I’ve been paying attention to retirement savings for a few years now since getting out of debt. I’ve always contributed something to my retirement account, just not very much at times. Now that I’m in the 40 and over club, I really study people and their finances. You’d be amazed how much people share with their eye doctor! I’ve learned lots from people who’ve done well and from people who are behind in one way or another. One thing I do see way too often is that there are lots of people over 40 who have no retirement savings to speak of. Either they never saved spent it on a big expense. Regardless it’s a scary place to be. If you’re over 40 with no retirement savings, this is what I’d recommend. Please remember I’m not a financial professional, just someone who studies ways to retire with a passion because I want to be there someday sooner rather than later.
Well, I want you to panic a little. If you’re over 40 and have nothing saved and there is no sort of a pension coming your way, it might not be a fun retirement. Working 35+ years to live like a pauper is not my idea of golden years. You don’t have the luxury of waiting until tomorrow. You also probably don’t need millions of dollars like some retirement calculators might lead you to believe. There are lots of people who live comfortably on $30,000 to $40,000 per year, and you have plenty of time to save that much money.
If you have a 401K or similar plan at work, go sign up! Let’s say you make $50,000 per year. If you contribute $1000 per month for 25 years at 6% interest, you’ll have almost $700,000. Using the 4% rule, that would give you an annual income of $28,000 per year. Although social security has it’s issues, you probably will get something. Currently a person with a 35 year work history of $50,000 per year would get around $1900 per month at age 70. If you continue to work until age 70, you’d have over $970,000 in your 401k. If you can invest more or get a match, the numbers continue to rise. The future is not all black, but early retirement will be tough unless you can find a way to earn lots more money.
If you don’t have a 401K or are self employed, you’ll have to do it on your own. You can open up an traditional or Roth IRA, SEP IRA, solo 401K, or invest in non-tax deferred assets. I’ve done all of the above, and none of it is hard if you use a low cost brokerage like Fidelity or Vanguard. If you have no idea about what funds to choose, pick a broad index fund, like a total stock market or total bond market index. Remember that you need to earn at least 6% or you’ll have to invest even more money. Since you aren’t touching this money for at least 25 years, I’d recommend something like an 80/20 percent stock/bond ratio. This might seem risky for your age, but you started late and still have many years to weather the ups and downs.
Where to Find The Money
If you haven’t ever invested in retirement because you live paycheck to paycheck, this is where it has to end. You absolutely have to pay off all consumer debt and buckle down on spending. If you are supporting adult children or saving for college for younger children, that has to end as well. Unless you want your kids to support you in retirement, you have to start taking care of yourself now. That might bring some difficult conversations, but I think we all can agree that it’s better to do it now than later.
Also keep in mind that any money invested in a 401k or Roth IRA has tax advantages. If you make $50,000 and invest $12,000 into a 401k, you will only be paying income tax on $38,000, so it isn’t as big of a paycheck hit as you might think. Anyone can earn extra money as well, so this is a good time to be thinking about what skills you have that might bring in some side income.
Don’t Compare To the Joneses
Don’t look at what you have or don’t have in retirement compared to the rest of the world. Once you start seeing your balance grow, you might be tempted to lower your contribution because you’re doing better than most people. On the other hand, don’t get discouraged if someone your age has much more than you do. Look at your own situation and stay focused.
Lower Your Housing Costs
The biggest item in most people’s monthly spending is housing. If you are house poor, this might be a good time to reconsider the situation. Downsizing to a smaller house or moving to a lower cost of living area now or after you stop working would help with retirement savings and/or spending. Would you rather live in a big house in an expensive neighborhood with no money or live somewhere else and be able to enjoy some hobbies or travel? If you can’t have it all, you should choose which is more important.
Things You Can’t Skimp On
You can go without buying a new car, taking expensive vacations, playing golf or paying for your daughter’s wedding. You can’t go without being prepared. It’s important to start saving for retirement, but don’t start putting all of your money into a 401K until you have a few things squared away.
I think you need at least 3-6 months worth of basic expenses plus enough to cover your insurance deductible saved up before you start investing. Basic expenses do not include cable and eating out! This doesn’t mean saving $50 a month for years either. You need to start putting your $1000 a month in this account until it’s funded, then go on to the investments. One big emergency could drain your retirement with all the penalties that go with that.
A large medical bill can also derail your retirement. Gambling that you’ll stay healthy is not a good plan.
If you have people who depend on your income and no retirement savings to speak of, you really need to get a term life insurance policy. If you get hit by a bus, where would your family be? Get enough coverage to pay off all your debts with some left over to help your significant other get by until he or she could start earning income.
If you aren’t yet 40, please get started with your retirement savings so this post won’t be necessary. If you are my age or older, it’s time to stop the excuses, valid or not, and start planning a positive future. I could be retired by now if we had avoided debt and lifestyle inflation. I can’t go back, but I can be even more dedicated going forward. It is possible to have a good retirement, even if you got a late start.
What tips would you give to someone over 40 with no retirement? What holds people back from saving for the future?