50 and No Nest Egg: Time to Save Yourself
Ah, the follies of youth.
For many Americans, when they were in their 20s, 30s, and even 40s, retirement was a far off, almost foreign concept.
I already covered how to plan for retirement if you’re starting to save mid-life.
But some of you may have already hit 50, and now retirement isn’t that far down the road. You may wake up one day and realize that you have zero savings for your golden years.
Though it’s probably of little comfort at this point, you’re not alone
A survey from financial research firm Bankrate.com showed that 26% of people aged 50 to 64 have nothing saved, with 14% of those over 65 at zero, as well.
Another survey from the Employment Benefit Research Institute found that 60% of Baby Boomers had less than $25,000 saved. And 36% had less than $1,000 saved.
I saw this scenario more than I wanted to when I dispensed financial advice professionally. People had spent everything and more time went into planning what color to paint the bedroom than planning for retirement.
This isn’t a very good scenario when you consider that lifespans – as well as the cost of health care – are increasing. And, of course, there’s the worry that Social Security won’t be around for much longer.
Luckily for most people in their 50s, they still have 10 to 20 years in the workforce. Believe it or not, that’s time enough to put together a financial plan for the future.
Time to Get Serious
And I do mean plan.
The cold, hard facts are thus: If you want to live the lifestyle that you’ve become accustomed to, most people will need 75% to 85% of their pre-retirement income annually in retirement. That means ideally you should have at least eight times your ending salary saved before retiring.
Since you weren’t disciplined enough to save earlier, I recommend seeing a professional to help you. Whoever you choose will need to know every intimate detail of your financial life, including your income, assets, and debts. So make sure you pick someone who is professional and who you can trust.
Most likely your advisor will tell you that you’re going to have to keep working as long as possible in order to allow for more time to build up both your nest egg and your Social Security benefits.
In addition, you’ll also be instructed to play catch-up with your retirement savings by getting a little help from Uncle Sam.
If you have a 401(k) plan at work, the maximum contribution allowed by the IRS for 2015 is $18,000 with another $6,000 allowed in catch-up contributions. You should also take advantage of any matching of contributions by your employer.
For people without a 401(k), go with a traditional or Roth IRA. The limit in 2015 is $5,500 with another $1,000 allowed for those over 50.
Finally, you’ll probably also be advised to look into long-term care insurance. Healthcare cost is a prime consideration for people in retirement. Brokerage giant Fidelity estimated that a couple retiring now at age 65 will incur about $220,000 in healthcare costs during their retirement alone.
Fitting Stocks in the Picture
Stocks should also make up a decent chunk of your retirement portfolio as the growth they offer over a long time span will help to offset the ravaging effects of inflation.
The actual percentage devoted to stocks will be determined by your advisor based on your risk tolerance, which is another one of those intimate details you’ll need to share.Here’s a simple example: You’ll need over $90,000 in 20 years to be the equivalent of $50,000 today, even if inflation only averages 3% annually. And medical costs have been rising at well above that rate.
A very rough rule for the stock percentage is 110 minus your age. But here are the caveats that I would add:
- In the two years or so before and after retirement, I would recommend a lower percentage in stocks. That’s to avoid the effects of a financial crisis, like the 2008-09 drop, just when you’re retiring.
- I would actually keep a bit more in stocks than the formula says after the above period passes. Again, you don’t want to run out of money if you live into your 90s.
- Don’t leave all the decisions up to your advisor – stay engaged and ask questions.
- Make sure you have exposure to other assets like bonds, real estate, and gold. And that your stock portion isn’t over-allocated to one sector, like technology.
- Have a mix of overseas stocks in your portfolio. Remember, well over 60% of the total stock market capitalization lies outside the United States.
Following a game plan similar to the one I outlined should still get you a decent and maybe even comfortable retirement. But the key is you must start saving TODAY!
Then you can live your life as Picasso once described, “I’d like to live as a poor man with lots of money.”