11/19/2013 5:30 PM ET|
How to rescue your retirement at 55
So, retirement is right around the corner and you're not prepared? Fear not -- you can still enjoy your golden years if you act fast.
If you're 55 and fearing that the only way to rescue your retirement is a time machine, you are not alone. You're also not out of options.
The typical household made up of Americans in the 55-to-64 age range has accumulated only enough retirement assets—$120,000—to produce $400 to $500 of income a month to add to Social Security payments, according to the Federal Reserve's Survey of Consumer Finances. If that sounds shockingly low, it is.
You've lost the advantage of time, which helps people in their 20s and 30s to use the power of compounding interest to reach their retirement goals, but you do have other financial tools at your disposal. The most powerful lever: capping or reducing consumption. Every dollar you don't spend in your 50s, after your kids fly the nest, pays you back twofold. Not only can you save it now, you won't feel the need of it later.
"You want to have a lifestyle you can maintain," said Alicia Munnell, director of the Center for Retirement Research at Boston College. "It's not saying you can't enjoy yourself. You can still travel, but go off season. Use Expedia."
In the first two-thirds of your life, your goal is simple and direct: accumulate assets. As you approach retirement, your goal becomes twofold: While looking to accumulate assets, you must also preserve them to ensure a sustainable monthly income—and consider how to reduce your monthly expenses.
Reduce your consumption
One of the biggest financial mistakes parents make is increasing spending after the kids finish college and the mortgage declines. Research published in 2010 showed that households ramp up spending on things like food and travel by 51 percent on average when their children leave home.
Maintaining the frugal ways you adopted when raising your kids is a good idea. "People are surprised by how much of a difference it makes," said Steven Sass, program director of the Financial Security Project at the Center for Retirement Research.
You can play around with the assumptions here, using a tool created by the Center for Retirement Research that shows how much of a difference spending decisions of today can make later in life. Consider, for instance, the following profile:
- You are 55 and plan to retire at 62
- Earning $100,000 a year
- Setting aside $500/month in your 401k
- Have $120,000 in retirement savings
The Center projects that, using the profile above, you will need a monthly income of $5,500 to maintain your lifestyle. But your investments and Social Security will only be producing $2,200. That's a gap of $3,300. Here's the trick: If you reduce your spending by an additional $500 a month now, you'll close the gap by $600 to $2,700, because you've reduced your needs by $500 and socked away enough to add $100 to your monthly income through investment gains. The biggest difference comes not from the investments you make, but from the reduction in spending. (The tool's earnings assumption for a portfolio investing 50 percent in stocks and 50 percent in bonds is 4.5 percent a year).
Don't plan for retirement; plan to keep working
If you're in your mid-50s, you've probably started to consider when, exactly, you will retire. Working longer means you not only extend the years you are adding to your retirement savings, but it reduces the number of years you need your savings to support. In the example above, working in the same job for another three years, until you are 65, reduces your gap to $1,900 a month.
What if you're burnt out? If you start planning now, you may be able to find a middle road, a second career into which you can transition in your early or mid-60s. In addition, if you delay taking Social Security, the government will increase your monthly benefit. If you are 55 (born in 1958), delaying retirement until age 70 will increase your monthly Social Security benefit by about a quarter, so that if you were set to get $1,000 each month, you'll get $1,267 instead. Social Security offers a website to help you figure out how much of a difference delaying will make.
Stay in equities longer than you may think 'safe
"Do not think you're going to invest your way out of this," said Harold Evensky, an investment advisor whose firm, Evensky & Katz LLC, is based in both Miami and Lubbock, Texas. But if you're shifting your planned retirement date, you also should extend the time frame of your investment portfolio. You can increase the chance that you'll earn a higher return by staying in equities for longer and in a greater proportion. Also, in this environment many experts say that bonds are a riskier investment than they usually are, because the government has been keeping interest rates artificially low.
In the post–World War II era, when interest rates rose after a long period of artificially low rates, bondholders lost money. "Since you will probably live to about 85, do not go into bonds until you are about 70, and then only gradually," said Charley Ellis, a consultant to governments and large institutions and a former board member of Malvern, Pa.–based Vanguard Group. (The average life expectancy for Americans is between 80 and 85).
Tap your house as an asset sooner rather than later
If you sell your house and downsize, you'll be able to use the proceeds to add to your retirement savings, tax rules permitting. You'll also be taking a huge step toward reducing your monthly expenses. Selling a house is an emotional decision for many. But if you believe you'll have to downsize eventually, the sooner you can practically make the move, the better off you will be.
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I wish these so called finical advisors from New York City and Boston would stop telling everyone what they need to save for retirement. They live in an overpriced restate market where making $100,000 a year is average I guess? There are few people living on $5,500 a month working yet alone retired. Telling people to work until 70 is just plain bad advice; do you charge for that? Tell the truth you want people to keep working so they keep investing so you can make that 100K+ salary. Don't worry you are going to live until 80-85; so keep working. I would rather die in a cardboard box under a bridge than drop dead at work. 62 and GONE!!!!
Well, unfortunately, I am not 55, I am 59, and the only thing I will have when I retire is Social Security. Spent my $20,000 401k on house payments when the economy crashed a few years ago, and I lost my job. At least I was able to save my house, get a good paying job (just a couple months ago), and if I work till I am 69 I will have something, not much, but something. Maybe about $20,000 put away, and also Social Security. And I am thankful for that, because there are so many people out there who don't even have that.
Not even sure where to begin with this article. I feel so sorry for this guy, having to make life style adjustments while making $100,000 a year. LMAO The major cuts that he will have to make to his family budget will be heart breaking. OH YA, he does not have a family. He is single.
My suggestion to this person is simple; grow up and quit your complaining. You have no idea how good your life is.
I so wish MSN would stop running what is essentially the same article every week.
NONE of this applies to me. If i had $120K in savings now, earing $100K annually, I wouldn't be worried!
Thanks to federal reserve policy..... banks are giving almost %0 interest for last 6 yrs
If you had savings it did not grow at all. Forcing you to invest in wall street ponzie scam
There is know save place to go with your money if your looking for high yields
Next up so called entitlement reform. The american Taliban party along with corporations and wall Street has successfully taken everyone's define pension plans and converted them into 401k wall street ponzi scams. They will take Social Security down same path
There are lots of ways to save money. The number one (it is never mentioned) is to keep your credit in good condition. A good credit score means better rates on car loans, home loans, student loans for your kids, and even things like insurance rates., not to mention any credit cards you may hold. Poor credit scores can prevent you from getting that job that pays a little/lot more that you are trying to land, or taking advantage of that once in a lifetime home deal.
It can really add up over a period of time.
Number 1a, contribute as much as you can to your 401k/IRA on a regular basis. Dollar cost averaging is a proven money maker. The market goes up, the market goes down. It is difficult to time it right even once and impossible to time it right consistently. Weekly 401k contributions were made for an average Joe like me to build wealth over time.
Keep saving and pay attention to your 401k and the fees. No need to obsess over it but be aware. It is your money and your life. Old age is coming. It sucks to be old and feeble, that is unavoidable. It sucks much worse to be old, feeble, and broke, and that is totally avoidable.
The 401k was never meant to replace a defined benefit pension, but it sadly has. If you think the roller coaster ride you took during the savings period of your 401k was rough, wait till you experience daily ( market ) convulsions while trying to keep your cat food down during your withdraw period.
"The best-laid schemes of mice and men often go awry......"
My advice: Just keep plugging away and putting away.
And don't worry too much about when you'll retire. Retirement just might find you, before you find it.
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