It has finally happened. You attend your 30-year class reunion, and the prom king is balding and grey. Friends have announced their retirement. Where did the time go? Panic strikes as you wonder if you will ever be able to afford to retire.
One popular challenge is to put aside $1 million by age 65. Sure, that is an achievable goal if you start when you are 30. If you contribute about $6,800 a year for 35 years, it will grow to $1 million by age 65.
But what about if you are 50 or even 60? How much do you have to set aside to save $1 million by the time you are 65 if you are 50 now? That amount balloons to close to $37,000 annually (all examples are at 7% compounded interest and are not adjusted for inflation).
The retirement planning strategies that were useful in your 30s may not apply if you are in your 50s or 60s. Here is what you should do instead if you are practicing “just in time” retirement planning.
Know your value
Standard financial planning advice we heard in our 30s was to “pay yourself first” and set aside 10% of your income for retirement. That advice did not work for many of us because we did not have enough disposable income (what is left over after you pay your fixed expenses) to save.
The truth is you will never have enough funds to save unless your income is high enough to cover your living expenses.
If you are shocked by how much everything costs, you should first question if you are earning enough to keep up. Inflation did not just start this year. It is an economic truth that is often disregarded.
According to the Consumer Price Index, today’s prices are 1.36 times higher than in 2010. If your pay is not roughly one-third more than it was 10 years ago, you are not keeping up with inflation.
For example, if you earned $60k a year in 2010, your pay, if it kept up with inflation, should now be $81,600. Find free salary surveys online to ensure your compensation is competitive and learn to negotiate your pay. If you are self-employed, most industry associations have surveys that list pricing and profitability ratios so you can see how you are charging against your competition. Make sure you increase your prices regularly to keep up.
Many business owners fail to fund a retirement account because they have been misled to believe they will retire on the proceeds from the sale of the business. This is, unfortunately, often not the case.
If you plan on selling your business when you retire, learn rule-of-thumb pricing and start planning to maximize your company’s selling price.
Here is an example. The rule of thumb for accounting firms is a sale price of 1-1.2 times gross revenues. If you gross $250,000 a year, that equates to a sale price of $250,000-300,000 before commissions and other selling costs. This would probably not be enough to retire, making 30+ years of owning a business seem not worth it.
The right way to cut spending
Popular financial planning “gurus” on radio and TV are quick to blame careless spending as the sole reason you do not have enough in retirement savings.
One of their most popular targets is your daily trip to the barista. This advice bothered me, so I did the math. By giving up the $5-a-day latte habit, you can save about $27k in 10 years, which is not tiny, but how about alternate ways to save without giving up on small pleasures?
If you list your monthly fixed expenses, largest to smallest, and then attack each item, you can save much more every month. For most of us, the categories are housing, taxes, interest, insurance, utilities and transportation.
If you plan to retire in 5-15 years, you must question whether you can pay less than you are now for the more significant expenses. Again, the tactic is to research, call, negotiate and switch companies if necessary. The benefits are worth it.
Let’s say you can put aside $10,000 a year with an increase in annual income or by (painlessly) decreasing the above costs. You would have almost $150,000 in retirement savings in 10 years. That is more than five times the amount of giving up the coffee habit, and you don’t have to be miserable.
Embrace being a senior
You do not have to wait until you are 65 to take senior discounts, cut down on how much you work or downsize your living arrangements. Start now for a smoother transition and a happier, simpler life.
One myth I often hear from my clients is that their living expenses will dramatically decrease when they retire. It is just not true. Your costs will not go down unless you cut them.
An AARP membership does not have an age requirement, and many discount programs start as early as 50. My husband and I saved $360 a year on our cell phones and $380 a year on our car insurance. If you are not taking advantage of the savings, you are leaving money on the table that could grow in a tax-free account.
Housing prices are up, so now would be an excellent time to consider downsizing and banking the profits. A smaller home not only equates to a smaller mortgage, but maintenance and utilities also will be lower. Most senior housing communities allow buyers and residents who are 55 or older, regardless of employment status. Even if you are not yet 55, start investigating options early.
Plan to keep working
It’s outdated to think there is a particular time you should retire. My uncle, who is 74, was recently offered employment by the company he retired from more than 10 years ago. With each call from his previous employer, the pay and flexibility they offered increased.
I know several professionals and tradespeople still working in their 70s and 80s but part-time and in consultancy and teaching roles. Some of them transitioned to a more leisurely schedule in their 50s.
Your knowledge, experience and reliability are all valuable and would be wasted if you quit before it was your time. You can also continue to pay into your Social Security (until age 70) and add to your retirement account. The additional savings can be used later when you can no longer work.
You do not have to follow outdated advice that does not apply to your life. You have more control than you think about how much your time is worth. You decide how to spend your hard-earned money. How and when you retire is up to you.
