Archives for October 14, 2019

These days, a growing number of Americans are extending their careers and retiring during their 70s, or even beyond. And there are plenty of good reasons to work longer, like boosting your savings, maintaining a social life, and, in some cases, staying in better physical shape.

Of course, many people don’t want to wait that long to retire, especially with all of the health-related unknowns that go hand-in-hand with aging. But unfortunately, retiring in your 60s isn’t a given.

Or is it? A good 62% of younger workers are confident they’ll manage to leave the workforce by age 65 or earlier, according to TD Ameritrade’s 2019 Retirement Pulse Survey. If you have a similar goal, here are a few important steps on the road to achieving it.

1. Know where your money is going

Although 62% of millennials feel they’re capable of retiring early, 66% admit that they need to catch up on their retirement savings. And while there are several factors contributing to younger workers’ shortage, one commonly cited reason is spending too much on housing.

If your goal is to retire on time or on the early side, you’ll need to get on board with the idea of not maxing out each paycheck you get on living expenses. To this end, set up a budget and identify what you’re overspending on at present. Maybe it’s housing, or maybe it’s something else, like transportation, food, or entertainment. The key, either way, is to understand where your money is going, and find ways to curb that spending so you’re able to free up cash for your nest egg.

2. Start saving (very) early in life

The more time you give yourself to build retirement savings, the more opportunity you’ll give your money to grow. Imagine you’re able to sock away $300 a month. That may not seem like much, but with a long enough savings window, it can grow into quite a substantial sum, as the following table shows:

Start Saving $300 a Month at Age:	And You’ll Have This Sum by Age 65 (Assumes a 7% Average Annual Return):
20	$1.03 million
25	$719,000
30	$498,000
35	$340,000
40	$228,000

You can’t help marveling at that $1.03 million above, especially when you consider that it comes at an out-of-pocket cost of just $162,000. And that’s why saving at an early age is crucial. The older you are when you start, the less growth you’ll benefit from. And if you’re wondering how it’s possible to start saving for retirement at age 20 — an age when many people haven’t yet graduated college — the answer boils down to a summer job and working part-time during your studies.

3. Invest aggressively

In the preceding example, we saw that $162,000 could magically turn into $1.03 million over time. Well, it’s actually not magic; it’s compounding coupled with a healthy return on investment. The 7% average annual return used above is a reasonable assumption for a stock-heavy portfolio. But if you invest your retirement savings too conservatively by loading up on bonds instead, or, worse yet, keeping much of your money in cash, you’ll limit your investment growth and end up with a lot less wealth to your name.

Here’s what the above table looks like when we apply a 3% return instead of 7%:

Start Saving $300 a Month at Age:	And You’ll Have This Sum by Age 65 (Assumes a 3% Average Annual Return):
20	$334,000
25	$271,000
30	$218,000
35	$171,000
40	$131,000

You can’t help noticing the stark — and not so favorable — difference. The takeaway? Don’t play it too safe with your retirement portfolio. If you do, retiring on time may not happen.

It’s encouraging to see that most millennials think they’ll retire by 65, if not earlier. If that sounds good to you, keep tabs on your spending, start funding your nest egg as early on as possible, and invest your savings wisely. With any luck, that combination will allow you to leave the workforce when you want to.

An estimated 44.5 million retired workers receive monthly income in the form of Social Security benefits. If you work and pay Social Security taxes, then chances are, those benefits will be an important source of income for you once your career comes to an end. But if you rely on those benefits too heavily and neglect your savings as a result, you may be in for an unpleasant reality check as soon as your golden years kick off.

Currently, 50% of married seniors and 70% of unmarried seniors get 50% or more of their income from Social Security, while for 21% of married seniors and 45% of unmarried retirees, those benefits represent 90% or more of their income. But when we look at how much money that actually translates into, it’s easy to see why Social Security alone isn’t enough to sustain the typical senior.

The average retiree on Social Security today collects $1,471 a month, or $17,652 a year. Meanwhile, the average senior aged 65 and over spends $46,000 a year on living expenses, reports the Bureau of Labor Statistics. Clearly, there’s a pretty wide gap between those two numbers, and it’s for this reason that planning to live on Social Security alone in retirement is a truly bad idea. If that’s your intent, consider this your wakeup call to start building savings and come up with a backup plan.

What will your expenses look like in retirement?

Many people expect their living costs to drop dramatically once they retire, but many seniors don’t see all that substantial a decline. And when we think about the things seniors generally spend money on, that makes sense.

Seniors require housing, transportation, food, clothing, utilities, and modest forms of leisure, like cable TV, just like working folks do. Furthermore, retirees tend to face higher healthcare costs than workers, especially when we consider the various out-of-pocket expenses associated with Medicare. And that’s why most seniors can’t get by on just 40% of their former income, which is what Social Security is designed to pay the average earner. Retirement just plain costs too much money.

The solution? Save as much as you can while you’re working. If you start out young, you can get away with contributing smaller amounts to a retirement savings plan and growing your balance with the right investments. If you’re already older, you’ll need to make more sizable contributions to build a solid level of savings.

Check out the following table, which illustrates how your savings efforts might pan out, depending on the window of time you have to work with and the amount of money you sock away in a retirement plan each month:

Age You Start Saving	Monthly Retirement Plan Contribution	Total Savings by Age 65 (Assumes a 7% Average Annual Return)
30	$400	$663,000
35	$500	$567,000
40	$600	$455,000
45	$700	$344,000
50	$800	$241,000

The less time you give yourself to sock away funds for retirement, the less wealth you stand to amass. In our table, increasing monthly contributions doesn’t help compensate for delayed savings. That’s because by putting off your savings, you miss out on years of critical investment growth. And if you’re wondering about the 7% return used above, it’s actually a couple of percentage points below the stock market’s average yearly performance.

Of course, building savings isn’t the only way to supplement your Social Security benefits. You can also get a part-time job in retirement or monetize a hobby. In fact, your retirement income can come from a variety of sources. Just make sure your plan is not to have all of it come from Social Security.

It’s a common misconception that you need to have a lot of money to start saving for retirement. In fact, among workers who have no retirement savings, the primary reason they aren’t saving is they don’t think they’re earning enough money to do so, a survey from GOBankingRates found.

That’s an understandable sentiment, considering retirement is becoming more and more expensive. If you know you need to save hundreds of thousands of dollars (or possibly more than $1 million) for retirement, it can seem pointless to stash anything away now if you’re struggling to save.

However, small investments now can result in a robust nest egg later. Even if you’re starting with as little as $1,000 to invest, you can achieve a significant amount in savings if you have a financial strategy in place.

Step 1: Invest in the right places

If you’re strapped for cash and don’t have much to invest for the future, it’s vital that your money is working as hard as possible. The key is to avoid simply saving your money; rather, you’ll need to invest it.

Investing your money in the stock market can seem like a risky move, but it’s one of the best ways to see your earnings skyrocket over time. Stashing your cash in a savings account, certificate of deposit, or other “less risky” account might seem safer, but you’ll likely only be earning a 2% to 3% annual return on your money. By investing your money in the stock market, although there will be ups and downs over the years, you’ll typically see returns of anywhere from 6% to 10% per year.

So, say you have $1,000 to invest right now. If you were to stick it in a high-yield savings account earning an interest rate of 2% per year and let it sit untouched for 20 years, you’d end up with $1,486. While you’re still a few hundred dollars richer than you were before, those are pretty depressing earnings. However, if you had invested your $1,000 while earning an 8% annual return, after 20 years you’d have around $4,661.

The trick to investing wisely in the stock market is to limit your risk while still earning relatively high rates of return, and the best way to do this is to invest in low-cost index funds and mutual funds. These are large collections of stocks, so when you invest in an index or mutual fund, you’re actually investing in dozens or even hundreds of different stocks at once. This allows you to still achieve higher rates of return, yet with limited risk because you’re diversifying your investments.

Investing in the right places is only step one of a smart investment strategy, though. The other half of the equation is ensuring time is on your side.

Step 2: Start investing early

The earlier you begin investing, the easier it is to grow a nest egg worth hundreds of thousands of dollars. That’s because when you have decades to save, compound interest is on your side. Compound interest allows you to essentially earn interest on your interest, so the bigger your retirement fund gets, the faster it will continue to grow.

In this scenario, say you invest your $1,000 and are earning an 8% annual rate of return. If you don’t make any additional contributions and let your money grow for 40 years, you’d have around $21,725. But if you were to let it grow for 45 years, you’d have nearly $32,000 total.

Of course, no matter how frugal you are, you can’t retire on just $32,000. But if you make small contributions to your retirement fund each month and let compound interest do its thing, you can achieve significant results.

For example, say you’re 30 years old and you invest $1,000 right now earning an 8% annual return. Let’s also say you continue investing $150 per month for the next 35 years. At that rate, you’ll have around $325,000 saved by age 65. Save just $50 more per month, though, and you’d have around $428,000 stashed away, all other factors remaining the same.

The key takeaway here is that you don’t have to be rich to save hundreds of thousands of dollars for retirement — you just need to take advantage of smart investment strategies. Even if you only have $1,000 to save, if you invest in the right places, start investing early, and continue saving what you can every month, you can build a healthy nest egg by the time you reach retirement age.

As you near retirement, you might look back and think that saving for this next stage of life was the easy part.

During your working years, the big decisions were how much to save and where to invest.

But now it’s time to switch gears. Instead of accumulating assets, you must figure out how to turn your nest egg into an income stream to last the rest of your life.

The best place to begin is to get a handle on what your annual expenses will be in retirement by creating a retirement budget.

Take a look at what you’ve spent in the past year. Then adjust those expenses for what might change in retirement. For instance, you won’t be commuting to work anymore, but you might be traveling to more far-flung destinations.

And don’t overlook health care costs, especially if you plan to retire before you’re eligible for Medicare.

Once you’ve nailed down your anticipated expenses, subtract all your expected guaranteed sources of income, such as a pension, annuity and Social Security.

The result is how much you will need to withdraw from your portfolio annually to maintain your lifestyle in retirement.

But how do you know if you will be withdrawing money too quickly from your nest egg and might deplete it?

One popular guideline has been the 4% rule, which was designed as a safe withdrawal rate for a 30-year retirement that may include bear markets and periods of high inflation. It assumes half of your retirement portfolio is in stocks and the other half is in bonds and cash.

Under this rule, retirees draw 4% from their portfolio in the first year of retirement. Then they adjust the dollar amount annually by the previous year’s rate of inflation.

So with a $1 million portfolio, your withdrawal in your first year of retirement would be $40,000. If inflation that year goes up 3%, the next year’s withdrawal would be $41,200. And so on.

The 4% rule is a good starting point but may need some fine-tuning to fit your own situation, says Maria Bruno with Vanguard.

“Are you retiring at a younger age? If so, you might need a lower withdrawal rate.” You may also need to withdraw your money more slowly if you are investing more conservatively, she adds.