If Retirement Looms Large But Your Nest Egg Doesn’t Then This Article Can Help You.
What can you do to salvage your retirement when you are on the other side of 40 without sufficient savings? Maybe it’s because you were a procrastinator, a big spender, put several kids through college, or experienced more than your fair share of setbacks. Whatever the reason, you now find yourself behind the eight-ball on your retirement savings. What can you do?
If it makes you feel any better, you’re not alone. 58% of Americans age 55 and older have saved less than $100,000 and only 19% have saved $250,000 or more according to the Employee Benefit Research Institute.
The good news is it’s never too late to begin. Sure, you already gave away the easiest and most secure path to a cushy retirement (compounding growth over time) by procrastinating, but all is not lost. The road to retirement security for late starters may be more challenging, but it is still possible if you apply the following six tactics to feather your nest egg:
- Tactic 1: Boost taxable savings by reducing expenses and/or increasing income (9 strategies).
- Tactic 2: Convert non-producing assets into investment savings (6 strategies).
- Tactic 3: Maximize tax-deferred savings by making your boss and the government fund your retirement (4 strategies).
- Tactic 4: Overcome the mathematical limitations to savings through leveraged, direct-ownership investments (2 strategies).
- Tactic 5: Stretch your savings so that you can retire comfortably on less (3 strategies).
- Tactic 6: Redefine your retirement for a lower savings burden today and greater happiness tomorrow (3 strategies).
The first four tactics fall into the category of what you must do before retirement begins to maximize savings growth. The fifth and sixth tactics are how you decrease the savings required once retirement has begun.
In other words, use the first four lines of attack to feather your nest egg, and apply the last two tactics during retirement to stretch the value of the savings you do accumulate. Designing your retirement plan with an appropriate combination of the six tactics above gives financial late-bloomers the best odds for retirement success.
Where To Get Started For Catch-Up Retirement Planning
The first thing you must do is focus forward rather than dwell on past mistakes. Kicking yourself and getting discouraged by your lack of results to date will only push you further from your goal. Sure you’re frustrated, but so what? It may sound cheesy, but today really is the first day of the rest of your life when it comes to retirement planning. Your job going forward is to focus on what you can begin doing today that will make the future different from the past.
Once you’ve gotten over your frustration and decided to do something about it, the next step is a reality check with a little basic retirement planning. The starting point in this process is determining the amount of retirement savings you will need in your golden years. If you haven’t done so already, I highly recommend reading the ebook “How Much Money Do I Need To Retire” on this web site which will walk you step-by-step through the process of estimating your retirement savings needs.
“The ultimate security is your understanding of reality.”
H. Stanley Judd
This is a necessary first step because all actions and plans will be designed around your retirement savings goal. Without a specific, measurable savings goal you will have nothing to work toward and no way of knowing if you are on track or behind. Additionally, studies have shown the act of planning and calculating your retirement needs improves the results you will get in achieving them. It is a worthwhile, necessary exercise.
Once you have completed this exercise you will know your sources of income in retirement, how much savings you have, how much more you will need to be financially secure, and by when. The difference between your current assets and future needs gives you an expected shortfall amount which then becomes your retirement savings goal to apply when working through the ideas in this article.
Below are 27 separate strategies that you can pick and choose from to assemble your plan for overcoming the savings shortfall you face and winning the retirement planning game.
Tactic 1: How To Begin Saving More Money For Retirement
The first line of attack is also the most obvious – increase savings. It’s as simple as it is unpopular because it requires decreasing spending and/or increasing income. This is easy to say, but probably hard for you to do if you are late to the retirement savings game in the first place.
For that reason, I have made the following action steps as painless as possible, but the unfortunate reality is certain medicines must be swallowed regardless of how bad they taste because they are the only way to cure the problem. Sorry, but there is no royal road to riches.
(1) Eliminate All Consumer Debt: Credit card debt is wasteful and expensive. Pay off your highest interest balances first and use the money freed up as each card gets paid off to accelerate the payoff of the remaining cards. Never spend more in a month than you can afford so that no new debt is accumulated.
Never settle for making just minimum payments on credit cards because it is financial suicide on the installment plan: it makes compound interest work against you instead of for you. The sooner you stop overspending and pay down existing debt, the sooner that money can be redirected to investments so that you’re financing your retirement as a wealth builder instead of the bank executive’s retirement as a debtor.
(2) Increase Savings – Automatically: The least painful approach to lowering spending and increasing savings is with an automatic withdrawal plan from your pay so that you never see the money in the first place. You’ll hardly miss it if you never see it, and the small inconvenience of lower pay will be offset by the great feeling of knowing your retirement savings are back on track.
(3) Bank the Raise: Most people increase expenses every time their income rises, but smart savers control spending by sending all raises and bonuses directly to savings where it can earn more income. What you never had, you will never miss. I know because I “walked the talk” with this little savings secret during my 20′s and 30′s when my income grew ten-fold and the result was the basis of my retiring at age 35. It’s simple and it works.
“If you would be wealthy, think of saving as well as getting.”
(4) Eliminate All Unnecessary Expenses: A few dollars here and a few dollars there can add up to enormous sums today and compound into a fortune during retirement. The value of a $5 latte at age 40 can compound to over a $1,000 by the time you are in your 80′s. The truth is much of our spending is just habit, and new habits can be formed that are just as satisfying and a lot more enriching. Examine your expenses closely and get creative, because little differences in spending today can make a big difference in your retirement savings tomorrow.
(5) Recover Lost Money: Is there a mother-in-law quarters in your house that you could rent out for cash? Could you move your office into a spare bedroom and save the rent money? Is your attic or garage filled with stuff that could find a happy home through Ebay and pad your retirement savings in the process? Each action may sound inconsequential by itself, but taken together these small actions can add up to significant savings over time. For my family, this strategy has been worth many thousands of dollars every year which has since compounded into a small fortune over time.
(6) Consider New Employment: The savings game is not how much you earn, but how much you keep after taxes and expenses. One way to expand the gap between income and expenses is to consider new employment in another state or country where the cost of living is lower allowing you to save more. Another possibility is to negotiate new employment with a company that would offer lucrative pension arrangements thus taking the pressure off your savings.
(7) Eliminate Unnecessary Insurance Policies: The rule for insurance is only protect against losses you can’t afford to take. The insurance you needed 10 or 20 years ago to protect your family may be an unnecessary expense now. You may be able to eliminate or reduce coverage and save the premiums for retirement instead.
(8) Drive Used Instead of New: Cars are a big expense. Few people appreciate how certain quality cars can travel 200,000 or 300,000 miles reliably. Let someone else pay the depreciation to impress their friends with new so that you can drive used for pennies on the dollar after it is little more than broken in. This strategy can add five figures to your retirement plan every time you apply it.
(9) Moonlighting Income: Second careers and home-based businesses have several advantages. The most obvious is they can provide additional income for your retirement savings. Less obvious is how they can safely transition you into a second career that you might really enjoy continuing after retirement. Meanwhile, they can open up the possibility of tax-deferred SEP and Keogh plans for self-employment retirement savings and other tax savings.
The keys to making this strategy work are to pursue the moonlighting income in a field you are passionate about and would enjoy doing even during retirement, and to commit all revenue produced toward boosting savings rather than lifestyle.
Always remember that it is never too late to begin saving. Some of these strategies might appear too small to dent the savings deficit you face, but small amounts add up over time. Every little bit will make a difference. Keep a positive focus, choose new habits that build savings, and you can achieve a comfortable retirement.
Finally, it is worth noting that if you have tried for years to save and are still behind the curve then odds are good there may be more required than a few how-to tips. You didn’t reach the age of 50 or 60 without having saved for retirement because the thought never occurred to you. Psychological blocks are probably in the way which may require additional help. Two affordable programs offering support and education include our Seven Steps To Seven Figures group coaching and our Monthly Mentor Mastermind.
Tactic Two: Convert Non-Earning Assets Into Retirement Savings
Once you have exhausted the ordinary ways to boost retirement savings and still find yourself coming up short, it is time to examine alternative strategies. Converting big-ticket assets into retirement savings is a good place to start, and for most people their biggest ticket asset is their home.
(1) Downsize Your Home: Consider harvesting some of your home equity by scaling down to a smaller, less expensive house. This creates a double-win for your savings because you increase investment income while simultaneously reducing or eliminating certain expenses such as your mortgage payments, utilities costs, maintenance, property taxes, insurance, and more.
(2) Relocate Where You Live: For people living in high cost areas where property values have soared consider relocating to a lower cost housing market. The price differentials between certain housing markets can be enough to fund a significant portion of some people’s retirement needs. For example, $300,000 of equity invested at 7% produces $21,000 per year in income.
(3) Reverse Mortgage: Another strategy for tapping the equity in your home that has the additional benefit of not requiring you to move is a reverse mortgage. In simple terms, it is a tax free loan against your home equity that typically doesn’t get repaid until after you move or pass away. These are complicated transactions often with high closing costs and high interest rates that will also reduce the value of your estate so make sure you read the fine print and consider all competing alternatives first. Many people will find downsizing a superior alternative after the facts and costs are considered but each person’s circumstances are unique.
“Mid pleasures and palaces though we may roam, be it ever so humble, there’s no place like home.”
John Howard Payne
(4) Sale-Leaseback: One final strategy for people who are house rich and cash poor in their retirement plan is the sale-leaseback arrangement. Usually this transaction involves selling your home to your children and renting it back. The motivation here is for the homeowner tax deductions to go to the children who are hopefully in a higher tax bracket and for the parents to gain some spending cash while staying in their home. If you take this route make sure to solicit solid legal advice that includes professional contracts and market rents so that you don’t run afoul of the law.
(5) Convert Other Assets: Consider what antiques, jewelry, collectibles and other valuable items you own that could be converted into productive investments. That old wedding ring from your first marriage, the boat you didn’t even use last year, the vacation home you seldom visit, grandma’s mink coat, and other infrequently used yet valuable items could bolster your retirement savings. What assets can you convert?
(6) Insure Your Inheritance: This is more of an offbeat asset protection strategy than it is an asset conversion strategy, but it may apply to your situation. The concern is that your parent’s asset base (which could equate to your inheritance) is at risk due to the possibility that long-term care expenses and nursing home bills could eat up your legacy. Consider “insuring” your inheritance by funding their long-term care insurance and/or life insurance premiums. This might help you be a good child to your parents and send a lump sum to your retirement savings all in one fell swoop.
Tactic Three: Maximize Retirement Savings By Making Your Boss And The Government Pay
It’s a lot easier to save for retirement when the government and your employer pay part of the bill. There are two ways you can benefit from this. The first is through tax deferred savings that provide an up-front tax benefit to you, and the second is through employer-matching savings programs.
For example, assuming your combined state and federal marginal tax rate is 35% you can invest in an IRA or 401(k) and it will only cost you 65 cents on the dollar. The government pays the rest by deducting it from your tax bill. When you add in the possibility of additional tax credits for lower income savers the advantage is even more compelling. Remember, it takes a lot less money out of your pocket to save for retirement when the government pays part of the bill.
“For every action there is an equal and opposite government program.”
In addition to tax savings, some tax-deferred plans (ie: 401(k)) include employer matching contributions ranging from 25 cents to a full dollar (within certain limitations) for every dollar you save. That is an immediate, guaranteed, return on investment that beats any deal you will find on Wall Street. The rule is simple: maximize all employer matched retirement savings plans or you are throwing free money away – literally.
Below are four strategies to help you catch up on retirement savings by having your boss and the government pay part of the bill.
(1) Maximize Retirement Plan Contributions: A recent study showed Americans contributed an average 6.8% to their 401(k) plan – far less than the maximum allowed by law for most workers. Maximize the value of tax deferral and maximize the value of employer matching contributions by maxing out your 401(k) every year. The same holds true for 457s, 403(b)s, SEP and other retirement plans. It is a no-brainer for anybody saving for retirement – maximize tax deferred contributions.
(2) Catch-Up Contributions: Uncle Sam encourages workers age 50 and older to save more than younger employees by offering catch-up contributions for retirement plans. This can be a big incentive for late savers to get back on track. Consult your accountant or IRS documents for the exact rules and this year’s contribution limits as they change frequently.
(3) Multiple Savings Plans: The 2001 tax law repealed some of the rules that coordinated the various annual contribution limits for the different tax deferred plans into one limit. What that means is you may now have the ability to save in more than one retirement plan at the same time because contributions to different savings plans are no longer interdependent.
“The government’s view of the economy could be summed up in a few short phrases. If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
For example, employer plans and IRA’s may be combined or you may be able to combine employer plans with self-employed plans for those with moonlight income. Make sure to consult your accountant for the current rules and limitations and don’t forget to include spousal IRA’s and Roth IRA’s in your strategy. For those that can afford it, maxing out more than one tax deferred plan is a great way to catch up on retirement savings.
(4) Switch Employers: It may be worthwhile to shop your services out to other employers with better pension benefits. You may be able to negotiate similar take-home pay while simultaneously qualifying for a generous pension. A lucrative pension plan from the boss can significantly reduce how much you personally have to save to fund your retirement.