how do you go about it when you are past 50 years old? Well, you have umpteen options.

Here is an in-depth guide to 401k contributions and their advantages in retirement planning. 

What is a 401(k), and How Does It Work? 

A 401(k) is an employer-sponsored retirement savings plan that is often funded by pre-tax payroll deductions. 

In most cases, employers may opt to match employee contributions and invest the funds in bonds, stocks, or mutual funds. 

There are two main types of 401(k) plans, including: 

Traditional 401(k) Plans 

Traditional 401(k) plans are funded by pre-tax payroll deductions. What this means is that your 401k contributions are taken directly from your paycheck before any tax deductions. 

However, you’ll pay tax on investment earnings when you withdraw the funds (taxable income) in retirement. However, distributions start no later than 72 years, or 71½, for individuals who turned this age before January 1, 2020.  

Roth 401(k) Plans 

Also known as designated Roth accounts, Roth 401(k) plans are funded by after-tax dollars. Distributions for Roth 401(k) plans start at 59½ years or later. 

Moreover, withdrawals (earnings) in this retirement savings plan don’t attract income taxes. However, you will pay taxes on the employer’s match when you withdraw part of it in earnings. 

Can You Start a 401K at 55, and Is It Worth It? 

Is it too late to save for retirement at 60 or 55? The answer is no, especially if you take the 401(k) savings plan approach. Under the new law, there are no age restrictions for 401k contributions, even among the 70+ years old folks. 

start retirement savings at 50

Moreover, 401(k) plan contributions for 2022 and 2023 are relatively higher than IRA, making the former a better option. 

Here is how to start 401k at 55:

1st Step

Get a 401(k) retirement savings plan offered by your employer as part of the benefits package, and pick a suitable investment method based on your risk tolerance. You can also have a late start with retirement planning by setting up an independent 401(k) plan if you're self-employed. 

2nd Step

Contribute pre-tax or after-tax deductions to your 401(k) account depending on the type of plan (traditional 401(k) or Roth 401(k)). At this stage, some employers may choose to match employee contributions. 

3rd Step

Qualified earnings and contributions to your 401(k) account grow tax-free until you make a withdrawal. The earnings will yield from the contributions invested in a diverse portfolio that you chose at the first step. 

4th Step

Start withdrawing your minimum distributions at 72 or 71½ years old if it's a traditional 401(k) savings plan, and 59½ years old for Roth 401(k) plans.

It's worth noting that the longer your money stays in a 401(k) retirement savings account, the higher the chances of appreciating significantly. For instance, a $60,000 balance in your 401(k) account will compound and double within around 10 years. That said, it will help if you seek professional retirement planning advice to understand which 401(k) plan is ideal for you. 

Advantages of Opening a 401(K)

Catching up on retirement savings at 55 with a 401(k) plan is a good idea, given the numerous benefits that this approach brings, including:

  • High contribution limits: Compared to IRA distributions, 401(k) plans have higher deferral limits of up to $22,500 in 2023. Contributors of 50 years old and above can defer an extra $7,500. 
  • Employer match: your employer may offer a matching contribution of up to 6% of your salary to the 401(k) retirement savings plan, increasing your earning margins. 
  • Tax incentives on savings: Whichever 401(k) plan option you choose the contributions can be tax-deferred until withdrawal or tax-free upon distribution. 
  • Earlier penalty-free access: You can start withdrawing funds from your 401(k) account if you quit your job when turning 55 or later without attracting any fines or penalties. 
  • A loan option: A majority of 401(k) retirement savings accounts offer loan options of up to $50,000 or 50%, whichever is lower. The loan repayment period is 5 years, after which a 10% penalty applies for the early withdrawal. 
  • Asset protection from creditors: Creditors won’t have access to the funds in your 401(k) account, no matter how much money you owe them. However, spouses may claim a share of the funds during a divorce. 

Does Age Affect Annual Contribution Limits?

401k age requirements influence contribution limits to retirement savings account in various ways. For instance, the annual contribution limit for individuals aged 50 years and above is $30,000 in 2023, up from $27,000 in 2022. Moreover, the contribution limit for the employer match plus employee deductions is $73,500 if you are 50 years old and above in 2023. 

Starting to Save for Retirement in Your 50’s: Is It Too Late?

So, you are a quinquagenarian and have no money in retirement accounts—is it too late to start executing your retirement strategy? Well, there is no time that is ever too late to save for retirement. In fact, the earlier you get a professional to help you with tax planning for retirement, whether you’re in your 30s or 50s, the better. 

how to prepare for retirement in your 50s

Ideally, you have a solid 10 years to get your post-career life in order if you start retirement savings at 55 and plan to stop working at 65. At the very least, you can contribute an equal amount to your employer’s match, and you’ll catch up on retirement savings. 

So... You Have Nothing Saved for Retirement: How Can You Build Your Wealth in Your 50’s? 

It’s possible to build wealth even if you clock 55 with no retirement savings in IRA or 401(k) plan accounts. Here are the best investment tips to help you build and grow your wealth, as echoed by experts:

Start with a Sound Financial Plan

You should start by formulating a new financial plan or updating the existing one if you are going to build wealth with no retirement savings at 55. 

For instance, it will help if you review your monthly budget and assess the financial situation of your dependents to determine your immediate personal expenses. 

However, building wealth and investing in your 50s isn’t about personal expenses and budget only. It will be prudent if you get in touch with a reputable financial planner in Portland, OR, to create a bigger-picture plan that covers your legacy. 

Build Multiple Income Streams 

Knowing how to catch up on retirement savings in your 50s by creating multiple income sources to build wealth is critical. 

Besides asking for additional pay at work, you can leverage your skills to build a side hustle for additional income. You can also work part-time on side projects on your idle evenings and weekends. 

Turn to Real Estate Rentals

Real estate can help you build wealth through rent or capital appreciation, especially if you start planning for retirement at 55. 

You can start by renting out an extra room in your family home or a vacation house to consumer-facing services, such as Airbnb. Alternatively, you can buy older homes, renovate them, and flip them at a higher market price. 

Manage Debt Wisely

Debt reduction should be a priority when you clock your 50s and plan to build wealth for retirement. 

Start by paying off your primary residence mortgage so that you can find extra money to diversify your investment portfolio. However, you can ignore debts on assets that generate positive cash flow, such as real estate. 

Open a Roth IRA Account 

Besides saving through your employer's 401(k) benefit plan, you can also open a self-funded IRA account for building wealth in your 50s. 

You can consult IRA financial planning experts to help you get started with this approach and gain insights on how to make it successful. 

7 Fastest Ways to Catch Up on Your Retirement Savings When You Are 55 

The best way to save for retirement in your 50s is to embark on a journey of catching up with the years you lost. No matter how much you feel is lost, there is always something that you can do to make a difference today and tomorrow. That said, here is how to prepare for retirement in your 50s in 7 ways:

Start Saving Now

One of the best retirement tips any professional will give you is to start saving as early as now, age notwithstanding. Let's look into a real-life example of planning for retirement at 55 to put this into a better perspective. With an average income of $97,000 a year, you can have up to $1 million for retirement in the next 20 years if you start investing 15% ($14,550) now. 

Cut Your Budget for More Savings 

Don’t look very far if you want that extra income to channel to your retirement savings account. Choose a specific amount you want to save and trim your personal expenses to ensure that money is always available at the end of the month. For instance, you can cancel unnecessary subscriptions or shop for relatively affordable insurance covers.

Create a Savings Account for Your Health

Are you suffering from a chronic condition that requires constant medical attention and often involves you getting into your pockets to supplement costs covered by insurance? If so, you would want to create a dedicated savings account for unforeseen health expenses. This will save you unplanned costs and give you peace of mind to focus on your plan for retirement in your 50s. 

Push Back Retirement a Few Years

Everyone dreams of retiring early to spend the best part of their golden years with grandchildren. However, you might not need this luxury if you’re starting to save for retirement at 55.

Instead of retiring at 65, keep working and saving until 75, especially if your health is solid. This will give you an additional 5 years to earn on compounding interest.  

retirement tips for 50 year olds

Leverage Catch-Up Contributions 

Failing to make retirement plans on time doesn’t mean that all is lost. You can get back on track by leveraging catch-up contributions in your tax-sheltered accounts, such as 401(k) plans. 

The goal is to have your money working for you in a diversified investment portfolio, no matter how small it looks. 

Don’t Make Withdrawals from Your Retirements Account

The longer your money stays in a retirement savings account, the higher the chances of it making a sizable yield. 

After you’ve saved for years, you can look for professional wealth management consulting services to help you plan your legacy and estate. 

Find an Investing Professional

The best way to catch up on retirement savings while in your 50s is by working with investing professionals from reputable organizations, such as Interactive Wealth Advisors

A professional will help you kick old habits that got you into this position in the first place. You’ll also get guidance on the most viable savings options to help you achieve your legacy. 

The Bottom Line

Starting saving for retirement at 55 is a wake-up call, but that shouldn't alarm you, especially if you're ready to turn on a new leaf and put your priorities in the driver's seat. 

This guide teaches you how to do so and secure your legacy. However, retirement planning isn’t a one shoe fits all approach—your situation might be different. Contact us today to discuss your options.

Comments
ABOUT INTERACTIVE WEALTH ADVISORS
Interactive Wealth Advisors is a Registered Investment Advisory firm in the State of Oregon and Washington. The Adviser may not transact business in states where it is not appropriately registered, excluded or exempted from registration. Individualized responses to persons that involve either the effecting of transaction in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.
Schedule a Call Today
Book now
DROP US A MESSAGE
Interactive Wealth Advisors are committed to helping you reach financial freedom. If you are in need of financial advice, please complete the form below.