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Wednesday, December 16, 2009
55 and haven't saved a dime? Yikes!
No doubt about it: Your late start on building a retirement is going to cost you. But don't panic. You still have these 10 options for padding your golden years.
If you're in your 50s and haven't saved for retirement, you know you're in trouble.
You've also got company. A full 30% of workers age 55 and older said they had less than $10,000 saved, according to the 2009 Retirement Confidence Survey (.pdf file) by the Employee Benefit Research Institute.
There's no sugarcoating the situation: Your late start is going to cost you. But it's still possible to cobble together a decent retirement, even if it looks different from what you might have originally planned.
Here's what you need to do now:
Run the numbers Finance expert Roger Ibbotson has done the math, as I wrote in "Your magic number for retirement," and says people who start saving for retirement after age 35 face increasingly strong headwinds. (You can try the magic-number calculator to the right as well.)
To have enough to retire at 65, late starters must put aside huge chunks of their income. The older you are and the more you make, the more you'd have to save to catch up if you want to maintain something like your current standard of living and be reasonably assured you won't run out of money.
At 55, for example:
Someone who earns $40,000 a year would need to put aside 27% of her income to retire at 65.
Someone who earns $60,000 should contribute nearly 33%.
Someone who earns $80,000 would have to save nearly 37%.
Someone who makes $100,000 would have to shovel in 40%.
Clearly, few people will be able to pull off savings rates anywhere close to those levels.
But not all is lost.
You can use the MSN Money Retirement Planner to fiddle with some of the assumptions that can make a big difference in how much you need to save. Working longer, for example, can make a big difference, as can living on less money in retirement (more on that in a moment). Speaking of which:
70 is the new 65 A few more years in the workplace will benefit you in three ways:
You'll earn more money to contribute to your retirement funds.
Your nest egg will have longer to grow before it's tapped.
Your retirement will be shorter.
Yeah, that last one is pretty grim. Deal with it.
Delaying retirement until age 70 might reduce your required contributions to 15% to 20% of your gross income rather than 30% or more. That's still a big chunk of change, but it might be doable if you get serious about trimming expenses.
You've also got company. A full 30% of workers age 55 and older said they had less than $10,000 saved, according to the 2009 Retirement Confidence Survey (.pdf file) by the Employee Benefit Research Institute.
There's no sugarcoating the situation: Your late start is going to cost you. But it's still possible to cobble together a decent retirement, even if it looks different from what you might have originally planned.
Here's what you need to do now:
Run the numbers Finance expert Roger Ibbotson has done the math, as I wrote in "Your magic number for retirement," and says people who start saving for retirement after age 35 face increasingly strong headwinds. (You can try the magic-number calculator to the right as well.)
To have enough to retire at 65, late starters must put aside huge chunks of their income. The older you are and the more you make, the more you'd have to save to catch up if you want to maintain something like your current standard of living and be reasonably assured you won't run out of money.
At 55, for example:
Someone who earns $40,000 a year would need to put aside 27% of her income to retire at 65.
Someone who earns $60,000 should contribute nearly 33%.
Someone who earns $80,000 would have to save nearly 37%.
Someone who makes $100,000 would have to shovel in 40%.
Clearly, few people will be able to pull off savings rates anywhere close to those levels.
But not all is lost.
You can use the MSN Money Retirement Planner to fiddle with some of the assumptions that can make a big difference in how much you need to save. Working longer, for example, can make a big difference, as can living on less money in retirement (more on that in a moment). Speaking of which:
70 is the new 65 A few more years in the workplace will benefit you in three ways:
You'll earn more money to contribute to your retirement funds.
Your nest egg will have longer to grow before it's tapped.
Your retirement will be shorter.
Yeah, that last one is pretty grim. Deal with it.
Delaying retirement until age 70 might reduce your required contributions to 15% to 20% of your gross income rather than 30% or more. That's still a big chunk of change, but it might be doable if you get serious about trimming expenses.
You'll help yourself even if you just cut down to part-time employment rather than giving up work entirely. Every $5,000 you earn means you need $100,000 less in assets, financial planner Ross Levin says, assuming you'll tap 5% of your nest egg annually in retirement.
Besides, you won't be alone in working longer. AARP tells us that two-thirds of baby boomers plan to work past traditional retirement age.
Don't underestimate Social Security If the reason you haven't saved is that you don't make much, you may be pleasantly surprised at how helpful your future Social Security check will be. It probably won't pay all your bills in retirement unless you really cut costs, but it could replace 25% or more of your current income. The MSN Money Retirement Planner can give you an estimate of how much to expect, or you can check the Social Security statement you get in the mail about three months before your birthday.
Isn't it dumb to rely on Social Security, you ask? Well, sure, if you're young. By 2041, Social Security is expected to have enough money to pay only 75 cents for every dollar in benefits promised to workers.
But you'll be in your late 80s by that point, long since retired (we hope) and among the least vulnerable to benefit cuts. Congress is much more likely to trim future benefits for young and well-off workers than it is to snatch checks away from vulnerable old folks.
"There will be Social Security reform, but it will be things like (removing) the cap on earnings and taxing at a higher rate," says Levin, who works for Accredited Investors, a financial-planning company in Edina, Minn. "You can't pull the rug out from under" elderly people already receiving benefits.
Video: A retirement reality check
Get brutal Retirement savings must become your priority, period. Everything else has to take a back seat.
That will be tough to hear if you've got kids heading for college or elderly parents you want to support. But college students can get loans, and your parents may qualify for all kinds of benefits (start with the Eldercare Locator and check out GovBenefits.gov as well).
If you've been the go-to family member when others run into financial trouble, it's time to shut down the Bank of You. You can read "Should parents bail out their kids?" and "Should you bail out spendthrift parents?" for generation-specific advice, or just head straight to "How to say no to anything -- or anyone."
Besides, you won't be alone in working longer. AARP tells us that two-thirds of baby boomers plan to work past traditional retirement age.
Don't underestimate Social Security If the reason you haven't saved is that you don't make much, you may be pleasantly surprised at how helpful your future Social Security check will be. It probably won't pay all your bills in retirement unless you really cut costs, but it could replace 25% or more of your current income. The MSN Money Retirement Planner can give you an estimate of how much to expect, or you can check the Social Security statement you get in the mail about three months before your birthday.
Isn't it dumb to rely on Social Security, you ask? Well, sure, if you're young. By 2041, Social Security is expected to have enough money to pay only 75 cents for every dollar in benefits promised to workers.
But you'll be in your late 80s by that point, long since retired (we hope) and among the least vulnerable to benefit cuts. Congress is much more likely to trim future benefits for young and well-off workers than it is to snatch checks away from vulnerable old folks.
"There will be Social Security reform, but it will be things like (removing) the cap on earnings and taxing at a higher rate," says Levin, who works for Accredited Investors, a financial-planning company in Edina, Minn. "You can't pull the rug out from under" elderly people already receiving benefits.
Video: A retirement reality check
Get brutal Retirement savings must become your priority, period. Everything else has to take a back seat.
That will be tough to hear if you've got kids heading for college or elderly parents you want to support. But college students can get loans, and your parents may qualify for all kinds of benefits (start with the Eldercare Locator and check out GovBenefits.gov as well).
If you've been the go-to family member when others run into financial trouble, it's time to shut down the Bank of You. You can read "Should parents bail out their kids?" and "Should you bail out spendthrift parents?" for generation-specific advice, or just head straight to "How to say no to anything -- or anyone."
You may not be able or willing to shed obligations to your parents, but any adult child without disabilities may need to be cut loose.
"With kids, you really have to think about some tough-love issues," says Delia Fernandez, a financial planner with Fernandez Financial Advisory in Los Alamitos, Calif., who recommends the books "Ready or Not, Here Life Comes" by Mel Levine and "When Our Grown Kids Disappoint Us" by Jane Adams. "You can't continue to support them at the level they were accustomed to when they were living with you."
Get radical The fastest way to reach retirement is to dramatically cut your expenses. That will help you save more and at the same time reduce the total amount you need to save.
To learn how some people are doing it, read "Retired at 50: What it really takes." Many people who opt for this approach cite the book "Your Money or Your Life" by Joe Dominguez and Vicki Robin as their inspiration. The authors encourage people seeking financial independence -- that is, enough money to retire -- to examine every expense, from shelter costs to snacks, for ways to cut back.
If you're serious about getting out of the rat race, "Your Money or Your Life" may help. Try your public library first.
Catch up with catch-up provisions Once you're 50, you're allowed to stuff considerably more money into individual retirement accounts and workplace retirement plans such as 401k's and 403b's.
In 2009 and 2010, for example, your younger co-workers can contribute an annual maximum of $16,500 to a 401k and $5,000 to a standard individual retirement account or Roth IRA. Those 50 and older, though, can contribute an additional $5,500 to their 401k's and an additional $1,000 to their Roths -- for a total maximum contribution of $28,000 a year.
"With kids, you really have to think about some tough-love issues," says Delia Fernandez, a financial planner with Fernandez Financial Advisory in Los Alamitos, Calif., who recommends the books "Ready or Not, Here Life Comes" by Mel Levine and "When Our Grown Kids Disappoint Us" by Jane Adams. "You can't continue to support them at the level they were accustomed to when they were living with you."
Get radical The fastest way to reach retirement is to dramatically cut your expenses. That will help you save more and at the same time reduce the total amount you need to save.
To learn how some people are doing it, read "Retired at 50: What it really takes." Many people who opt for this approach cite the book "Your Money or Your Life" by Joe Dominguez and Vicki Robin as their inspiration. The authors encourage people seeking financial independence -- that is, enough money to retire -- to examine every expense, from shelter costs to snacks, for ways to cut back.
If you're serious about getting out of the rat race, "Your Money or Your Life" may help. Try your public library first.
Catch up with catch-up provisions Once you're 50, you're allowed to stuff considerably more money into individual retirement accounts and workplace retirement plans such as 401k's and 403b's.
In 2009 and 2010, for example, your younger co-workers can contribute an annual maximum of $16,500 to a 401k and $5,000 to a standard individual retirement account or Roth IRA. Those 50 and older, though, can contribute an additional $5,500 to their 401k's and an additional $1,000 to their Roths -- for a total maximum contribution of $28,000 a year.
Consider a side business You can put even more into tax-deferred accounts if you own a business. Sole proprietors who are 50 or older can stuff up to $54,500 into a solo 401k in 2009 (the limit is $49,000 for people younger than 50).
If you're able to save even more than that -- lucky you -- then a traditional pension plan may be the answer. These are complicated (read expensive) to set up and run, but they can allow you to put aside $100,000 or more a year toward your retirement.
Talk to a CPA or other tax pro experienced with small-business retirement plans for advice.
Don't count on your house When home prices were soaring, late starters had a backup plan: Sell the house and live off the equity.
Falling home prices have made that more difficult for today's retirees, and it may take years for real-estate values to recover.
In any case, trading down is usually more desirable in theory than in practice. To free up enough money to live on, Levin says, you may have to buy a much smaller place in a much less desirable neighborhood than where you live now.
"We've hardly seen anybody want to do that," Levin says. "They're not necessarily comfortable with what that looks like."
Moving to a cheaper area is also a possibility, but the majority of retirees want to "age in place" rather than start life over somewhere else.
Still, millions of retirees do opt to move, and some even go abroad to make their retirement funds stretch (read "Why retirees are fleeing the U.S."). If you've got plenty of equity and are considering such a change, consider spending at least a few weeks in your destination area to make sure it's a good fit before putting your house up for sale.
Video: A retirement reality check
Get help You can't afford to delay any longer. If your finances are a mess or you're intimidated by investing or you just need someone to hold your hand, then find an objective, qualified financial planner to help you get started.
You can get referrals to fee-only financial planners from the National Association of Personal Financial Advisors and the Garrett Planning Network. (Why fee-only and not fee-based or commissioned? Read "Can you trust your financial adviser?")
"If you're 55 and have credit card debt and you don't know what you're spending," Fernandez says, "you need to go to the emergency entrance of a financial planner's office."
Don't give up!
If you're able to save even more than that -- lucky you -- then a traditional pension plan may be the answer. These are complicated (read expensive) to set up and run, but they can allow you to put aside $100,000 or more a year toward your retirement.
Talk to a CPA or other tax pro experienced with small-business retirement plans for advice.
Don't count on your house When home prices were soaring, late starters had a backup plan: Sell the house and live off the equity.
Falling home prices have made that more difficult for today's retirees, and it may take years for real-estate values to recover.
In any case, trading down is usually more desirable in theory than in practice. To free up enough money to live on, Levin says, you may have to buy a much smaller place in a much less desirable neighborhood than where you live now.
"We've hardly seen anybody want to do that," Levin says. "They're not necessarily comfortable with what that looks like."
Moving to a cheaper area is also a possibility, but the majority of retirees want to "age in place" rather than start life over somewhere else.
Still, millions of retirees do opt to move, and some even go abroad to make their retirement funds stretch (read "Why retirees are fleeing the U.S."). If you've got plenty of equity and are considering such a change, consider spending at least a few weeks in your destination area to make sure it's a good fit before putting your house up for sale.
Video: A retirement reality check
Get help You can't afford to delay any longer. If your finances are a mess or you're intimidated by investing or you just need someone to hold your hand, then find an objective, qualified financial planner to help you get started.
You can get referrals to fee-only financial planners from the National Association of Personal Financial Advisors and the Garrett Planning Network. (Why fee-only and not fee-based or commissioned? Read "Can you trust your financial adviser?")
"If you're 55 and have credit card debt and you don't know what you're spending," Fernandez says, "you need to go to the emergency entrance of a financial planner's office."
Don't give up!
No matter how huge the task seems, even a partial victory is better than nothing. Wouldn't you rather face old age with something -- anything -- in the bank than wait for the mail carrier the first of each month?
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