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.
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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 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 been 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.
Related: Feeling guilty about spending savings in retirement
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.
Related: All about retirement planning
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 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 in 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 spend tomorrow?
