Late-Start Retirement Savings – You Can Do This!

late-start retirement savings

It’s NEVER Too Late!

For anyone with a less-than-ideal retirement account (or none at all), it’s easy to feel behind, or even desperate. You’re fine now, but what about when you’re ready to leave the rat race? Will you EVER be able to retire?

It’s absolutely true that saving from a young age is ideal – for each year, the compounded interest pays you major dividends. But crying over spilled milk doesn’t do anyone any good, and at the end of the day, the best time to start a retirement account is RIGHT NOW!

Getting it done right now, even if that means you start with nearly nothing, means you won’t end up three years down the line even more upset with yourself than you already are.

Here are three of the top pieces of advice for people who need some late-start retirement savings.

late-start retirement savings

1: Play Catch Up

Let’s assume you’re 40 years old, with $0 retirement savings.

At your age, you’re legally allowed to save $17,000 per year in a 401k retirement fund. How far will that money go?

Assuming a 7 percent rate of return – which, not coincidentally, is the average annualized rate of return that investing legend Warren Buffet predicts we’ll see in the coming decades – your 401k will grow to $1 million in 24 years and 2 months. That means you’ll be on track to have $1 million by the age of 64, in time for retirement.

You’ll need an extra 7 years to have an inflation-adjusted $1 million, equivalent to today’s dollars. In other words, you’ll have an inflation-adjusted $1 million by the age of 71, assuming you keep contributing $17,000 per year. Since many retirees work until the age of 68 or 70, working for an extra 7 years could be a feasible goal.

2: Understand How Much You Need

“But I don’t need a million!,” you might be thinking. “I just want a simple life.”

Ah, but a simple life requires $1 million in the bank. You see, most experts agree that during your retirement, you should withdraw no more than 3 – 4 percent of your retirement portfolio each year. (These are known as the “4 percent rule” and the “3 Percent Rule”.)

Three percent of $1 million is $30,000.

Four percent of $1 million is $40,000. In other words, if you want to live on an income of $30,000 – $40,000 per year in retirement, you’ll need a portfolio of at least $1 million dollars.

(This assumes that you don’t have a pension, rental properties, or other sources of retirement income. It also excludes Social Security, which many people find to be more paltry than they expect.)

3: DON’T Take on More Risk

Some people make the mistake of taking on additional investing risk to make up for lost time. The potential returns are higher: rather than 7 percent, there’s a chance that your investments can grow 10 percent or 12 percent.

But the risk, the potential for loss, is also much higher. Your risk should always, always be aligned with your age. People in their twenties can accept greater losses since they have more time to recover. People in their forties cannot.

Don’t accept extra risk in your portfolio. Pick one of the following tried-and-true asset allocation recommendations:

120 minus your age in stock funds, with the rest in bond funds. (Highest acceptable level of risk.)

110 minus your age in stock funds, with the rest in bond funds. (Moderate level of risk.)
Your age in bond funds, with the rest in stock funds. (Most conservative acceptable level of risk.)
– via The Balance

A Little Tough Love

Now’s the time for some blatant honesty. Starting your retirement savings later in life might not be ideal, but that doesn’t mean it isn’t doable. But taking an honest look at where things stand, what you’ll need to do, and creating a backup plan means you’ll be in a better place tomorrow than you are today.

Perhaps the biggest problem in starting a retirement plan later in life is the loss of a prior significant period of time over which earlier investments could have compounded and grown. At a 5% rate, an investment doubles in 15 years; at 4%, in 18 years. But even if you’re in your 50s, you can still take advantage of the magic of compounded returns. That’s because–actuarially, anyway–your retirement is likely to run upwards of 20 years. That’s a long-enough period for investments you put away today to bear fruit.

As you get the savings going, you should figure out where you stand financially and what you’ll need. Even if you aren’t the sort to track every nickel spent on Intuit’s Quicken, it’s not hard to draw up a family net worth statement listing all assets and liabilities, and an income statement showing income and expenses over the last year. Data on your latest tax return can help.

There are all kinds of rules of thumb about what level of your current net income you’ll need to sustain yourself in retirement, generally ranging from 60% to 80% to even more. But if you’re new to retirement savings, don’t be paralyzed because you won’t reach those goals. Simply do the best you can and keep in mind that you’re not starting from zero.

For example, even if your current employer doesn’t offer a traditional defined benefit pension plan–one that pays a set amount each month–you may well have earned a monthly stipend from a previous job. This is a good time to paw through your old files and find records of any pensions from ex-employers you may be entitled to.

Even more significant is Social Security, which replaces 42% of the salary of a median wage earner who retires at the “full” or “normal” retirement age–66 for those who were born between 1943 and 1954. Replacement rates are higher than that for low-wage workers and lower for high earners. Plus, the replacement rate is higher for one earner couples, when spousal benefits are factored in.

Every dollar that comes from Social Security is one less dollar you otherwise have to provide for. You can get online an official estimate of your benefits from Social Security. Given the federal deficit, younger folks might rightly worry they won’t get what they’re promised from Social Security. But those 55 and over are unlikely to be nicked too much by any Social Security changes, unless they have a fairly high income.

You can start drawing early retirement benefits from Social Security at age 62, but it pays to wait, especially if you continue working past that age, and is crucial if you’ve begun saving late. Delaying the start of Social Security benefits until age 70 can boost the monthly payout by as much as 80%. For more on how to get the biggest Social Security payout, click here.

Here comes the tough-love part. If you seem to have no money left over at the end of the month to put away one way or the other and you don’t want to get a second job or work longer, you’re going to have to reduce your style of living. It’s as simple as that. Sure, there’s a lot of nickel-and-dime stuff many people can do–eat out less, buy used cars and so on. But you’ll have to tackle the big stuff. Consider downsizing to a smaller, cheaper and less-expensive-to-operate house or even renting an apartment. (The first $500,000 of any gains on a principal residence sold by a couple is tax free, meaning more to invest now.) Even more dramatically, ponder relocating in retirement to an area with a significantly lower cost of living. Tell the grown children still living at home they’re going to have to start fending for themselves.
– via Forbes

Have you started saving for retirement yet? How’s it going so far?

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