Late to the Game, How to Ramp Up Retirement Investing in Your 40s and 50s

Maybe you looked in the mirror this morning and found a new crinkle on the face staring back at you. Doubtful, however, that your very next thought was: "Boy, am I way behind in retirement savings."

The reality is, like any anti-aging regimen, retirement planning takes regular maintenance. We often skip a few preventative measures on both fronts.

[See Saving for a Comfortable Retirement.]

For some individuals, there's not all that much to maintain. They've put off investing for retirement because of financial hardship, they spend too much, or they put all their efforts into their kids' college savings.

It's never too late to get started or to find new ways to grow anemic savings. But that begs the bigger question: How aggressive should you be in your 40s and 50s as you look to ramp up your retirement plan?

Before considering how to invest, it's important to think about how you're generating that money. Are there more ways to save? Depending on your retirement goals, you might need to be saving more than 20 percent of your income in your 50s, say advisers at Wells Fargo. Before that, 10 to 15 percent is a common benchmark. Some advisors want to toss all percentage guidelines out the window. In general, the more you can save and invest, the better off you'll be.

-- One of the best ways to extend your retirement savings is to plan to work longer. Consider that the maximum Social Security benefit at age 62 is a tad over $1,800 a month. If you hold off claiming Social Security until age 70, your monthly benefit jumps about 75 percent, to almost $3,200, according to Social Security Administration data. Not only will waiting to collect that gold watch potentially allow you a heftier government payout, it means your own nest egg can continue to grow. But working indefinitely may not only cut into your grand travel plans, it may be physically impossible. More options are necessary.

[Related: How to Beat Government Bonds -- Using Social Security]

-- Work aggressively toward eliminating high-interest revolving credit, like credit cards or unsecured loans. A consolidation loan may help lower interest rates and it's easier to manage.

-- Make sure you're taking full advantage of tax-beneficial 401(k) or other employer-sponsored retirement plans and if available, any matching incentives. Receive a bonus? Earmark it for your retirement savings. If you feel your company plan isn't enough, if a plan isn't not part of your benefits package, or if you work for yourself, taking advantage of the tax benefits of an IRA is crucial. You are allowed extra "catch-up" contributions to IRAs and 401(k)s in your 50s. For traditional and Roth IRAs, the catch-up amount is $1,000 above the standard limits, which are now annually indexed for inflation. For most 401(k)s, the catch-up amount is $5,500 above the contribution limits and indexed for inflation in subsequent years.

[See Does an IRA Still Make Sense?]

What's the difference? For a Roth IRA, you contribute after-tax funds. The contributions are limited to $5,000 per year, but they are increased to $6,000 per year if you're over 50. Once you are 59 1/2 years of age, and the funds have been in the account for at least five years, the money can be withdrawn tax- and penalty-free. You can keep your account active indefinitely, allowing it to grow. Contributions to a traditional IRA are tax-deductible at the outset. Once you access the funds after age 59 1/2, you will need to pay taxes on the amount you withdraw. The funds must be withdrawn before you turn 70 1/2 to avoid penalties.

-- If you haven't already, consider the pros and cons of additional life insurance and long-term care insurance or annuities, which guarantee income later in life.

-- Take a look at your house with new eyes. There may be an invaluable emotional connection and you may still have minor children at home that you don't want to uproot. But at some point, if you can detach yourself from the sentiment, changing your relationship with your house now may go a long way toward financial security later. Even if your house is paid for, if it's too expensive to maintain, it may be a burden. You might consider selling your home and downsizing to a smaller, more affordable property with minimal upkeep. Pay off your mortgage early, then turn that savings into retirement funding.

Consider that investing your $700 mortgage payment in a diverse portfolio of assets with an average 8 percent return could add more than $100,000 to your retirement savings over a decade. Of course, if you're banking on more equity growth in the home, it may make sense to stay put. With the former option, however, you're actively taking on your retirement planning and not pinning all your hopes on housing-price appreciation.

-- Most advisors agree that college savings should never come at the expense of your retirement planning. There's no scholarship, grant, or loan to finance your retirement. There are a myriad of options for supplementing the cost of higher education, however.

Now, the question: If I'm playing catch-up, should I be overly aggressive with the type of investments I pursue?

Many investors are still stinging from the stock market realities of the past few years. From October 2007 until March 2009, the worst stretch of the recession and credit crisis, the S&P 500 shed 55 percent of its worth. It has since regained about half of that drop. Nearly 1 in 4 investors age 56 to 65 had more than 90 percent of their account balances in equities going into 2008, and more than 2 in 5 had more than 70 percent in stocks, according to the Employee Benefit Research Institute.

[See 50 Best Funds for the Everyday Investor.]

"Investors can't likely reach the portfolio size they want without the growth that comes from stocks," says Mike Piper, an accountant and creator of the blog Oblivious Investor. "But the crash of 2008 and 2009 provided useful information. For those who had a high stock allocation, it scared them and many moved out of stocks. It's unfortunate, perhaps, that they did. Doing so tells them something very real about their personal risk tolerance. The market has come back, but it doesn't always happen like that."

Some advisers like to think of the market in bigger snapshots, say 15 years. The stock market has never put in a 15-year negative return, according to index data. For investors in their 40s and 50s, they likely have at least 15 years until retirement. More important, say experts, is the mix of stocks within the portfolio that expose investors to both cyclical stocks (those that can grow in boom days) and steady-eddies like utilities or large conglomerates that can be solid defensive plays. Advisers collectively are worried that recent market history will unduly turn off mid-career investors from a relatively aggressive stock position they may need to finance a longer lifespan and fight inflation.

Some investors are drawn to the relative ease of target-date funds, which draw mixed reviews from financial planners after sharp losses in recent years. The funds are an increasingly popular retirement-plan default. They automatically change the fixed income-equity-cash mix depending on the retirement target date. Some plan administrators have moved to more conservative formulas in this popular product.

Stock allocation hinges in large part on how big your retirement fund is. Here's why: Retirees (and those nearing retirement age) should first figure out their necessary cash flow and work backward. If they'll be supplementing a pension and/or Social Security, they may need to draw down fewer resources from their retirement plan and can let the pot grow with help from a more aggressive allocation to equities.

The same is true if they're lucky enough to have a large retirement account and can allocate a portion to fighting inflation with an aggressive stock move, leaving the bulk in more conservative holdings. If the whole retirement plan will have to generate income, investors will need to strongly limit their stock exposure. How secure you believe your job is can determine how risky you're willing to go with stocks.

Piper sees some value in dusting off an old allocation rule-of-thumb as a starting point. It says your age represents the percentage you allocate to "safer" bonds: If you're 50 years old, for example, you allocate 50 percent to this asset class.

But Piper stresses the value in dropping any upside target and instead concentrating on a downside target. That is, what is your maximum tolerable loss? Put a number on your emotional comfort zone and multiply it by two. So a 15 percent loss, doubled, becomes a 30 percent allocation.

Your allocation should be driven by your age, not by market history or present-day news, says Jane White, president and founder of education and advocacy organization Retirement Solutions. She believes investors should stay fully invested in stocks until they hit their 50s or so. She suggests multiplying your final pay (what you expect to earn right before leaving the workforce) by 10 to determine how much you'll need for a long, comfortable retirement.

With that target in mind, next time you look in the mirror, give yourself an honest talking to about the kind of makeover you may really need--more aggressive savings and smart inflation-beating and income-generating growth in your retirement stash.