Much has been written about decade-based retirement savings targets. T. Rowe Price, for example, recommends having three to six times your annual salary socked away for retirement by the time you turn 50.
But what about the go-to stash of liquid cash in your savings account?
In terms of personal finance, the big five-oh is an important year that puts you in the on-deck circle for retirement. That birthday, after all, is when the IRS allows you to start making catch-up contributions to your tax-advantaged accounts.
With that in mind, people might be tempted to invest as much as humanly possible, even at the expense of their savings. But for many people, 50 can be an expensive year thanks to growing children, aging parents and higher healthcare bills. The last thing in the world they need is an early withdrawal penalty on their 401(k) plans because they wrung too much out of their savings.
If you’re entering your sixth decade on planet Earth, here’s how to find your savings sweet spot.
For Most 50-Somethings, It’s All or Nothing
According to a new GOBankingRates survey of 1,000 adults, people in their 50s are most likely to have savings accounts that are either tiny or enormous.
About 45% of those in the 45-54 age group (so the early 50s) and 32% of those in the 55-64 age group (late 50s) have $100 or less. Those are the biggest percentages by far for both age groups. The No. 2 most common amount is on the other end of the spectrum entirely. About 11% of the younger set and 25% of the older set have $10,000 or more.
The rest in both groups are distributed fairly evenly somewhere in between.
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The Evolution of the Middle-Age Emergency Fund
There is, of course, no one magic number that will strike the proper balance for everyone.
“The right amount of cash to keep in savings accounts as middle-aged people turn 50 depends on individual circumstances and financial goals,” said Gabriel Lalonde, CFP and president of MDL Financial Group. “But as you approach 50, you should have a solid emergency fund.”
The term “solid,” however, changes at 50 — as does the concept of an emergency.
The Boilerplate Advice From Before Expires at 49
The IRS allows you to start padding your 401(k) or IRA at age 50 because that’s when most people begin the sprint to the retirement finish line. The clock starts ticking much faster as middle age winds down, and without sufficient savings, you won’t have time to recover if you encounter a major setback.
That reality validates the survey’s most prudent savers with five figures on hand for a rainy day.
Lalonde notes that the standard emergency fund “should cover three to six months’ worth of expenses and be kept in a liquid savings account that can be easily accessed in case of unexpected expenses or job loss.”
But at 50, that’s no longer enough.
“You should also set aside some cash reserves to provide stability and security in case of market volatility,” Lalonde said.
So, How Much Is Enough? Adjust For Your New Worst-Case Scenario
According to Fulton Bank, 50-year-olds should adjust their savings accounts from the standard three to six months’ worth of expenses to two to three years’ worth — and for good reason.
While you might despise the thought of that much cash losing value to inflation as retirement nears when it could be earning you much-needed gains on the stock market, consider the alternative.
Imagine you lose your job or suffer some other major setback now, just as you’re supposed to be catching up. If you’re one of the 60% or 70% of 50-somethings from the survey with less than $2,000 in savings, you’ll have to start selling off your investment portfolio right when you need to grow it the most.
If that happens during a market downturn like the one that stymied investors this entire past year, you’ll sell at a loss. If it forces you to pull from a tax-sheltered account like a 401(k), you’ll eat the loss and take an early withdrawal penalty, to boot.
With the finish line in sight, that’s the worst-case scenario that must drive your calculations. So if two to three years’ worth isn’t realistic, how much should a 50-year-old allocate to savings?
“Depending on your risk tolerance and investment strategy, this should be 5%-20% of your portfolio,” Lalonde said.
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Methodology: GOBankingRates surveyed 1,000 Americans aged 18 and older from across the country on between December 7 and 12, 2022, asking nineteen different questions: (1) What category does your current financial institution fall under?; (2) Have you considered changing Banks within the past year?; (3) If you have considered changing banks in the past year, were any of the following factors? (select all that apply):; (4) Which feature, perk, or other offering is most important to you when opening an account with a new institution?; (5) Are you currently satisfied with all your banking products and services offered by your Bank/Credit Union?; (6) Would you ever have different types of accounts across multiple banks? (i.e. Checking at Chase, but Savings at TD Bank); (7) What is your most preferred method of banking?; (8) Which of the following is the biggest factor of you staying with your current bank?; (9) Which of the following bank accounts do you currently use/have open? (Select all that apply); (10) How much is the minimum balance you keep in your Checking Account?; (11) How much do you currently have in your Savings Account?; (12) What amount of a sign up bonus would make you consider switching banks?; (13) Have you considered using any app-only banking platforms (aka neobanks) in the past year (e.g. Current, Upgrade, Chime, Dave, etc.); (14) How important is it to you for your bank to be affiliated with a crypto exchange/platform?; (15) In the past year how often have you written a physical check?; (16) When was the last time you visited your bank in-person?; (17) Why would you choose to visit your bank in-person? (Select all that apply); (18) When you think about banking, do you think of it as something you need or don’t need?; and (19) What services/products do you expect from your Bank and/or Credit Union? (Select all that apply). GOBankingRates used PureSpectrum’s survey platform to conduct the poll.