James Stehr woke up with a sinking feeling one day when he was 47. “Jeesh,” he thought, “I’m pushing 50 and I haven’t saved a cent for retirement.”
That’s a midlife crisis, ’90s style. Plenty of Baby Boomers in their 40s and 50s aren’t lusting after red convertibles, hot babes or lost opportunities to start a major corporation in their garage.
They are waking up to the nagging fact that they have only 10 or 20 years to save for retirement. They have been too busy paying for everything else–a home, medical bills, child care. Or, like Stehr, an architectural consultant, they’ve been putting kids through college, have gone through a divorce, or are self-employed.
If you can overcome the temptation to say, “Ah, the heck with it; it’s too late–I’ll never catch up,” you can still make a huge difference in your standard of living in retirement.
On the plus side, you are probably in your peak earning years. And you still have time on your side. Consider: If you are in your 40s, you have 20 to 25 years before you retire, and another 20 to 30 years in retirement. (It’s not as if the savings clock stops when you hit 65.) That’s 50 years in which your savings could grow and compound.
If you are able to save, say, $100 a week, in 20 years you will have $297,830, assuming a 10 percent return. Would you want to turn 65 with zero savings, or $297,830?
Realizing he had nothing to lose–and a lot to gain–Stehr started to plow as much as he could into savings. Now, after eight years, he is ahead of his scheduled goal of retiring at age 66 with 70 percent of his preretirement income. He concedes that the bull market did half his work for him.
While late-starters can’t count on 30 percent annual returns to bail them out in the future, they can take advantage of some major changes in the tax law that could do them just as much good. Some things to consider if you are just starting:
– Downsize your home. If your home has appreciated greatly in value, consider selling it and moving to a less-expensive one. The new tax law allows you to take as much as $500,000 in capital gains tax free, which you can invest. “The ability to downsize a home–tax free–has become an enormously useful planning tool for late-starters,” says David Walz, a fee-only financial adviser in Oak Park. One of his clients, a professional couple in their late 50s, sold their home and used the gains to buy a smaller home, debt free. Now, the amount that used to go toward the monthly mortgage goes into savings. And the smaller home has lower property taxes, utilities and other expenses.
Walz notes that the new law allows people to take their gains tax free after only two years in a new home. So this couple could conceivably sell their smaller home in a few years when they retire–and again capture the gains tax free.
– Restructure your debts. Even if you can’t sell your home, consider refinancing your mortgage. Walz advised a woman in her 50s who, by refinancing, was able to free up a couple hundred dollars a month to invest for retirement. People with high credit-card debts might consider consolidating them under a home-equity loan, which could lower their payments, and make their interest deductible.
– Contribute to your 401(k). If you have a 401(k) or any type of plan at work that lets you set aside pretax pay, contribute as much as you are allowed, if you can afford it. The contributions lower your taxable income. And if your employer matches a portion of your contributions, it’s like getting a huge boost in your return. (A 50 percent match would be like getting a 50 percent return on your money.)
If you are a teacher or non-profit worker, take advantage of a major break some of these plans offer older workers: they let you make “catch-up” contributions that can be thousands of dollars more each year than the usual limits.
– Put money into a Roth IRA. You can have a Roth IRA even if you are covered by an employer’s retirement plan as long as your combined income is $150,000 or less ($95,000 for single filers). The $2,000-a-year contribution will grow tax free.
– Invest for growth. Even late-starters have long-term investing horizons, which means they can take on the added risk of investing in stocks. Stocks will keep you ahead of inflation, which historically has run 3 percent a year. But resist the temptation to bet on the riskiest investments in an effort to catch up. Lower-to-moderate-risk stock funds include equity income funds, growth and income funds, balanced funds and utilities funds.
– Take stock. Even if you have saved nothing, you are probably not starting out with zero. A middle-income couple in their mid-40s will receive roughly $30,000 a year in retirement from Social Security. Currently, Social Security replaces approximately one-third to 40 percent of average annual preretirement income for individuals who earn from $30,000 to $60,000 a year.
If that couple has managed to accumulate something by now–whether it is in IRAs, pensions, home equity, a small business–these assets could also generate income in retirement. To figure out how much your assets will generate, and how much you will need to supplement them, check out software programs such as Quicken, or web sites including www.smartmoney.com, www.vanguard.com and www.troweprice.com.
– Get help. A good adviser can help you figure out how much you need to save, and can do a cash-flow analysis to see where you can squeeze out some money for savings (possibly by restructuring debt, consolidating or eliminating insurance coverage, and downsizing your home or living expenses). “You can really dig up money by doing a budget,” says William Hoeschele, a financial planner in Shawnee Mission, Kan.
An adviser can also help you set up a SEP-IRA (a retirement plan for self-employed persons) or Keogh, check out your pension and figure out how much Social Security you are likely to get. For a list of fee-only advisers, call the National Association of Personal Financial Advisers at 888-333-6659, or check out the website: www.napfa.org.
– Aim to save 10 percent of your gross income. Between your employer’s savings plan and IRAs, try to save at least 10 percent of your pretax income. To make saving for an IRA easier, set up an automatic-investing program in which a set amount, say $100, is shifted from your credit union or bank account monthly into a mutual fund.
– Make it a priority. Don’t wait until you have paid off debts or put the kids through college. Joan Chasan, a fee-only adviser in Framingham, Mass., notices that some people come up with an annual excuse why they can’t save. There’s always a good reason not to save. Ignore it.
Stehr is trying to persuade his sister, who is 46, to start contributing to her 401(k). “It’s not too late for her,” he says. “That’s about the age when I woke up and smelled the coffee.”
