James A. Stehr, 54, started planning for retirement just a few years ago after an investment went sour and he lost his $20,000 nest egg. “Abject terror is what motivated me,” said Stehr, a facilities manager for Sun Microsystems in Mountain View, Calif.
But Stehr’s not worried anymore. A disciplined effort to dig himself out of debt, save money and invest aggressively may help him retire at 61–several years ahead of schedule.
Even if you’re 50-something and haven’t saved a penny, there’s a lot you can do during the next few years to get ready for retirement, as Stehr has shown.
“There’s absolutely no need to panic,” said Victoria F. Collins, co-author of “Your Next Fifty Years: A Completely New Way to Look at How, When, and If You Should Retire.”
And you may be in better financial shape for retirement than you think because your expenses will probably drop, and you’ll have several income streams.
“People need far less money than most of the horror stories tell them they need,” said Ralph Warner, author of “Get a Life: You Don’t Need a Million to Retire Well.”
– Needs. It’s impossible to predict exactly how much money you’ll need for retirement. The amount depends on the economy, your health and your lifestyle, among other things.
One rule of thumb often pushed by financial service companies is that you’ll need up to 80 percent of your current annual income to maintain a similar lifestyle in retirement.
Using this figure, a 50-year-old single man who earns $50,000 annually will need to save about $19,800 each year for the next 15 years if he’s starting from scratch.
The amount assumes an 8 percent return on investment, and an average inflation increase of 3 percent a year.
Women need to save even more because their income tends to be lower than that of men, they take time off from work for child-rearing and they’re more likely to work part-time.
But these numbers are needlessly scaring people because they don’t consider other income, such as pensions, 401(k) plans, IRAs or Social Security, said Warner.
“One of the biggest myths out there is that you need 80 percent of your current income (for retirement),” he said. “It’s just crazy. Once anybody hears that, they’re perfectly justified in freaking out.”
Not everyone agrees with Warner. Social Security benefits will be lower, and inflation and taxes will rise, said Dorothy Clarke, director of the National Center for Women and Retirement Research at Long Island University’s Southampton College in New York..
“The money you have in retirement will probably buy a third of what it would buy today, so you’ll need a lot of money to keep up with the cost of living,” she said.
When calculating how much you’ll need to save every month for retirement, include your Social Security benefits, your employer’s pension or profit-sharing plan, the money you’ll get from your 401(k) or IRA, and any savings.
To find out how much money you can expect from Social Security based on your earnings record, contact the Social Security Administration (800-772-1213) and request a free “Personal Earnings and Benefit Statement.”
– Saving. Once you’ve determined a savings goal for each month, the next step is to make a budget. Figure out how much money you make each month, how much you spend, and what expenditures you can trim.
The best item to tackle first is high-interest debt, such as credit cards, car loans and mortgages, said John Wasik, a senior editor at Consumer’s Digest magazine who’s writing a book called “The Late Start Investor.”
“Finance charges are a black hole. There’s a phenomenally high cost to borrow,” he said. “In most cases, you can’t deduct the interest, and you never see the money again.”
At the same time, try to save a little extra money from your paycheck every week. An easy way to do this is to sign up for automatic payroll deposit, which takes money from your paycheck and sends it straight into a savings account.
Enroll in your company’s retirement plan, whether it’s a 401(k) or a similar program. You can contribute up to 15 percent of your annual salary, or a maximum of $9,500, to this type of plan. Many of these contributions are matched by employers.
Consider opening an IRA, too. This plan lets you save up to $2,000 of income every year, and up to $4,000 a year for married couples. Some contributions are tax deductible, and the account is allowed to grow tax deferred until retirement.
– Investing. Once you’ve paid off all or most of your high-interest debt and started contributing to a 401(k) or IRA, it’s time to consider aggressive investments. Despite what you may think, you can make high-risk investments even if you’re in your 50s because retirement is at least 10 years away.
“People who are maybe 10 years away from retirement have their money in fixed-income investments,” said Collins, who in addition to being an author, is also a certified public accountant and financial planner. “That doesn’t make any sense. They need to be in equities.”
Although the stock market may be overvalued, don’t be afraid to buy stock mutual funds. Diversifying into a wide range of investments such as bonds and international funds can cushion your portfolio against a market correction, she said.
Dollar-cost averaging is another option, she said. With dollar-cost averaging, you invest the same amount of money each month. That way you don’t buy too many shares when prices are at their peak, but you do buy more shares when prices are low.
– Working. If you find you’re barely managing to break even every month no matter what you do, you may want to consider taking a second job, at least for a while, said Collins.
“Stash away all the money from the second job for retirement,” she said.
Other options are to keep working full- or part-time past the standard retirement age of 65, something more and more people are choosing to do.
You can continue to work and get Social Security benefits, but how much you receive depends on your age and income, according to the Social Security Administration.
If you’re under age 65, you can earn up to $8,640 a year without affecting your benefits. But your benefits will be reduced $1 for every $2 you earn above that limit.
If you’re between 65 and 69, you can earn up to $13,500 a year with no effect on your benefits. But your benefits will be reduced $1 for every $3 you earn above that limit.
Once you hit age 70, there’s no limit and you can earn any amount without any effect on your Social Security benefits.
