Feeling like they have not saved enough for a comfortable retirement is a common theme with my financial makeover coaching clients. If this is what you are feeling, you are not alone. It doesn’t matter if you make $100,000 or $800,000 a year, saving for retirement is a deliberate move. If you don’t make the move, your savings will not grow.
Inadequate income is rarely the reason for not contributing to retirement savings. It is almost always a matter of not making a conscious choice to save. Those who don’t make the effort to save will end up spending all they earn. After all, when we work hard, we feel like we should be able to enjoy the fruits of our labor. Early in life retirement seems so far away that we feel we have the luxury of putting off saving. As the years go by, we realize we should have started saving earlier.
The good news is that the best time to start saving for retirement is now. Whether now is at age 25 or 55, it is still the best time to start a savings program.
Since everyone retires at some point, ready or not, the real question is how nice will your lifestyle be in retirement? It is never too late to begin saving for retirement. Every dollar saved will be an increase in retirement income/lifestyle. So how can we save the most as retirement nears?
1: Calculate your expected retirement budget.
If you have not been living on a budget or at least tracking your expenses, you should begin now. It’s important to discover where your money goes. You will be surprised how much of your hard earned money is going to things that are not giving you happiness, or is just being wasted.
Once you have established your current budget, you can extrapolate your retirement budget. There are many things you are currently purchasing that will not be needed in retirement: Disability insurance, life insurance, college expenses for your children, home mortgage (if it has been paid off), work clothes, and maybe even the second car. I discovered we really didn’t need a second car when we were both retired.
There may be a few things in your retirement budget you will need to increase, such as travel and hobbies.
Once you have a realistic budget for your retirement years, you will have a target to shoot for.
2: Estimate your social security income at your desired retirement age.
Estimate the amount of social security you and your spouse will receive if you retired on your desired retirement date. You can do a quick estimate at this social security website.
Now, estimate how much income you will receive from your pension if you have one.
When you subtract the social security benefits and pension benefits from your projected budgeted expenses you are left with the income your investments will need to produce in retirement.
3: Use the 4% rule to estimate your required savings.
Taking 4% of your total invested money each year is a safe withdrawal rate that will enable your nest egg to last the rest of your life. There are many opinions on this, but this is the best rule that I have encountered, so use 4%. Be sure to account for taxes in this calculation so you don’t use the 4% rule wrong like lots of people do.
If you estimate you will need $15,000 a month to live the life you want in retirement and the social security and pension benefits for you and your spouse total $5,000 a month, then you will need $10,000 a month from your investments or $120,000 a year. Assuming this already takes taxes into consideration, you will need a nest egg of $120,000 x 25 = $3,000,000.
If you are ten years away from retirement, have an estimated need of $3,000,000, and have nothing saved, assuming an 8% overall estimated return on your investments, you will need to save $16,300 a month to meet this goal.
If you feel you can’t save the amount needed to reach your goal, you will need to either cut back on your current expenses in order to meet this goal, or decrease your retirement budget to reduce the total savings amount needed. Then recalculate using the new retirement budget.
4: Cut back on your current spending.
If you don’t have anything saved for retirement, it is because you are spending your money as fast as you earn it. The only way to start saving for retirement is to cut back on your spending.
Look at all areas where you are currently spending money. Do you really need three cars? Do you really need to be making payments on a $70,000 car? Can you vacation to destinations that cost half of what you have been paying? Can you live in a smaller house now that your nest is empty?
Many times when I propose spending cuts I am met with, “But there is nothing we can cut.” Yet their household income is well above the average American household income. If the average American can live on 1/3 the income you earn, then there is room to make cuts.
Selling a large, expensive house and moving into a very nice house that costs half as much could be a move that makes you debt free. Any left-over money can be added to your retirement fund. The reduced monthly upkeep of the smaller house will also produce added money that can increase your retirement savings.
5: Get out of debt and stop borrowing money.
It is surprising how much debt people are allowed to accumulate. I was half a million dollars in debt when I realized debt was not my friend. Every dollar of debt payment you don’t have to make is a dollar you can put toward retirement.
Carrying your mortgage into retirement is a terrible mistake. If you increase your mortgage payment enough that your house is paid off before you retire, you will need a great deal less saved in your retirement fund.
6: Maximize all your tax advantaged retirement accounts.
I am surprised at the number of people who don’t take full advantage of tax advantaged accounts. You should put in the maximum amount allowed into your company retirement plan, annually max out an IRA for both you and your spouse and contribute to a health savings account if you qualify. Not maximizing these accounts is like walking past a $100 bill on the street and not picking it up. It is free money.
If you are over age 50, and you haven’t fully contributed to your IRA and 401(k) funds, you can use the catch up provision which allows you to annually add an extra $1,000 to your IRA account and an extra $6,500 to your 401(k).
That totals $19,500 for the 401(k) + $6,500 catch up + $6,000 for the IRA + $1,000 catch up for a total of $33,000 per person. If both you and your spouse are working $66,000 each year can go into tax protected accounts.
Just maximizing these will compound to a million dollars over the next ten years if you average an 8% return. That’s an additional $40,000 a year to spend in your retirement years using the 4% rule.
7: Buy cash flowing rental real estate.
Establishing real estate cash flow will allow you to leverage your money for better returns. I have received far better returns with real estate than I did in the stock market. You can read about my experience here.
Whatever cash flow you establish from your real estate will reduce the amount of money you will need to earn from your savings. It’s like getting an additional social security check each month.
8: Save money outside your retirement plans.
As a late starter, the tax protected retirement plans will not likely be enough to give you the retirement income you want. You will likely need to open a brokerage account and save money beyond the retirement plans and real estate investments.
10: Work a few more years.
If the above doesn’t establish an adequate retirement fund, then you will need to postpone your retirement. For every year you continue to work, your social security payments will increase about 8%, your retirement funds will get another year’s interest and you will make another year’s deposit.
Postpone your retirement until your income exceeds your retirement expenses.
If your expenses are so much higher than your retirement income that working a few more years won’t make up the difference, then you will need to make a drastic change in your current living expenses until you can reach your retirement fund goal. Otherwise, you will need to make big spending adjustments once retired, and you will not like that.
11: Any extra savings will make your retirement years better.
The best part is knowing that whatever you do to save money for your retirement will increase your lifestyle in retirement above where it would have been by continuing your current low savings rate. Anything helps.
Don’t worry about being behind the eight ball. The most important thing to do now is to get started making up ground on your insufficient retirement fund. But any retirement savings will put you ahead of everyone who is only living on their social security, and due to your high income your social security income will be much higher than average.
Now is always the right time to get started. For more information on retirement, check out The Doctors Guide to Smart Career Alternatives and Retirement.