so you've got more excuses for putting off an investment plan than Bill Gates has dollar bills. But don't despair. Lots of people get started late, and you may have more time than you think to build a sizable nest egg. Here's why:
People are living longer: A man age 65 can expect to live another 16 years, a woman the same age, about 19 years. You could live even longer than these averages, so there's plenty of time to save even if you've reached your 50s. For example, if you invest $2000 today, assuming you can earn a tax-deferred 11 percent annual return, in 30 years you'll have about $45,000. Now imagine how much you'll accumulate if you put away that $2000 every year. (That's more than $443,000.)
Retirement isn't what it used to be: A gold watch, pension, and life of leisure is no longer the norm. One survey by AARP found that 80 percent of baby boomers plan to work full or part-time when they reach their retirement years; one in four dream of starting a new career or business after they retire.
So if you are getting a late start saving for your later years, here's how to proceed:
First, think about what kind of retirement you want: Do you want to work in your retirement years? How about a new career? Where will you live? And how will these decisions affect your retirement financial planning?
Show yourself the money. Once you've got a notion of your retirement lifestyle, you can start to figure out what it's going to cost. A rough rule of thumb used by many financial planners is to figure on about 70 percent of your pre-retirement income. But your expenses may be vastly different: If your house is paid off and you live modestly, maybe you can get by fine on half your old income. On the other hand, if you envision a life of travel and maybe a new mortgage, you might need more than what you were making on your job.
What can you count on? Now add up whatever funds you've got on hand for retirement, what you can expect from Social Security (for an estimate call SSA at 800-772-1213 or log onto www.ssa.gov) and any pensions or other probable retirement income. Figure a monthly income using the regular checks from pensions and social security, and the interest from any lump sumps (at say 6 percent a year). Now do some math and figure the difference between what you can count on and what you'll need. That's the gap you need to fill with investments. Admittedly, this is extremely rough. A good financial planner can give you a more exact idea, or you can try one of the many calculators available on the Internet, such as www.vanguard.com. Quicken Retirement Planner software can also do the job.
Trying to catch up. Now comes the hard part. You've got to save more, but how? One way is to automatically have a regular amount deducted from your pay check or checking account. The first place this money should go is into a tax-advantaged account, a 401(k) if you're eligible, or an IRA. If you have other income from a business or self-employment, look into SEPs (simplified employee pensions), Keoghs and Simples. The power of tax-deferred investing is so strong that even if you've got credit-card
balances to pay off, it still makes sense to fund one of these accounts (all the while working to knock down those card balances).
Risk and reward. Given the fact that people are living longer and working well into retirement, the old advice about shifting more of your money into less risky investments as you reach retirement no longer holds. That's doubly true if you've got some catching up to do. Stocks have historically returned more than just about any other investment--the companies in the S&P 500 have an average annualized return of 11 percent over the past 72 years.
By stocks, we're talking about a well-diversified portfolio or mutual funds, not spinning the wheel on IPOs or penny stocks. You want a mix of large-company stocks, small-company stocks and international stocks, with the emphasis on the steadier large-caps. It makes sense to cut back a bit on stocks as you age, but you never want to be totally out of the market.
Using your home equity. For many Americans, home is their biggest asset. Yet the equity built up in a house is often overlooked in retirement planning. Though you'd probably rather not have to draw on the equity, you can take out a reverse mortgage. Essentially, the bank sends you a check every month and the loan is paid off when your house is eventually sold after you die. Fannie Mae and FHA are two agencies that can make such loans.
Finally, keep in mind that the right kind of greed can be good. The baby boom generation has elevated buy-now, pay-later to a high art. Unlike our parents, we don't save up to buy something. We just run out and get what we want with cards. Building a nest egg means refocus greed. Instead of pouring your attention (and dollars) into new baubles, fancy vacations and the like, learn to take pride in the swelling balance of your investments.
Looking for the sandwich generation. If you're faced with supporting (or footing some bills) for an aging parent while supporting your own kids, I'd like to hear from you. Drop me a line at moneytalk@moneymail.com
