Nearly everyone knows that it is best to start investing for retirement at an early age.
However, not everyone follows that advice for reasons that may be beyond their control.
Whatever your reasons, it is never too late to start investing for retirement, regardless of your age. Of course, you need to adopt a more aggressive saving approach to support your dream retirement if you are in your late 50s or early 60s.
Keep reading to learn how to invest for retirement at age 60 by choosing proven retirement investment options.
Long-Term IRA Investments
One of the best retirement options that can help you save enough money for the long-term is an individual retirement account or IRA.
An IRA is a savings account that offers tax advantages for individuals to save and invest money. With an IRA, you can invest in a wide range of financial products, including mutual funds, stocks, exchange-traded funds (ETFs), and bonds.
Types of IRA
There are a few different types of IRAs you can choose from, depending on your needs. These include:
Traditional IRA: Money contributed to a traditional IRA is tax-deductible in most cases. That means your taxable income decreases by the amount you contribute to a traditional IRA. Also, savings in a traditional IRA grow tax-free until you withdraw them in retirement.
Roth IRA: Contributions in a Roth IRA are not tax-deductible but you won’t pay taxes on your investment gains. A Roth IRA is a great option if you think you will be in a higher tax bracket when you retire.
Rollover IRA: With a rollover IRA, you can move your retirement savings from a former employer-sponsored savings plan, such as a 401(k), into another IRA account. You don’t have to pay early withdrawal penalties or current taxes when you move the funds. The tax-deferred status of your retirement asset is protected with a rollover IRA.
Self-Directed IRA: A Self-Directed IRA lets you own assets, including gold and real estate, in addition to other common investment vehicles. You get to make all the decisions in a Self-directed IRA. This type of IRA has the potential for higher gains, but it is better suited to experienced investors.
Who and how can you open an IRA?
Unlike a 401(k), which can only be obtained through an employer, anyone who has earned income can open an IRA. Thankfully, you can also obtain an IRA even if you have a 401(k).
Age isn’t an issue either. You can open a new traditional IRA even if you are 70 years old. Plus, you can continue to make contributions to the account beyond the previous 70½ years age limit, thanks to the SECURE Act of 2019.
You can open an IRA account through an investment company, personal broker, online brokerage, or a bank.
What is the maximum contribution to an IRA?
For people younger than 50 years, the maximum annual contribution to a traditional IRA is $6,000 in 2021. Those who are 50 or older can contribute no more than $7,000 annually.
Here are key factors that can improve your chances of having more money in your IRA nest egg:
Never touch your IRA funds prematurely.
Be consistent in contributing to your IRA.
Put money in the account as much as you can.
What are the Benefits for 60-year-olds?
With an IRA, you are not expected to withdraw from your account until you reach age 72. That means you have more than 10 years to invest and grow your retirement nest egg if you are currently 60 years old.
Here’s a rough example of what you could have in your IRA account if you aggressively saved from your 60th birthday until you reach age 72.
If you have a balance of $200,000 and make a yearly contribution of $7,000 with a 10% annual interest rate, your savings will have grown to over $770,000 at the end of 12 years.
Getting the Most From 401(k)
It takes a lot of discipline and determination to start stashing away money in an individual retirement account.
The process is comparatively easier and more convenient with a 401(k) plan or similar plans, such as 403(b) and 457.
What are the benefits of 401(k)?
First, a 401(k) plan has an automatic payroll withholding feature.
This means your employer takes your contribution out of your paycheck and puts it in your retirement account even before the check ever gets to you. There is no way you’re going to miss any payment with this type of arrangement.
Secondly, some employers offer a matching contribution. This means your employer can put into your 401(k) account, matching a certain percentage of what you are contributing. The funds in your retirement account are invested in different investment vehicles, including mutual funds, bonds, and stocks.
Also, a 401(k) plan is a tax-advantaged retirement account, meaning you save taxes today since you can contribute money before any state or federal income taxes are withheld. You will only pay taxes when you make withdrawals from the account in retirement.
In addition to tax-deferred savings, your retirement savings can grow tax-deferred. So, you save taxes on the interests or earnings of your contributions.
How can 60-year-olds make the most of 401(k)?
Okay, how do you make the most of the 401(k) retirement account?
Here is how to invest for retirement at age 60 if you plan to make the most out of this type of retirement account: fund your 401(k) with the maximum amount you can contribute to the plan.
The idea is that you are most likely in the peak of your earning years in your 50s and early 60s. This puts you in a higher tax bracket presently than you will be when you retire.
Funding your 401(k) to the max in your 50s and 60s means you will pay fewer taxes in retirement.
What is the maximum contribution to a 401(k)?
The maximum amount you can contribute to a 401(k) account in 2021 is $19,500 if you are younger than 50 years old.
But if you are above 50, the savings plan recognizes that time is against you. So, it makes room for you to contribute an additional $6,500 (known as a catch-up contribution) to make up for the lost time. This brings the maximum amount you can put in your 401(k) to $26,000 per annum.
What if you have more than the maximum allowed amount of $26,000? This is where having multiple retirement accounts come in handy. You could stock away any excess money in a traditional or Roth IRA.
Keep in mind that while multiple retirement accounts can be great, it is best to limit them to a few accounts so that you can better manage them.
The Power of Diversification
Many savers who follow conventional financial wisdom invest more conservatively as they grow older. Most of their money goes into bonds and only a small portion (if any) is allocated to stocks.
While conservativeness is a matter of personal preference, it is usually best to have a retirement portfolio that is made up of stocks and bonds in a healthy balance.
It is true that stocks can take a nosedive for a long time and that won’t be too good for an older person, as they may not have many years to wait for the stocks to recover.
However, stocks can grow your portfolio significantly over time. Plus, it offers a hedge against inflation – something that bonds are poor at.
Bottom line: consider diversifying your portfolio in both bonds and stocks while factoring in your age. You may want to be moderately conservative and have a portfolio that consists of 55% bonds, 35% stocks, and the remaining portion spread across cash or money-market fund.
Don’t Forget About Your Taxes
You’ve worked so hard and saved up sizeable money to support you in retirement.
Of course, not everything in your retirement savings is yours to keep. You have to pay taxes at the ordinary income rate as you make withdrawals.
But it will be wiser not to lose a chunk of your savings to taxes. If it is possible, consider moving to a tax-friendly state to reduce the amount of taxes you will pay and hold onto the larger part of your retirement fund.
However, this strategy is usually best for people who are in a higher tax bracket in retirement.
If you’re wondering how to invest for retirement at age 60, your best bet is to combine a few retirement plans.
A combo of an individual savings account (IRA) and 401(k) can help you stock money away for your retirement. Best of all, these are typically tax-deferred accounts, meaning you will pay fewer taxes.
But beyond putting money in one or multiple retirement accounts, you should never touch your retirement savings, ever! Allow the funds to grow and create other sources for emergency funds.
Lastly, don’t put all your eggs in one basket. Put your money in a few different investment vehicles to ensure a secured financial future.
John E Chambers is an experienced financial advice expert. Born in Chicago, he has a master's in Industrial Finance, but he has spent decades offering investment advice to businesses and individuals alike. He is the founder of RetireeWorkforce.com and wants the website to be valuable for retirement advice. In addition, he writes articles that help users jump-start their retirement plans and choose the best investment options. If not pondering over stock market statistics or reading some magazines, you can find John spending time with his family. As an early retiree, John also offers unique insights into what post-retirement life is like.