When gearing up for retirement, typical advice emphasizes the importance of maximizing contributions to retirement accounts, including catch-up contributions for those who are older.
Individuals aged 50 and above can add an extra $1,100 to their IRA in 2026, which totals $8,600. For those contributing to an employer-sponsored retirement plan, the limit rises to $32,500 once they hit 50. Also, people between 60 and 63 can take advantage of “super catch-up” contributions to their 401(k), allowing for contributions of $34,750 in 2026. A change brought about by the Secure 2.0 Retirement Act mandates that high-income earners must direct their catch-up contributions into a Roth 401(k) instead of a traditional one starting in 2026.
Colleague Amy Arnott points out that these additional contributions can accumulate significantly for those starting at age 50. She indicates that maximizing the 401(k) with both catch-up and super-catch-up contributions from ages 50 to 65 could boost retirement savings by over $200,000, assuming a 5% return on investment. Realistically, the actual increase is likely to be even higher due to inflation adjustments on contribution limits.
However, past age 60, the reduced number of years for these contributions to grow can make tax deferrals less beneficial in the near term. If someone isn’t planning to tap into their assets until much later or intends to leave funds for their heirs, continuing to contribute still has its merits. In fact, the perks of compound interest and tax deferral are amplified over a longer investment window.
On the flip side, if your retirement savings look relatively solid, you might consider shifting your focus to financial choices that bring you comfort and joy.
Four Financial Choices with Emotional Benefits
Here are several spending strategies that may not significantly enhance your retirement savings but could offer emotional rewards.
Strategy 1: Anticipate Big Expenses
This advice might be overly simple, but it’s vital.
As you near retirement, it’s wise to foresee major expenses that could arise in the next few years, like home repairs or car replacements. If you’re still employed, you might prefer to absorb those costs directly through your regular income rather than diverting money from your retirement savings.
You could also plan for these costs in your retirement budget, which is a common practice among those with high net worth. Putting off these big expenses until you’re still working can ease the psychological strain of withdrawing money from your investment accounts, especially at the beginning of retirement. If you’re considering delaying Social Security benefits, you might be relying on your investment portfolio for cash flow in the interim. During this transition, it’s generally more satisfying psychologically to spend money you’ve earned rather than tapping into savings.
Think about what brings you joy. If you’re eager to dive into cooking during retirement, investing in a new kitchen countertop might be a good move. Planning to hit the road often? Ensure you have a reliable vehicle that fits your budget.
It seems likely you’d find it easier to part with cash now, rather than waiting until retirement.
Strategy 2: Eliminate Debt
Debates about whether to prepay mortgages can stir strong opinions online. Ultimately, it boils down to which choice offers better returns: paying off debt or investing elsewhere for similar returns.
What’s considered the best decision can fluctuate with interest rates. Many homeowners today might earn more from safe investments than what they’re paying in mortgage interest. And, don’t forget the liquidity and spending considerations. If paying off a mortgage means raiding retirement accounts and incurring hefty taxes, you might want to reconsider.
Nevertheless, being mortgage-free can lead to significant peace of mind, especially when nearing retirement, as it helps align fixed costs with a steady income source like Social Security. Plus, having more financial flexibility can enhance your spending experience in retirement. People often argue about the numbers involved, but I haven’t met anyone who regretted paying off their mortgage.
Strategy 3: Increase Liquid Reserves in Taxable Accounts
Putting money into a taxable account may not be as tax-efficient as contributing to a tax-advantaged retirement account. You’ll typically owe taxes on the income or gains generated from these taxable investments, unlike in retirement accounts where your funds grow tax-deferred.
The advantage of boosting liquidity reserves in a taxable account mainly lies in its flexibility. You have the freedom to deposit and withdraw funds without limitations. If you’re over 59 1/2, not only do you avoid the 10% penalty for early withdrawals from traditional IRAs, but you can also pull from Roth IRAs penalty-free. However, withdrawals from traditional IRAs will incur regular income taxes, while preserving Roth assets for later can maximize tax benefits. Managing spending from a taxable account with minimal tax implications allows for exploring other strategies early in retirement, like converting traditional IRAs to Roth accounts.
The key takeaway? Don’t allocate too much into safer assets in taxable accounts. Tax implications from income distributions may not be drastic; more importantly, too much cash may yield lower returns and not even keep up with inflation. I believe retirees should ideally have no more than two years of liquid reserves saved across all accounts.
Strategy 4: Allow Yourself to Splurge
This might seem like the least practical recommendation, but it’s incredibly vital.
If you’re in your 60s, you likely know people who passed away too early to enjoy their retirement. So why not embrace those big experiences you’ve been saving for, while you still can?
As illustrated in Jamie Hopkins’ insights, enjoying life while still earning an income can help delay withdrawals from your portfolio and allow for favorable strategies, like deferring Social Security. If planning a few memorable trips or investing in a vacation home feels worthwhile to you, it’s definitely worth considering—even if it requires dipping into some savings.
