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It is Never, Never Too Late to Start Saving for Retirement

This topic contains 12 replies, has 0 voices, and was last updated by  Bainc 3 years ago.

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  • #177537

    norules
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    Pretty interesting article from website “Real Deal Retirement”. I am kind of disappointed the person never considered IRA for a retirement vehicle since none of their employers offered a 401K plan. It sounds like they just lived in the moment and now looking around and saying “Oh, bleep”. There is no mention of personal investments or savings. At least, the light bulb came on. I wonder if they will follow the recommendations. You like to hear the success stories of someone asking a question and following through and see how the results turned out.

    http://realdealretirement.com/im-48-and-have-zero-savings-will-i-ever-be-able-to-retire/

    Ask Real Deal Retirement

    I’m 48 years old, have always worked, but none of my employers offered a retirement plan. So I have nothing saved for retirement. Is there any hope for me at this point?

    —M.A.

    Sure, there’s always hope. But how much depends on how willing you are to make a concerted effort to improve your retirement prospects over the next 20 or so years. That’s not to say you can get yourself to where you would have been had you been planning for retirement since the beginning of your career. But if you make retirement planning a top priority in the time you have left in the workforce, you should at least be able to recoup some lost ground. And you’ll certainly be able to retire in better shape than if you do nothing.

    That said, let’s not sugar coat this. By virtually any standard you are far behind. According Vanguard’s recently released “How America Saves 2016” report, the average account balance for the 401(k) plans Vanguard oversees is just over $96,000. For people in your age group (45 to 54), it’s even higher, roughly $116,000. And based on benchmarks Your Money Ratios author and financial planner Charles Farrell has calculated, someone your age should have savings equal to roughly five times annual salary to be on track toward replacing 70% to 80% of pre-retirement income after retiring. So if you earn, say, $60,000 a year, that means you should have roughly $300,000 already set aside to be on track.

    But enough of where you should be. Let’s talk about ways to get you where you want to be, that is, in a position where a reasonably secure retirement is at least a possibility.

    There’s no magic bullet here. No “Make Up For 20 Years of Not Saving” mutual fund that will generate blockbuster gains and power you to a big fat nest egg. If you’re going to have any shot at turning your situation around, you’re going to have to do something that you clearly haven’t done to date: save. As much as you can. Starting right now.

    It won’t be easy. You’ve been living on 100% of your income (minus whatever the IRS and another other tax authorities siphon off). So this is going to require a dramatic change in your lifestyle. But there are a variety of techniques that can make you a better saver—including these 10 tips to supercharge your savings—provided you’re willing to follow them. If you’re not willing to make the transition from a spender to saver, then in the absence of rich, accommodating relatives or hitting the lottery, you’ll have to reconcile yourself to living on Social Security, which, with an average benefit for retired workers of just over $16,000 a year, will barely cover the basics.

    Normally, I recommend that people shoot for a target savings rate of 15% of annual salary. But given how far behind you are, you really ought to push for 20%, if not more. If that’s just not possible immediately, try starting at 15% and increasing that amount by a percentage point a year. Saving at that rate starting this late in life isn’t going to get you to where you would have been if you’d saving diligently your entire career. But you can accumulate a pretty impressive stash.

    For example, someone who earns $60,000 a year, receives 2% annual raises and saves 15% of salary a year, would have a nest egg totaling just under $400,000 after 20 years, assuming a 6% annual return. Save 20% a year, and that figure increases to roughly $530,000. Those amounts, while certainly sizable, won’t accommodate lavish living over a retirement that could last 25 or more years. But they’re enough to materially improve your retirement lifestyle.

    Ideally you want do this saving in a 401(k) or similar workplace retirement plan. Aside from such plans’ tax advantages and the fact that most employers kick in matching funds that leverage your savings effort, your contributions are automatically deducted from your paycheck, which makes it much more likely you’ll stick to your savings regimen.

    But based on your question I gather you don’t have access to a 401(k) in your current job (although I recommend that you consider looking for a job that does offer one, ideally with an employer match). You can get the same tax advantages, however, by investing in a traditional deductible IRA or a Roth IRA. (Morningstar’s IRA calculator can help you decide which type is right for you and how much you can contribute.) The downside, though, is that the maximum allowable annual contribution to an IRA ($5,500 this year, plus a $1,000 catch-up contribution starting at age 50) is typically lower than the 401(k) ceiling ($18,000, plus a $6,000 catch-up for people 50 and older, although individual plans can set lower limits).

    So if you contribute the max to an IRA over the next 20 years, including catch-up contributions when you hit 50, and earn a 6% annual return on those contributions, you would have an account balance of just under $250,000 (actually a bit more, as the IRA contribution ceiling can rise with inflation). Again, that’s a sizable sum, but when you consider you’re likely going to be relying on your savings to get you through two decades or more of retirement, you’ll probably want to accumulate a larger amount.

    Which means you’ll likely want to supplement what you stash away in an IRA with additional savings. Some might recommend you invest any extra money in some sort of annuity (a variable annuity, fixed indexed annuity, whatever) because of the tax advantages they can offer (tax deferral on any investment gains). But I think the advantages are outweighed by their many drawbacks (their complexity, high fees and the fact that long-term capital gains within an annuity are eventually taxed at ordinary income rates rather than generally lower long-term capital gains rates, to name a few.)

    So I suggest you invest any extra savings in a regular taxable account, preferably in stock and bond index funds, which have low-fees (which means you get to keep more of the funds’ returns) and are relatively tax-efficient (which means less of your gain goes to income taxes). For guidance on how to divvy up the money you have in your IRA and other accounts between stock and bond funds, you can check out this risk tolerance-asset allocation questionnaire. To check your progress, I suggest you periodically rev up this retirement income calculator.

    The other single biggest thing you can do to improve your retirement outlook is work a few extra years. For one thing, doing so will get you a higher Social Security benefit, in your case an extra 8% or so for each year you delay taking benefits beyond your full retirement age of 67. (To see what size Social Security benefit you might qualify for at different ages, you can go to Social Security’s Retirement Estimator tool.)

    Staying on the job longer also gives you the opportunity to save more and affords whatever money you do sock away more time to earn investment gains and grow before you begin tapping it. (In fact, the figures in the examples above assume you’ll work to age 68, although you may want to stay on even longer if possible.) Every extra year you spend in the workforce is also one less year your nest egg has to support you, which, all else equal, lowers the chances of your money running out.

    If you can’t continue working full-time, then you should at least consider part-time or doing occasional stints in the workplace, as any money you earn in retirement will allow you to draw less from your nest egg, effectively allowing you to stretch your savings. You can see what sorts of jobs are available for older and retired workers by going to sites RetiredBrains and Retirementjobs.com.

    Even if you do all of the above, you may still find that the combination of Social Security and draws from your nest egg aren’t enough to allow you to live the life you’d like in retirement. In which case, you can try a few more moves. If you own a home, you may be able to tap the equity in it by either downsizing to smaller digs and/or taking out a reverse mortgage. Or you can make a move in the more literal sense—i.e., actually move, relocate to an area with lower living costs. This Cost of Living Calculator can help you compare living costs in cities different parts of the country.

    Ultimately, though, if you want a realistic shot at improving your retirement prospects, you’ve got to start a disciplined savings regimen now. So the question you’ve got to ask yourself is this: Are you willing to spend less today so you’ll have more to save tomorrow?

  • #294218

    Bainc
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    You should invest in a Roth IRA or traditional IRA up to the limit before investing in a 401k that doesn’t offer a match.

  • #294210

    LC
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    No one should ever exceed investing in the maximum 401k match, nor take less. Your risk is cut by 50% usually, but they are mostly crap funds. You can do better on your own beyond the matching agreement.

  • #294219

    Bainc
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    Yep, get the match then go back to an IRA/Roth IRA and max those out before considering going back to your 401k.

  • #294217

    gearshark23
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    I have a Roth IRA, 457 and 401. I’m thinking about rolling everything from my 457 into my 401k.

    I want to get into investing in other places, but maybe in a couple years.

  • #294211

    LC
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    Last night I met a new neighbor who is a financial advisor and we ended up talking for about an hour about planning. He sure seemed like a smart guy, and likable. I think he does pretty well. Not surprisingly, his theory is that saving first and the vehicle second is what matters. It’s a habit to develop. I told him I’ve never actually saved much as I want everything working for me, and started planning for retirement early by building projects for cash flow, rather than actual passive investing. Also, just my habit of buying and selling anything with some arbitrage or value added gain. He said investing style is personality related, and that my profile wasn’t that unusual for alpha types, and that’s probably what we should be doing. Others, more sedate types, are better in funds and managed investments. The upshot was don’t try to invest in a style that isn’t comfortable for you, because you probably won’t put enough into those assets to come out. Interesting assessment, hadn’t considered that previously.

  • #294214

    norules
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    @lc 126399 wrote:

    Last night I met a new neighbor who is a financial advisor and we ended up talking for about an hour about planning. He sure seemed like a smart guy, and likable. I think he does pretty well. Not surprisingly, his theory is that saving first and the vehicle second is what matters. It’s a habit to develop. I told him I’ve never actually saved much as I want everything working for me, and started planning for retirement early by building projects for cash flow, rather than actual passive investing. Also, just my habit of buying and selling anything with some arbitrage or value added gain. He said investing style is personality related, and that my profile wasn’t that unusual for alpha types, and that’s probably what we should be doing. Others, more sedate types, are better in funds and managed investments. The upshot was don’t try to invest in a style that isn’t comfortable for you, because you probably won’t put enough into those assets to come out. Interesting assessment, hadn’t considered that previously.

    I looked at buying rental property in 2010 and 11 with real estate prices down in Sacramento area. I was looking to branch out from stocks and funds for investments. I was researching property management firms and looking at neighborhoods to best buy rentals. I just couldn’t pull the trigger. Not sure if I needed guidance from a more experienced rental person. I didn’t want to go into something that I had little knowledge. It definitely was outside my comfort zone, but I was willing to explore it. I sort of kick myself for not pulling the trigger to buy rental property. Missed opportunity.

    About 20 years ago, a friend told me that if you just save, you are coming out ahead. If you take a $100 out of your paycheck every month and put it in a bank, you are saving, interest sucks, but still saving. Inflation doesn’t come into play. It is like what you new neighbor said, it becomes a habit. For some reason, what my friend said stayed with me. I do other things with the money to make it work for me, but the concept is still there.

    If you put $100 in a shoe box every month, in 20 years you would have $24,000. No need to adjust for inflation. It became a habit. You have $24,000 cash in your hands, right now.

  • #294212

    LC
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    Funny, the guy last night said the same thing about real estate. He said he didn’t have the persona for the risk and tenant hassles. So, in his case, maybe yours, it may not be the thing for you. I had a couple of houses for a few years, but I had a system set up that practically guaranteed me no hassles and rent paid in cash, on time. I made some money, not enough to want to expand that business.

  • #294215

    norules
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    @lc 126406 wrote:

    Funny, the guy last night said the same thing about real estate. He said he didn’t have the persona for the risk and tenant hassles. So, in his case, maybe yours, it may not be the thing for you. I had a couple of houses for a few years, but I had a system set up that practically guaranteed me no hassles and rent paid in cash, on time. I made some money, not enough to want to expand that business.

    I have concluded that too. Sometimes you just have to know your tolerances.

  • #294209

    EGL Admin
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    Being in real estate there would be less fear for us in having rentals. I wish we had the money to buy some during the recession. You would have positive cash flow on a monthly basis plus the increase in value. We almost bought one last fall. In a horrible area by marysville Blvd. it was $89000. We could have got it for $80K. There were already tenants paying $1000. Mortgage would have been $400 a month. The house was in need of repairs. We had a home inspection done. Lot of issues. I just said nope. You can’t really do it in Elk Grove. Prices are too high.

  • #294220

    Bainc
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    Doc, working in Real Estate and investing in rentals seems a bit risky. If both go south like they did in 08′ you’d be done. Similar to employees owing a bunch of company stock. When it’s great it’s great but when the company tanks and you lose your job and your investment it’s a double whammy. Think Enron.

    I too wanted to own more RE in 2010-2011 but no assets to buy. The best we could do was sell our primary house and upgrade in 2013. Glad we did because we couldn’t afford our house today at it’s current value.

  • #294213

    LC
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    @bainc 126416 wrote:

    Doc, working in Real Estate and investing in rentals seems a bit risky.

    If you want to make a better than money market or rated bond interest rate on your money, you have to take risks. I’ve put everything I own on the line many times, and it’s worked out, but if it didn’t I’d have to start over. When you’re under 50 you can–around my age you don’t have enough time so my risk threshold has become higher.

  • #294221

    Bainc
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    Not saying it’s not worth the risk but pointing out the volatility if business dries up at the same time house prices collapse.

  • #294216

    loonyman
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    I have some rental properties, bought some during the recession and bought some after. Doesn’t take a genius to be successful just find the right house at the right price and if you can make a few dollars positive cash flow then go for it. There is plenty of information available out there to help you figure out how to do it and if you can do it. I was fortunate in that I knew people who were successful and gave me good information. I was also fortunate I had money to invest during the recession and that has worked out well. I will continue to look for deals that make sense for me without overextending myself.

    I don’t use property management companies. If you have only one or just a few rental properties you should be able to manage them yourself without giving your positive cash flow to somebody else. If you own a home and can make most repairs yourself at home then you already posses the skills to be successful in renting property. If you have to pay someone every time a drain(Or toilet) clogs or every time your tenant sees an ant inside the house, it probably isn’t for you. Just my 2 cents.

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