What if you’re in your 50s, or early 60s, and have little or no retirement savings? Or what if you’re in your 20s or 30s and don’t sense that you ever will? What is your retirement plan? In Retirement Will Be a Fantasy For Most Americans we discussed how the majority of people fall into this category, even though few are willing to admit to it publicly. Today we’re going to discuss saving for retirement late in the game.
I’m not going to offer false hope here, and suggest that if you have only minimal retirement savings – or none at all – that you’re going to have a golden retirement, based on some magical savings and investment strategy (there is none). But I am going to suggest – strongly – that you save for your retirement years anyway.
Now notice that I said “save for your retirement years”, and not save for retirement? That’s because they are two are very different end results. Saving for retirement assumes that you’ll actually retire. But I’m daring to make the very real assumption that you’ll never actually retire, so the savings strategy needs to go in a different direction.
Keep Saving For Your Retirement Years – But With a Different Goal in Mind
Or put another way, start saving something! A late start is no reason to not begin. Saving is very much a habit, that once adopted, becomes self-reinforcing. While it’s very unlikely that you will save your way to a full-on retirement, it’s beyond question that more savings will improve your financial situation drastically. For that reason alone, you should plan to be saving money for the rest of your life.
The dynamic changes however as you get older. Start saving in your 20s or 30s, and you may be able to afford to retire. But if you don’t start until your 50s or 60s, you have to be realistic about your goals.
The way that you approach savings will have to be different. You can’t save for retirement in the usual sense, but rather for specific needs that will be present during the retirement years.
The basic idea is to create savings that will serve to reduce stress in your life, as opposed to supporting a life free of work. That will look a lot different than traditional retirement savings.
Here’s what I mean.
Start With an Emergency Fund
This is important throughout your life, but it become mission critical with advancing age. You should have enough money in liquid savings to cover at least three months of living expenses. Six months would be even better. One year is better still.
Even though an emergency fund won’t allow you to retire, it will eliminate most of your short-term money problems and that’s reason enough alone. Much of what makes work – and life in general – so stressful is a lack of money to pay unexpected expenses. An emergency fund will enable you to do that.
If you can at least cover emergencies, that will keep small problems from becoming big ones, and that’s a real stress-reliever. We should always look to find ways to reduce stress, and having a well-funded emergency fund is one of the best ways to accomplish this.
Once you get an emergency fund started, don’t look back. That means that you should plan to keep feeding it for the rest of your life. That will keep it well stocked and ready for whatever might happen.
Set Up Medium Term Savings Goals
After establishing an emergency fund, save for medium savings goals. This can include saving money for a new car – so you won’t need a car loan. Or to pay uncovered medical expenses; that will keep a disaster from wiping you out financially. You can also save for some nice vacations. Just because you can’t afford to retire, doesn’t mean you should never travel and enjoy some rich experiences.
The medium term savings will enable you to do many of the things that retirees do, but without putting added stress on your working income.
What About Actual Retirement Savings?
You should do that too. Only you won’t be saving to retire at 62, 65 or 70. Those ages probably won’t be doable goals. But you can – and should save to retire at 75, 80 or 85.
Here’s the thing…even if you’re blessed to be able to work long into your old age, there will come a time when either health, lack of energy, or lack of enthusiasm will make it impossible. That’s the day you need to save for.
If you’re 60 years old, you’ll be able to save for 20 years to retire at 80. It probably won’t be an opulent retirement, but it may enable you to live comfortably once you’re unable to work.
If you fund an IRA at $6,500 per year (the maximum you can contribute if you are age 50 or older), and invest at an average annual rate of 7%, you’ll have nearly $300,000 saved by the time you reach 80.
Using the safe withdrawal rate of 4%, you’ll be able to withdraw $12,000 per year. That may not seem like a lot of money, but when combined with Social Security, it may give you enough to live comfortably. And at a minimum, it would allow you to finally retire in the event that life circumstances require that you do.
Even if you never retire at all, just knowing you have the option to do so – albeit late in life – will make your life a lot easier.
The alternative – not saving for retirement at all – could leave you in a hopeless situation. That’s why you should plan to save for retirement no matter what your current age is, even if you’re already in the retirement years.
Be Very Careful About Investment Risk
Most financial people will tell you to be aggressive when investing for retirement. But that’s usually because they’re speaking to a younger crowd. When you’re 20-something, you can afford to be 90% or 100% in stocks. If the market tanks, you’ll have decades to overcome the losses.
But if you’re over 50, those decades are gone. You must invest more conservatively. That means maintaining a reasonable balance between equity investments (high risk) like stocks, long-term bonds and real estate, and capital preservation assets, like money markets, Treasury bills, certificates of deposit, and shorter-term bonds.
You will need to be in growth assets throughout your life, but you don’t want to go crazy here either. Never think that you can make up for lost time by heavily investing in high return/high risk investments. More likely you’ll end up sustaining big losses, that will cause you to lose interest in retirement savings for good.
At the same time, you can’t afford to be 100% in safe assets either. Interest rates at current levels don’t even cover inflation, so they’re guaranteed money-losers.
So the moral of the story is that saving money becomes even more important if you are close to the retirement years and have little savings. You won’t be saving for retirement in the usual sense – nor can you – but you can go a long way toward improving the quality of your life and your finances by becoming a committed saver.
The alternative is…let’s not go there.
Have you been unable to save for retirement up to this point? Do you think any of these strategies have merit to improve your circumstances?