8 Retirement Planning Tips for Those Who Start Late

Almost every piece of financial advice emphasizes one point: Begin saving for retirement as early as possible. But what if you didn't?

Jun 8, 2014 at 10:00AM

So you recently decided to become serious about retirement planning. You bought a few books, read a few online articles, and found yourself growing disheartened. You discovered that you should have begun this task 10 or 20 years ago.

Almost every piece of financial advice emphasizes one point: Begin saving for retirement as early in your life as possible. The younger you are, the more traction your portfolio will gain.

That's great advice for young readers, but your 20s (and 30s) are a distant memory, and your portfolio hasn't gone anywhere fast. What can you do?

Here are eight tips to help you save for retirement if you're getting a late start.

1: Assess the situation
How much money will you need for retirement?

Here's a rule of thumb: Multiply your annual expenses by 25; that's the amount of money that you should have in your portfolio on retirement day.

Why? As a general guideline, you can safely withdraw 4% of your portfolio per year during your first year of retirement. You can withdraw that same amount, adjusted for inflation, every year thereafter.

In other words, if you have a $1 million portfolio, you can safely withdraw $40,000 during your first year. You can withdraw $40,000 adjusted for inflation in years two, three, four, and beyond. This is called the 4% rule.

The inverse of this is the "multiply by 25" rule. How much money do you need to support your lifestyle? If you want to live a lifestyle afforded by $50,000 per year, you will need $1.25 million.

Don't panic. This is achievable. Let's move on to the next step to demonstrate how.

2: Invest age-appropriately
Invest your retirement savings in a manner that is neither too conservative nor too aggressive. You want the Goldilocks of plans: sufficient growth without excessive risk.

How can you achieve this? First, avoid the temptation to take on too much risk in order to compensate for your late start. Some people feel they should become extra-aggressive investors in order to make up for lost time. This is a mistake.

Instead, try this guideline on for size: 110 minus your age is the proportion of your portfolio that you should keep in equities, with the remainder going into bonds. If you want a more aggressive portfolio, modify that equation to 120 minus your age. If you want a more conservative portfolio, modify it to 100 minus your age.  

Diversify your equities among domestic and international funds. Further diversify these by "size" (think large-cap and small-cap) and "styles" (think growth and value). Diversify your bonds with safer bets like Treasuries and riskier fixed-income investments like corporate bonds or junk bonds.

3: Buy adequate insurance
Why are we discussing insurance in an article about retirement planning? Many financial calamities are the result of insufficient insurance.

Avoid financial catastrophes, such as bankruptcy due to medical bills, by purchasing adequate health insurance, disability insurance, car insurance, and homeowner's insurance. Consider a term life insurance policy if you have dependents. Remember, retirement planning doesn't end with your portfolio.

4: Pay off your debts
Your progress toward retirement slows down if you're carrying debt. Pay off all non-mortgage debt as quickly as possible, particularly high-interest loans such as credit cards or car loans.

Your mortgage, however, is a different case. If you are in the later stages of your mortgage and your payments are primarily applied to the principal (rather than interest), you might want to consider moving your money into a retirement vehicle such as your 401(k) or IRA, rather than accelerating mortgage pay-down.

5: Build extra income
Find a side job to build extra income. Jobs could include consulting, teaching, freelancing, babysitting, construction projects, or lawn care. If you can earn an extra $200 per week ($800 per month) and put it straight into your retirement plan, you will make a lot of progress.

How much more? Let's say you're starting with just $1 in your account. Each month, you add $800, which grows at a 7% rate and compounds annually. After 20 years, you'll have a whopping $393,560, according to the U.S. Securities and Exchange Commission's Compound Interest Calculator.  

That's a huge heap of money growing from just $200 per week.

6: Trim back your lifestyle
In order put more money into your retirement accounts, you have to cut back on your current lifestyle. You can downsize your home, drive a used car, and stop dining out at restaurants except for special occasions.

Let's imagine that you downsize your home. Your mortgage drops from $2,000 per month to $1,500 per month. You trade-in for a used car, which lowers your payments from $400 per month to $200 per month. And then you reduce your dining out budget from $400 per month to $200 per month.

In total, you've reduced your monthly expenses by $900. Invest this at 7%, compounding annually, and over the course of 20 years, you'll have an extra $442,755.

7: Prioritize retirement over your children's college expenses
It's tempting to prioritize your children's education above your own retirement. Don't do it. The greatest gift you can give your kids is the freedom of not having to care for Mom and Dad in the future.

Your kids have the rest of their lives ahead of them, whereas time is not on your side. Your kids can take out student loans, but you can't take out a retirement loan. Your children will be adults by the time they're old enough to attend college. Allow them to stand on their own two feet.

8: Delay retirement
If you started saving late, you may need to work past the typical retirement age. You may not be able to hand in your resignation until you are 70, so focus on protecting your ability to work. Maintain your health, keep your resume sharp, and be an attentive and valuable employee.

There's a second benefit to retiring later, as well: You'll get a bigger Social Security paycheck. If you were born in 1943 or later, your benefits will jump by 8% for each year in which you delay collecting Social Security, up to age 70. (Technically, the benefit is an additional 0.66% for each month in which you delay). And don't worry: You can (and should) still sign up for Medicare at age 65; this doesn't impact your Social Security payment. 

If you can defer collecting Social Security until your 70th birthday, you'll be handsomely rewarded. Add that higher payment to a few extra years of collecting a paycheck, and you'll start your retirement on much more solid footing.

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