Archives for April 23, 2019

You’ve screwed up. You’re drowning in debt. You haven’t saved for retirement. You’ve chopped yourself to bits in the stock market.

“Too late now, I’m screwed.”

You are not screwed. The only way you are screwed is if you are at retirement age already. Then it is kind of too late. But if there is any time on the clock at all, you can fix this.

I know many people who got to age 50 and didn’t have a dime saved for retirement. Then they staged the greatest comeback of all time, and retired comfortably.

You can do it. But there is only one solution for this. There are no shortcuts. There are no ways around it. You have to do it.

The answer is: austerity.

Austerity program
Austerity is defined as “conditions characterized by severity, sternness, or asceticism.” “Asceticism” is an even better word. If you want to retire comfortably, you will have to live like an ascetic. By choice. Or else you will be in your 80s, living like an ascetic, not by choice.

I know people who have partied it up well into middle age, then said, “Oh crap, I don’t have anything saved for retirement.”

This is super common. The people who start at age 23 (like me) are actually not very common. In 1997, I was buying issues of Money magazine out of the bookstore and picking out mutual funds.

Most people screw around into their 30s and 40s and don’t figure it out until they are already well behind schedule. Some people don’t figure it out until their 50s.

So what does this austerity look like? You will have to start saving 50% or more of your paycheck every year. Sound bad? Hey, look, if you started when you were 23, you could get by with saving 10%-20% of your paycheck. Now you have to double up to catch up.

But the point here is that it can be done.

It’s not too late

So many people get to this point and they just say “screw it” and give up. They figure they’ll live off Social Security, or that their kids will take care of them. That is not a very good plan.

I know someone currently in this position. His mom ran out of resources in her late 70s and the kids have to pitch in to bail her out. It is embarrassing and awkward for everyone — especially because it was preventable.

Look on the bright side. Saving money can be fun, too. I derive satisfaction out of socking money away. Most of the time, investing is fun. It has been pretty easy the last 10 years.

Side note: Half of the population takes Social Security at age 62. Only 2% takes it at age 70. Your monthly checks are twice as big if you wait until age 70. Plus, you will have worked an extra eight years, so you’ll have more money kicking around. These days, 62 is not very old. You can, and should, keep working.

Being poor sucks. But there are few things worse than being completely broke in old age. That’s the motivation behind Social Security. But it turned out not to be enough. This is real! People suffer!

Time to get serious.

Austerity fixes all your problems:

• If you’re drowning in debt, you’ll be able to pay off your debt.

• If you haven’t saved anything, you’ll be able to put something away.

• If you’ve screwed up your investments, you can make up for the shortfall.

This is probably the first time I speak like a motivational speaker. Quoting Rob Schneider from “The Waterboy”: “You can do it.” I have seen it done.

No shortcuts

When properly motivated, people are capable of saving and investing. Almost nobody is motivated to do it at age 23. So pretty much everyone will end up in catch-up mode at some point in their lives. That’s normal.

Even if you start at age 45 or 50, you can make up for lost time with a little bit of compounding. You obviously won’t do as well as if you had started earlier, but it’s better than doing nothing.

And when I said there are no shortcuts, there are no shortcuts. If you reach for more risk in the stock market, there is a very good chance that you will lose more.

Now I spend more money than I used to. But I have spent most of my life in some state of austerity. Austerity has enabled me to do a few really good things:

• Survive my firm’s bankruptcy and loss of restricted stock.

• Start a business in the middle of the financial crisis.

• Buy real estate at really opportune times without a lot of leverage.

Wouldn’t it be nice to deal from a position of strength, rather than a position of weakness?

Yes, yes it would.

I sincerely hope that this article has helped you look at your situation a bit differently, whether you’re 23 or 43 or 63.

Although you may know it’s not healthy to constantly try to keep up with the Joneses, it’s human nature to want to see where you stand in comparison to your peers — and it’s no different when it comes to saving for retirement.

Everyone’s retirement needs are different, so everyone needs a different amount saved to last through their golden years. So even if others your age have more or less stashed away for the future, it doesn’t necessarily mean you’re on or off track.

That being said, seeing what other people have saved for retirement can give you the motivation you need to jump-start your own savings.

The Transamerica Center for Retirement Studies examined the retirement accounts of millennials, Generation X, and baby boomers to see, on average, how much individuals in each generation had saved for retirement. Here’s how everyone stacks up.

Millennials (born 1979-2000)

The median estimated amount in millennials’ retirement accounts is $23,000, which isn’t surprising considering they have a lot of time left to save for retirement. However, given their young age, millennials are very much engaged in the topic of retirement. More than half (53%) say they expect their primary source of income in retirement to be their personal savings (as opposed to a pension or Social Security benefits), and 72% say they’re interested in learning more about how to achieve their retirement goals.

Whether that $23,000 now will amount to enough savings in the future, though, largely depends on how much you’re saving and how long you have until retirement.

Millennials are classified as those born between 1979 and 2000, which is a huge range. If you’re a 40-year-old millennial with only $23,000 saved, you may need to supercharge your savings earlier rather than later. For example, if you want, say, $800,000 saved by age 65, you’d need to save roughly $900 per month for the next 25 years to reach that goal, assuming you’re earning a 7% annual rate of return on your investments.

However, if you’re a 19-year-old millennial with $23,000 saved, you’re well ahead of the game. If your goal is to save $800,000 by age 65, you’d only need to save around $75 per month, still assuming a 7% annual return.

Generation X (born 1965-1978)

Slightly older than millennials, Generation X-ers still have a few years left before retirement — but it’s approaching quickly. Individuals in this generation only have around an estimated median of $66,000 saved for retirement. With the youngest Gen X-ers in their early 40s, that’s a concerning number.

People this age also seem to be aware that they’re struggling. Only 14% say they’re “very confident” they’ll be able to retire comfortably, and nearly a third have taken a loan or withdrawal from their retirement account.

So how much work would it take for the average Generation X-er to get back on track? If you’re on the older side of the spectrum (about 54) with only $66,000 saved, you’ll need to dramatically take your savings to the next level. Even if you save $2,000 per month earning a 7% annual return, you’d only have around $500,000 saved by age 65. For those who are around age 40 with $66,000 saved, stashing away $800 per month will get you to savings of about $1 million by age 65.

Baby boomers (born 1946-1964)

The oldest baby boomers are in their early 70s and possibly well into retirement by now. The youngest are around age 55 with only a few years left to save. However, for most boomers, their savings aren’t ready for retirement; the median account balance for baby boomers is just $152,000.

That may sound like a lot of money, but the average person age 65 and up spends around $46,000 per year, according to the Bureau of Labor Statistics. At that rate, that $152,000 would barely last three years.

According to the Transamerica survey, most boomers realize their current savings won’t cut it — nearly 70% say they expect to work past age 65 or possibly not retire at all. However, only a quarter of them said they had a backup plan in case they were forced to retire earlier than they had anticipated.

How much should the average baby boomer have saved, then? It depends on how much you expect to spend each year, but you can estimate your retirement number by using the rule of 25. It’s based on the 4% rule, which states that you can withdraw 4% of your savings the first year of retirement, then adjust that number each subsequent year to account for inflation. The rule of 25 essentially allows you to work backward to figure out your total savings based on how much you expect to spend in the first year of retirement.

For example, say you expect to spend $46,000 in your first year of retirement. Multiply that by 25, and you get $1.15 million. (You can check your work by taking 4% of $1.15 million, which comes out to $46,000). Keep in mind that Social Security benefits will play a part here, too. If you expect to receive, say, $15,000 per year in benefits, that’s only $31,000 you’ll need to save on your own. Multiply that by 25, and your adjusted retirement number is $775,000.

What to do if you’re off track

Even if your numbers align with the median amount people in your generation have saved, that doesn’t necessarily mean you’re saving enough. If you’re falling short, the best thing you can do is set a goal for yourself and make some lifestyle changes so you can save more.

First, figure out your retirement number so you have something to shoot for. Play around with a retirement calculator to see how much you should have saved by retirement and how much you’ll need to save each month to get there.

Once you have a monthly savings goal, take a good look at your budget to see where you can make cuts. These cuts don’t have to be drastic — saving a couple of hundred dollars by cooking at home more often or riding your bike to work rather than driving to save on gas can make a big difference. If you’re seriously behind, though, you may need to make some dramatic changes, possibly by downsizing your home or moving to a less expensive neighborhood.

Regardless of how you choose to save money, the best thing you can do if you’re behind on your saving is to realize you need to make a change and then create an action plan. By making an effort to get back on track, you’re already well on your way to achieving your retirement goal.