The Late-Start Retirement Plan
Are you worried about retirement? Let’s get to work putting together a late-start retirement plan so that you don’t end up becoming something a good bit less appealing than “Young, Fabulous and Broke” (the title of a recent Suze Suze Orman book) -- “Old, Kind Of Cool, and Still Broke.”
Here are nine tips on how to save when there’s not much time left to save.
Tip #1 for putting together a late-start retirement plan is to avoid panic.
Your problem until now is that you have been insufficiently intense about saving. It doesn’t help to swing to the opposite end of the emotional spectrum.
It helps to change your money management habits. It doesn’t help to freak out.
There’s time. Maybe there’s not much time. But there’s some time. The way to make the most of what time there is left to you is to think clearly and proceed calmly, carefully, and deliberately.
You don’t have as many options as some others. But the best that can still be done is the best that can still be done. There’s a good chance that the best that can still be done will be good enough.
Tip #2 for putting together a late-start retirement plan is to take comfort in the fact that it doesn’t necessarily take four decades to finance a retirement plan.
If you were twenty-five, you would have four decades ahead of you to finance a retirement beginning at age sixty-five. If you’re fifty, you only have fifteen years.
That sounds bad. But you know what? Some of The World’s Greatest Savers (members of the Financial Freedom Community) retire in their early forties. If they can go from zero to complete financial freedom in about fifteen years, maybe you can too.
You haven’t done so hot sticking solely with the conventional money management approach. So pick up on some new ideas. Check out some of the Financial Freedom Community discussion boards.
Tip #3 for putting together a late-start retirement plan is to make up for the loss of Compounding Returns Magic with another kind of magic.
They told you to start saving when you were young. They pointed to the huge benefits you would obtain as the value of a dollar saved at an early age grew into something much larger while it remained untouched over the course of your working life. You see now that you should have listened.
Compounding Returns Magic is lost to you. That hurts.
It’s okay. You can tap into a different kind of saving magic, a type that is probably as powerful as Compounding Returns Magic, maybe even more so.
Create a Life Plan (the boring, conventional kind of money advisor refers to them as “budgets”). It’s not as easy to calculate the dollar value of writing a budget as it is to calculate the value of compounding returns. My strong sense, however, is that well-crafted budgets (I mean well-crafted Life Plans, of course) are more effective wealth generators.
Budgets matter. If your fear of ending up Old, Kind of Cool and Still Broke is strong enough to push you into writing a budget, you just might make it after all.
Tip #4 for putting together a late-start retirement plan is to forget about using the conventional rules of thumb to determine how much you are going to need to live on in retirement.
I’m not a big fan of the conventional money-management rules of thumb. Personal finance is, well, kind of personal. Rules that work for Mr. or Ms. Average don’t necessarily work for you.
Perhaps you have heard that you will need in retirement an income that is 80 percent of your highest pre-retirement income. It’s not necessarily so. You can ease the burden of saving for retirement a lot by reducing the amount of income you need to live on in retirement.
Assuming that you can earn a 4 percent real return on your investments, every time you reduce your retirement spending number by $1, you reduce the amount you need to save for your retirement by $25. That’s motivation to scout out ways to live on less, is it not?
You might not want to travel in retirement. Maybe you won’t need getaways anymore when there is no boss and office to getaway from. You might be able to cook your own meals because you will have more free time.
If you have fully funded your retirement, you won’t have to worry about saving anymore (I'm presuming here that you have been saving something until now, even if not too much). Your income-tax bill will likely be less. Your kids are probably grown and on their own, so you won’t have to worry about covering orthodontist bills and college tuitions.
You might be able to move to an area where housing and living costs are lower (because you no longer need to live near a job center). You might be able to move into a smaller place.
Remember the rule. Cut $1 dollar in retirement spending, and you can probably cut about $25 in pre-retirement saving. It’s like getting paid for identifying spending cuts.
Tip #5 for putting together a late-start retirement plan is to ignore dumb advice to up your risk profile to make up for lost time financing your retirement plan.
It does not make sense to take on additional risk with your investments because you got a late start financing your retirement plan. It does not. It does not. It does not.
This takes us back to Tip #1. The worst thing you can do is to panic. You need to take on some risk in your investments, of course. Everyone needs to take on some risk in his or her investments. But someone who is getting a late start financing his or her retirement should not be taking on extra risk to make up for lost time.
I’ve heard money advisors say otherwise, but I think that those who do so are offering dumb advice. Don’t panic. Don’t take on more investment risk than otherwise makes sense. Look for a sensible way to make up for lost time.
Tip #6 for putting together a late-start retirement plan is to consider working in retirement.
Remember that 25-for-1 one rule cited above? It works with earnings too. Come up with a plan which calls for $10,000 of annual earnings in retirement and you have reduced the amount that you need to save before retirement by $250,000. There are ways to earn $10,000 that don’t require reporting to an office every day and working until you are bone tired every night.
Don’t wait until the day you hand in your resignation to decide on what it is you will do to earn the $10,000 per year in retirement. Do your research now.
Even better, get started in the side business now. You might learn that you hate it, and be able to make a change without suffering a financial setback by doing so. Or you might find that you can earn more than $10,000 doing the work you are thinking of doing in retirement and thereby make it possible to retire a bit earlier than you would have under the initial plan.
Tip #7 for putting together a late-start retirement plan is to make it a practice to update your budget at least twice per year.
When I bought the Beatles’ 45 RPM record with “Hey Jude” on the “A” side and “Revolution” on the flip, I could not make sense of the decision to put the focus on the Paul McCartney song. “Revolution” sounded great, and “Hey Jude” was snoresville. “What were they thinking?” I wondered.
Now I get it. “Hey Jude” really is the better song.
It takes time for some songs to kick in. Budgets are like that. You will not be able to put together your best budget by taking a single stab at it. Each time you work through the numbers, you will come to a deeper level of understanding of them.
Those who are on track with their retirement plans might be able to afford to update their budgets only once a year. You’re in a bit of a pickle. So you need to do better than that.
It’s not so bad. When you get to that deeper level of understanding, writing budgets become fun. “Hey Jude” is today one of my all-time favorites.
Tip #8 for putting together a late-start retirement plan is to check out budgets used by other middle-class workers in preparing your own.
Looking at other budgets is a great way to determine where you can make cuts. You are so accustomed to your spending habits that they seem natural and almost beyond question to you. You need to get outside yourself to gain a good sense of what really is possible and what really is not.
In days to come, I will be adding articles to “The Turned-On Budget” section of this site that will examine budgets of some of The World’s Greatest Savers (members of the Financial Freedom Community).
Tip #9 for putting together a late-start retirement plan is to stop worrying and start reducing things to paper.
Worry doesn’t get you anywhere. You need to do.
The thing to do is to start putting things to paper -- identify possible spending cuts on paper, generate targeted retirement spending levels on paper, reduce your new financial plan to paper, list on paper ideas picked up from looking at budgets of other middle-class workers.
When you reduce things to paper, you do three good things: (1) you turn the financial planning exercise from something potential into something real; (2) you ease your worries (there’s nothing that eases worry like taking action -- even imperfect action is often better than no action at diminishing anxiety); and (3) you learn what you need to do next (the best expert on what you need to do to make up for lost time financing your retirement plan is you once you become familiar enough with the particulars of your financial circumstances to make sound calls, and that comes from sitting down at a table with a piece of paper, and a pen or pencil, and a calculator).