10 Years From Retirement? Here’s How to Invest While There’s Still Time
Key Takeaways
- It’s not too late to plan and save for retirement, even if you’re 10 years away.
- Review your current financial situation and look for ways to optimize your savings.
- Calculate your expenses to determine how much income you’ll need when you retire.
- Pay down as much debt as you can so you can live your retirement stress-free.
- Focus on planning and how you can generate income during retirement by choosing the right mix of accounts based on your risk tolerance and goals.
If you’re 10 years away from retirement, it’s not too late to fine-tune your savings plan, but your limited timeline requires some strategic decisions. You’ll need to review your financial situation, calculate how much you’ll need to maintain your lifestyle, pay down your debt, and max out your retirement contributions. We’ve highlighted some tips to help you accomplish these goals, including the best investments to guide you down this path.
Assess Your Current Financial Position
If you’re 10 years away from retirement, first review and optimize your savings plan so you can retire comfortably. Consider some of the accounts you have or may need to open to make up for any lost savings:
- High-yield savings account: A high-yield savings account is a liquid account that pays you more interest than traditional savings accounts. Your money is insured and grows without the volatility that comes with stocks and bonds. Rates fluctuate based on the economy and the Federal Reserve’s rate changes.
- Certificates of deposit (CDs): Adding a CD can enhance your retirement portfolio. A CD locks your rate for a specified period, ranging from a few months to as long as 10 years and often earns more than savings accounts. You lose the interest and generally pay a fee if you need to cash it in earlier.
- Brokerage account: You can still open a brokerage account if you’re 10 years away from retirement. This lets you invest in different assets like stocks, bonds, exchange-traded funds (ETFs), and mutual funds. There are tax implications that come with these accounts. For instance, you incur capital gains for any profits from the sale of any shares or dividends you take as cash.
- Traditional IRA: You can contribute pre-tax dollars to a traditional IRA as long as you have earned income. This lowers your taxable income, giving you a tax advantage. You can invest in different assets like stocks and bonds, giving you a diverse portfolio. The investments grow on a tax-deferred basis until you make withdrawals in retirement, which are taxed as ordinary income.
- Roth IRA: A Roth IRA uses after-tax dollars for contributions, while earnings in the account grow tax-free. You can contribute after 70½ as long as your modified adjusted gross income (MAGI) meets certain limits. You can make qualified withdrawals without incurring taxes from your Roth IRA after you turn 59½ and you’ve held the account for at least five years.
- Health savings account (HSA): A health savings account can help you pay for your healthcare and can be a great retirement tool if you have a high-deductible health plan. Your contributions are tax-deductible, your investments and earnings grow tax-free, and your withdrawals are tax-free if you use them for qualified medical expenses.
- Employer-sponsored retirement account: If your employer offers a retirement plan like a 401(k) or a 403(b), make sure you enroll. Contributions are made using payroll deductions, which lowers your taxable income. Your earnings grow on a tax-deferred basis, and you don’t pay taxes until you begin making withdrawals. If your employer offers a match and you aren’t contributing, you’re essentially giving up free money.
Calculate Your Income Needs for Retirement
Determine your retirement needs by listing all of your current expenses to give you a good idea of how far your retirement income will go. The following list will help you get started with your calculations:
- Housing
- Health care
- Food
- Utilities
- Taxes
- Insurance
- Transportation
- Clothing
- Entertainment
Retirement income calculators can help you determine your needs. You also can use a robo-advisor, which is a digital platform that automates investing through algorithms. When you sign up, you fill out a questionnaire about your financial situation, risk tolerance, and goals. It uses this information to calculate how much you can withdraw without running through your savings.
Important
Don’t forget to establish an emergency fund. You should save at least three to six months’ worth of expenses in a liquid account, such as a high-yield savings or money market account. Use this account to cover unexpected expenses and emergencies.
Pay Down Debt
Concentrate on paying down as much debt as possible before you retire. Working toward this goal can help you achieve a greater degree of financial freedom and ensure that your retirement is spent worry-free.
Focus on high-interest debt first. Credit cards usually come with the highest rates, so it’s a good idea to tackle these first. Personal loans, including any unsecured loans, should be next. followed by medical debt, and car loans. You also may want to work aggressively to pay off any student loans. Keep in mind that you can deduct up to $2,500 in interest on qualified student loans.
Consider using the debt avalanche or debt snowball strategies to pay off your debt, especially your credit cards. If you can, try balance transfer cards, which often give you low or 0% promotional interest for a certain period. You may want to consider taking out a debt consolidation loan, which gives you one manageable payment each month.
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Maximize Retirement Contributions
Be sure to enroll in your company’s retirement savings plan, especially if your employer provides a matching contribution. This gives your nest egg an additional boost. To get the most out of your retirement savings plans, ensure that you maximize your contributions.
| Contribution Limits for Retirement Savings Plans | ||
|---|---|---|
| Under 50 | Catch-up contribution (50 and older) | |
| 401(k), 403(b), 457(b) | $23,500 | $7,500 |
| Traditional IRA | $7,000 | $1,000 |
| Self-Directed IRA | $7,000 | $1,000 |
| SIMPLE IRA | $16,500 | $3,500 |
The contribution limit for Roth IRAs varies based on your MAGI and your tax filing status:
| Roth IRA Phase-out Ranges and Contribution Amounts | ||
|---|---|---|
| Filing Status | MAGI | Allowable Contributions |
| Single | Less than $150,000 | $7,000 ($8,000 if age 50 or older) |
| $150,001 to $165,000 | Partial contribution | |
| $165,001 or more | $0 | |
| Head of Household | Less than $150,000 | $7,000 ($8,000 if age 50 or older) |
| $150,001 to $165,000 | Partial contribution | |
| $165,001 or more | $0 | |
| Married Filing Separately (if you lived away from your spouse at any time during the year) | Less than $150,000 | $7,000 ($8,000 if age 50 or older) |
| $150,001 to $165,000 | Partial contribution | |
| $165,001 or more | $0 | |
| Married Filing Separately (if you lived with your spouse during the year) | Less than $10,000 | Partial contribution |
| $10,001 or more | $0 | |
| Married Filing Jointly | Less than $236,000 | $7,000 ($8,000 if age 50 or older) |
| $236,001 to $246,000 | Partial contribution | |
| $246,001 or more | $0 | |
| Surviving Spouse | Less than $236,000 | $7,000 ($8,000 if age 50 or older) |
| $236,001 to $246,000 | Partial contribution | |
| $246,001 or more | $0 | |
Choose the Best Investments
Nicholas Shaheen, CFP, CIMA, chief compliance officer, and financial advisor at Financial Services of America, said investments should be about what best fits with your retirement plan.
“At this stage, focus on planning how to generate income from investments during retirement,” he said. “There’s no one-size-fits-all investment.”
Depending on your risk tolerance and goals, Shaheen suggests considering a mix of:
- Dividend stocks: Companies that pay dividends often are known to be financially strong and well-established. Dividends can be reinvested, offering compounding growth as your portfolio grows. When you’re ready to retire, they can act as a passive source of income.
- Bonds: Bonds are generally considered safer and less volatile than stocks. They provide you with regular income from regular coupon payments and are designed for capital preservation as long as you hold them until they mature, Choose from U.S. Treasury notes and bonds, investment-grade corporate bonds, and bond ladders.
- CDs: As noted above, CDs let you lock in your money for a fixed rate for a certain period and provide you with a safe and predictable way to grow your savings.
- Money market funds: Money market funds are mutual funds that invest in highly liquid, short-term debt securities. They aim to preserve your capital while giving you some income. By investing in these funds, you can diversify your portfolio, reduce your volatility, and use them as a place to park your cash as you explore other investment options.
- Annuities: With an annuity, you pay an insurance company a lump sum or a series of payments. The insurance company invests that money for you, which grows on a tax-deferred basis. The annuity provides you with a guaranteed and steady income stream when you’re ready to start making withdrawals.
Investing starts with setting realistic goals, even if you’re 10 years away, Shaheen said. To be successful, he suggests estimating your retirement expenses and income sources, including Social Security, identifying any income gaps you may have, and developing a savings and investment plan.
You can use the services of a financial professional or a robo-advisor to help achieve your goals. Many top brokers and automated platforms have professionally managed portfolios that can help you plan for your future, even if you have a 10-year time horizon to retirement.
The Bottom Line
Creating a solid retirement plan and fine-tuning it is key, regardless of how old you are. You may be feeling the pressure if you’re 10 years away from leaving the workforce. There are many tools you can use as you plan. But if you’re unsure of where you stand financially and/or how to make the most of your savings plan as you get closer to retirement, make sure you consult a financial advisor or retirement specialist who can help guide you down the right path.