You can accumulate and retire with a million dollars even if you are over 40. It’s not easy, but it is definitely possible to build a million dollar nest egg.
Compounding of your savings and investment dollars is easier if you start young, but not impossible if you wait. For those of you hitting 40, with nothing saved, the important point is to start immediately to save, invest and plan for your future. I know you feel like avoiding and hoping that “it will all work out”, but if you do nothing you will be guaranteed not to build wealth. There are millions of folks depending upon Uncle Sam to get them through. But do you really want to trust your entire retirement to the government and Social Security? I didn’t think so. Let’s get to work.
How to Begin Saving for Retirement
Kareem and Marie are determined to start saving for retirement now. They are aged 39 and 40 and are scared of the future. If they were in their 30s, the tactics would be a little different. But let’s get back to their story.
Their kids are almost in college and they expect them to go to community college first and later transfer to the state school, and live at home. They recognize that their kids can work and go to school and borrow a bit for their education. Kareen and Marie understand that it is their responsibility to save for their own retirement, and they do not want to be a burden on anyone in their later years. Seeing their own parents struggle in retirement scared them into facing the future head on.
Together they make $85,000 per year. Their biggest expenses are housing costs of $2,000 per month including mortgage and tax payments. They only have one car note for $250 per month and the car will be paid off in a year. They paid off all of their credit card debt last year and are committed to paying cash unless they can pay off a charge in the same month. For the first time ever, they started keeping a budget and cutting back on expenses. But, as they continue to cut back, they do not know how how to save for retirement. They just don’t know where to begin.
Step 1: Contact Your Workplace Human Resources Office
Kareem and Marie didn’t realize that if they had funds transferred from their paychecks into a workplace retirement 401(K) account, their employer would match those funds dollar for dollar up to 5% of their income. That’s $354 per month of free money. All they needed to do was sign some paperwork requesting that money to be transferred from their paycheck to the company’s retirement plan every month and the company will add $354 to their own funds.
Step 2: How Much to Invest
If Kareem and Marie want to reach $1,000,000 by the time they reach 68, they will need to save a lot. Here’s how much they will need to deduct monthly in order to have a chance at reaching their goal. Kareem, age 39 has 29 years to invest his funds and Marie has 28. With an investment of $1,173 per month and an investment return of 6% annualized, they could reach $1,000,000 in 28.5 years. Subtract the $354 from their employers Kareem and Marie would only need to save $819 per month between them.
You’re probably thinking, sounds great, but where are they going to get a 6% return? After all, today the banks are barely paying 0.25% interest per year.
Step 3; Where to Invest
In investing, as in life, there are no guarantees. That said, over the last 100 years, stock market returns have averaged about 7-9% and bonds about 5%. So a portfolio comprised of a basket of diversified stocks and bonds has the potential to average 6% per year annualized. Of course, I’d be remiss if I didn’t mention that investing has it’s ups and downs and you must be prepared for returns that go up and down over the years. If you are wondering how to invest your 401k, there are a variety of options.
Most workplace retirement funds offer low cost diversified index funds. These funds offer an individual the opportunity to invest their money in a wide variety of stocks and bonds to get diversification and returns that match the underlying index. For Kareem and Marie I would suggest about 65% invested in a domestic/international stock index fund and 35% in a diversified bond index fund. Most mutual fund families offer some variety of these funds.
What if Your Workplace Doesn’t Offer a Retirement Option?
If you don’t have a workplace retirement plan, open an IRA or ROTH IRA at a discount broker such as Scottrade and have the same funds transferred to the index funds each pay period. If you want to automate the investment process, consider opening your retirement account at Betterment instead.
Don’t let fear or indecision stop you from investing for retirement. Whatever age you start saving and investing is okay. After all, if you never start the process, you are guaranteed to be dependent on the government to fund your retirement.
Caveat: This article is not a recommendation to buy any specific investments. Please visit your own financial advisor for advice related to your personal situation.
What is your retirement planning strategy?
This article was written by Barbara Friedberg, MBA, MS, Finance Instructor at Santa Clara University and website publisher at Barbara Friedberg Personal Finance.com.