Retirement Savings Tips for Individuals 45–54 Years Old

There’s still time to get on track

Reviewed by Chip StapletonFact checked by Vikki VelasquezReviewed by Chip StapletonFact checked by Vikki Velasquez

If you’re 45 to 54 years old, you may be at the midpoint or second half of your career. So your income is higher. Of course, your financial obligations for home and family may be higher, too. And that can make retirement planning tricky. Here are six tips to help keep (or get) your retirement savings on track.

Key Takeaways

• Although it’s important to start your retirement planning and saving early, you can still try to reach your goals if you’re between ages 45 and 54.
• Small business owners may be able to stash extra savings by funding retirement accounts designed for small businesses and the self-employed.
• If you’re age 50 or older, you can make catch-up contributions to your IRAs and employer-sponsored retirement plans.
• Consider other additional sources of retirement income such as Social Security benefits, employer pensions, or benefits based on your spouse’s income. 

The Challenge

The 45- to 54-year-old age range is probably one of the most challenging to plan for on a general scale. It includes people on all ends of the family spectrum, from childless individuals to new parents to empty nesters. It includes those who are just starting their careers and those who are nearing the end of theirs. While it’s not uncommon for any age range to include individuals at varying stages of life, 45 to 54 appears to be the range within which people have the greatest differences.

Ideally, if you are within this age range, you are gaining traction on your retirement savings goals. But if you’re not, there are opportunities to increase the pace at which you contribute to your retirement nest egg. These include starting your own business, adopting a retirement plan for the business, and making catch-up contributions.

1. Start Your Own Business

If you’ve always dreamed of starting your own business — or even if it’s a newer goal — now might be a great time to pursue it. If you have a talent or skill that can be used to produce income, consider starting your own business while keeping your regular job. This will produce additional income and also allow you to establish and fund a retirement plan through your business.

Note

Starting your own business can be an excellent way to generate additional income, contribute more to retirement, and even create passive income for yourself during retirement. However, make sure to run the numbers carefully. A business with high start-up costs could actually detract from your retirement goals.

Depending on the type of retirement plan you establish, you could contribute as much as $69,000 for the 2024 tax year ($66,000 for 2023) to your retirement account, according to the Internal Revenue Service (IRS). If you’re 50 or older, you may also make a catch-up contribution of up to $7,500 in 2023 and 2024.

You Can Have an Employer-Sponsored 401(k) and a Self-Employed Retirement Plan

The IRS allows you to contribute to your employer’s 401(k) plan and a self-employed retirement plan simultaneously. The amount you’re able to contribute depends on the type of plan you choose and the amount you contribute to your employer’s plan.

Solo 401(k)

This type of plan, also called a one-participant 401(k), is available to businesses with no other employees other than a spouse. This plan has the same contribution limits as an employer-sponsored 401(k). You can defer the lesser of 100% of your income or $23,000 in 2024 ($22,500 in 2023). If you’re 50 or older, you may also make a catch-up contribution of $7,500 in both years.

In addition to your contribution, your business can make an employer nonelective contribution of up to 25% of your compensation. The maximum combined contribution for both your employee and employer contribution is $69,000 in 2024 ($76,500 if you’re 50 or older) and $66,000 in 2023 ($73,500 if you’re 50 or older).

Warning

The same 401(k) contribution limit applies to all plans. So if you have an employer 401(k) and a solo 401(k) plan, you may only contribute a total of $23,000 across both accounts in 2024, not $23,000 to each.

However, you may still max out your employer nonelective contribution in your solo 401(k) if you contribute to your employer’s 401(k). In fact, this arrangement would allow you to get the best of both worlds if your employer offers a matching contribution.

SEP IRA

A simplified employee pension (SEP) individual retirement account (IRA) is another type of tax-advantaged retirement plan designed for self-employed individuals. In a SEP IRA, you can contribute up to 25% of your income or $66,000, whichever is lower.

There’s no catch-up contribution for a SEP IRA like there is for a 401(k). This is because the catch-up contribution is an employee contribution and SEP IRAs are funded solely by employer contributions.

Let’s take an example. Rosa’s contributions to her employer’s 401(k) plan can be up to $23,000 in 2024, plus a $7,500 catch-up contribution because she’s over 50. She can also contribute 25% of her net earnings from self-employment for a total of $69,000 in 2024.

Before starting a business, you may want to consult with an attorney about the different legal structures to help you decide which one would be most suitable for your business. These include sole proprietorships, partnerships, limited liability companies (LLCs), and corporations.

2. Take Advantage of Catch-Up Contributions

If you start saving for retirement later in life, don’t be disheartened. The adage, “better late than never,” certainly applies. In fact, there are special provisions for individuals who are of a certain age to play catch-up by contributing an extra amount.

If you are at least age 50 by the end of the year, you can contribute to an IRA or make salary deferral contributions to a 401(k), 403(b), and/or 457 plan:

• IRAs: For tax year 2024, you can contribute the lesser of $7,000 or 100% of compensation to an IRA, or $8,000 if you’re age 50 or older. (For tax year 2024, it’s $6,500 and $7,500, respectively.)
• Employer-Sponsored Plans: If you have a SIMPLE IRA, you can defer 100% of compensation up to $16,000 for 2024 ($15,500 for 2023), plus a catch-up contribution of $3,500 in 2023 and 2024 if you are age 50 or older. With 401(k), 403(b), and 457 plans, you can defer up to $23,000 for 2024 ($22,500 for 2023), plus the catch-up contribution of $7,500 for 2023 or 2024 if you’re age 50 or older.

In general, if you participate in multiple employer-sponsored plans with salary deferral features, your aggregate salary deferral contributions cannot exceed the dollar limit that applies for the year.

3. Know Your State’s Laws if You Get Married or Divorced

Getting married or divorced can have a significant effect on your retirement nest egg. While projections may show that the amount you need to save on a regular basis is less than the amount you would save if you were not married, it may be wise to continue saving at the higher rate if you can afford to do so.

If your spouse dies and you do not remarry, you would be solely responsible for funding your retirement nest egg. Should you get a divorce, you may be required to share your retirement assets with your spouse. Alternatively, you could be on the receiving end as your spouse may be required to share their retirement assets with you.

If you had IRA assets before you were married, consider whether you want to keep those assets in a separate IRA and add new contributions during your marriage to a new IRA. If state law determines that marital or community property is defined as that which is accumulated during the marriage, you may not be required to include your premarital IRA assets in the property settlement. Consult with a local attorney regarding the rules that apply to your state.

4. Consider Other Sources of Retirement Income

Depending on your situation, the money in your 401(k) or IRA may not be the only funds available to you during retirement. Here are some other funding sources to consider:

Social Security

Assuming you’ve worked at least 10 years (or have a spouse who has), you can collect Social Security retirement benefits starting at age 62. And you can receive even more if you defer collecting benefits until your full retirement age (67 if you were born in 1960 or later). There’s an incentive to delay taking benefits: it’s an 8% increase per year for each year you wait, up to age 70.

Note

Many people fear that Social Security benefits won’t be around to help them during retirement. And it’s true that starting in 2035, the program is only expected to be able to fund roughly 75% of benefits. However, there’s been no serious discussion of eliminating Social Security benefits.

Employer Pension Plan

Pension plans, also known as defined benefit plans, are a type of employer-sponsored plan that guarantees a certain income during retirement.

While these plans have lost popularity — only 15% of private industry workers had access to one in March 2023 — some companies still offer them. If you currently work for or have previously worked for a company with a defined benefit plan, you may have some guaranteed income coming to you during retirement.

Your Spouse’s Income or Work Record

If you’re married and have no income of your own, you can still contribute to a retirement account. You can use your spouse’s income to fund your own traditional or Roth IRA through a spousal IRA. Additionally, you may be able to qualify for Social Security benefits based on your current or former spouse’s work history.

5. Balance (or Rebalance) Your Portfolio

Your asset allocation for your retirement nest egg should be reassessed periodically. This process is known as rebalancing and will give you the opportunity to determine whether you need to change your asset allocation.

As you get closer to your retirement age, you may want to choose less risky investments, as there is less time to recover investment losses. However, this rule does not apply to everyone. You may want to consider consulting with a competent financial advisor for assistance with choosing an asset allocation model that is right for you.

6. Think About Other Retirement Costs

You may be faced with several issues that affect your retirement planning. For example, you may have to choose whether to pay for your child’s college or provide for adult children who still live at home alongside putting much-needed funds into your nest egg.

If you can’t afford to save for retirement and save for your child’s education, prioritize your retirement. There are other options available to help your children pay for college, including loans and scholarships. However, no such programs exist to help you pay for retirement.

While it may seem like you’re doing your child a favor by prioritizing their future, it increases the chances that they’ll have to financially support you during your retirement years (or prevent you from retiring altogether).

Consider also whether it would be wise to purchase long-term care insurance (LTC). This can help prevent your retirement savings from being used to cover expenses from a long-term illness instead of being used to finance the retirement lifestyle you have planned.

How Much Money Should a 45-Year-Old Have Saved for Retirement?

The amount you should have saved for retirement at age 45 depends on a number of factors, including the age at which you plan to retire and your desired income during retirement. For example, according to data from Edward Jones, if you’re 45 and have a $100,000 salary that you wish to maintain during retirement, you should have between $330,000 and $450,000 saved.

How Much Should a 54-Year-Old Have Saved for Retirement?

According to data from Edward Jones, a 54-year-old who has an income of $100,000 and wishes to maintain that during retirement should have between $585,000 and $735,000 saved.

What Is the Best Way to Invest for Retirement at Age 45?

A 401(k) is a solid retirement investment tool because of its high contribution limit and the potential for an employer match. Additionally, starting at age 50, you’ll be able to make a catch-up contribution of $7,500 — and that’s on top of the normal contribution limit, which is $23,000 in 2024 ($22,500 in 2023).

The Bottom Line

The 45- to 54-year-old age range is the time to get on track and kick your retirement savings into high gear. Whether you are just starting a career—or your own business—or you’ve been saving for years, keep saving, and stay the course.

Read the original article on Investopedia.