During my 20’s it was easy to live in the present, only ever thinking of retirement as being a far-off fuzzy “what if” scenario. Colleagues in their 40’s would caution me to start planning for this distant event before it was too late. However, I didn’t take their sage-advice and somehow thought my path would be different, i.e. I’d win the lottery or be swept off my feet by a millionaire. But guess what? I’m now pushing 40 myself and that “far away future” seems to be creeping up on me at light speed.
Yet just because I didn’t plan my retirement early in my career doesn’t mean I’m doomed to eating cat food and pushing around a shopping cart to my card board box home. What it does mean is I need efficient strategies to help me catch-up and get on track to a stress-free retirement, and I need to start NOW.
Getting Back to the Basics
Thankfully I’ve always been budget conscious and track my spending using a software program. I’m then able to use past information to gauge future spending; meaning I can take a year’s worth of expenses and predict where my money will most likely be spent each month. Using my monthly budget as a guide, I can cut down on the luxuries and get back to the basics or necessities; one necessity that I’ve been avoiding is saving for retirement.
Without completing depriving myself of all of life’s indulgences, I can minimize expenses in certain categories, like say Starbucks, and apply the remaining amounts to my retirement fund. Since small expenses can add up quickly, finding an extra $100 – $200 a month will be a small gold mine that I can reserve for my future.
Maximizing all the Avenues
This is the year I get serious about my future and open a 403 (b), the equivalent of a 401 (k). In the beginning, I will only be able to contribute about 5-7% of my salary. However, within the next 3-5 years, my goal is a lofty 15-20% of my income. As my income presumably increases and, restraining myself from life style inflation, I should be able to take the additional income and apply it toward my retirement.
Another option I’m investigating is mutual funds. Not wanting to stick all of my eggs in one basket, so to speak, I don’t feel entirely comfortable relying on one account to support my golden years. Mutual funds would allow me a little diversity. Setting up automatic deposits of 3% of my income to begin with also minimizes the cost of opening a mutual fund. Some companies, like USAA, waive minimum deposit amounts altogether with auto debits. One benefit, or downfall depending on how I look at it, is there isn’t a fee associated with withdrawing funds, though any withdrawal is taxable.
I know a lot of people prefer IRA’s as a supplement to their traditional retirement account. However, I’m in an unusual position when it comes to the popular ROTH IRA – my husband and I don’t file our taxes jointly and there are some limitations and exceptions when it comes to opening a ROTH. For now, a mutual fund seems easier to start.
Alternative’s to Retirement
Of course there are always alternatives to retirement such as prolonging my retirement age. For some, this might be an excruciating option, but in my case I actually enjoy what I do so extending my job a few more years is a viable option, as long as my patience doesn’t wear thin (working with young children requires the patience of Job), or cutting back to half-time for a few years . Not only would it mean contributing to my retirement funds a little longer, it would also mean I’d receive a little more from social security and my teacher’s pension plan.
Another possible alternative could be a drastic lifestyle change; now or in the future. Drastic as in moving to a city that’s one-third the cost of the current one I live in. Or, changing my lifestyle to a more simplistic one; canceling my land line phones, moving into a lower cost housing structure, selling most of my material possessions, going car-free – all possible options if need be.
The beauty of planning retirement earlier in one’s career is to maximize the benefits of compound interest and to ride out the economy’s valleys and peaks. Though I still have some time on my side, there’s no better time than NOW to begin my path towards a brighter and more hopeful retirement.
Readers, have you always been focused on retirement since you started working? Do you have any catch up strategies or suggestions if you are a late starter?
I think ever since I started working I planned my retirement, b/c that’s what the money retirement professionals told us the very weeks of work. We had seminars teaching us what we should and shouldn’t do with our money. Retirement planning is the only world I know. It’s like drinking water, need it to survive!
Life does seem to catch up on us quick. But, while you were living in the moment, I’m sure you had a great time too, so that’s worth a lot!
Early on, I worked for a company mainly managed by females and none of them ever mentioned retirement planning. I don’t really know what I was thinking, except that retirement was soooo far off, it could wait. Well, obviously it wasn’t that far off!
I’m 23 and I’ve started saving for retirement, but it still seems like a struggle. I do see my peers around me who say they don’t need to worry about that ’til they’re 30, or if they’re 30, they don’t see it as something to worry about ’til they’re 35. You never *feel* so old, so you don’t think you need to start thinking about retirement. Believe me, my father is 65 and still doesn’t feel old enough to be retiring! (Although he doesn’t confuse that with not needing to save for retirement!)
@Kellen – You have a good point about not “feeling” old. I think that’s how I was able to rationalize not having to save for retirement earlier. At least I’m now getting my act together – good thing I’m not waiting another decade or two!
So long as you enjoy what you do, retirement can always be postponed. I don’t plan to stop working entirely until perhaps my very old age. Getting out of the rat race though is a goal of mine, but that is achievable much sooner (I define it as relative financial freedom, which in turn is denoted by low debt and decent side income).
By incorporating some early retirement extreme elements, the age may not hold you back all that much in the end!
@Invest it Wisely – I don’t think I could ever really just sit around and not do anything, so working past a traditional retirement age is quite probable in my case. The only thing that could prevent this would be illness, but hopefully genetics is on my side and as long as I stay active I should be able to push myself to 99 ;).
I agree with Kevin that as long as you like the job, you can postpone retirement. I think the “like” could disappear quite suddenly in some cases though.
We’ve always saved for retirement and I had my dad to thank for that. In fact I have a post coming up just about this topic. I’ll ping you when it’s up on Friday.
The earlier you start the better off you’ll be. It’s also never too late to start.
@Retireby40 – I see what you mean by “like” disappearing suddenly. A few teachers who are past traditional retirement age are beginning to lose their patience. They still “like” what they do, but they complain a lot more than in previous years! I look forward to your post on saving for retirement!
[…] I’m guest posting at Yakezie.com about retirement strategies for those of us, like me, who are getting a late start on saving for […]
Little House,
I urge you to research “couch potato portfolio”. ETFs are such a better option than Mutual Funds. In the long term ETFs can save you 10s of thousand in fees, and considering compound interest, those 10s of thousands can easily exceed $100k for your retirement, if not more. The couch potatoe portfolios are defined for you – the goal is you buy ETFS (which charge 0.25%-0.50% vs MFs which can be 1.5%-3% in fees!) and sit back and don’t touch them. You re balance based on the strategy you like, but otherwise an ETF is just like a MF w/o the awful fees. The goal is to match the index(market) not beat it.
Sustainable PF, I totally agree with you on finding the lowest fees possible. The mutual funds I invest in are all under 1% management fees though – MF doesn’t automatically mean fees of 1.5% to 3%. The only fees I have actually at or slightly above 1% are international funds. I think that the ability to invest in small increments is worth the extra.
@Sustainable PF – I haven’t looked into ETFs, but the mutual funds I’m investigating are very low fee funds (under 1%). I’ll research ETFs a little bit for comparison. Thanks for that tip.
I’m still pretty young but I’m focusing on retirement early. I opened an Roth IRA and plan on funding it soon. Now I’m looking into 403b options. I’m not in a rush to start funding it but I do know it will help in the long run.
@20 and Engaged -I don’t want to sound like an old ’90’s song – and Cher for that matter (ew!), but if I could turn back time I’d have invested in a 401(k) and 403(b) long ago. Starting early is the way to go, most definitely!
Why did you wait so long? Did no one sit you down or was it I am a too young thing
@MyJourneytoMillions – No, no one sat down with me and explained the benefits of compound interest or the possible scenarios of investing early vs. waiting until mid-life. If I had the information in the beginning of my career(s), maybe I wouldn’t have waited so long!
I was lucky when I first started my full-time job in 2003, I sat next to a co-worker who was about to retire and he gave me sound advice about getting started in the company 401(k) program and Roth IRA. I look back on it and it’s one of the best piece of advice I received. It was very easy to invest money. I was coming from a no income college life to a steady paycheck. So, I was able to pay myself first(invest) and still live comfortably rather than cutting back on my spending now and trying to invest.
To piggy back off kellen, some people still work past their retirement age or part-time because they need something to occupy their life with. If you stay healthy and plan on continue to work past retirement, you may not necessarily need to bank a fortune.
@Mike Choi – You were also smart to follow your co-worker’s advice as well. It is a lot easier first getting started with the mind-set to put some of your income away (or pay yourself first) than the other way around, which is what I am now doing. Thanks for sharing!
I was fortunate in that the company I work at has a fairly generous matching 401k problem (100% for the first 5% that I contribute). Not wanting to turn down a 100% return on my first 5%, I jumped in. The deferred tax on that amount was just icing on the cake.
While I’m still a long way from where I want to be with my 401K Balance, I’m still happy with it overall.
@Money Reasons – That is a very generous offer – the 100% match. My pension works this way, but it doesn’t apply to the 403(b) plan or 457(b) plan I’m researching. Still, something is better than nothing!
LH- I thought I was smart putting every spare dime into retirement when I first got out of school….and then lost a huge chunk when the market crashed. So maybe you did yourself a favor by starting late! You got to enjoy that cash. But that said, even with my losses, I would still advise those a little younger to start contributing as early as possible.
@Car Negotiation Coach – I still think you were smart to invest, even with some losses I’m guessing you still came out ahead. ;)
You were smart, to do what you did. Even though the market crashed on you just as it has on me, if you stick to the plan, you should have more than easily recovered from your losses by now. I know I have. I didn’t get started until December 2001, which was still during that Oct 2000-Oct 2002 bear market, but then I didn’t have much to regain with that one given I started out in Dec 2001. As for the Oct 2007 to Mar 2009 crash, I have already fully recovered from that one as well just by sticking to the game plan.
I started my first 401K at 19. I understood that even 2% of the meager money that I made taken off the top wouldn’t make too much of a difference in the grand scheme of things. I don’t think that I have ever contributed more than 5% of my salary and I’m not making buckets of cash. This was done through every up and down. I just acted as if it were not there most of the time. I’m not sitting on a fortune, but it’s something I guess. :)
@Sandy – I think that train of thought, forgetting about it, is a good one. I’ll have to do that as well, forget about it, so I won’t touch it!
Given the LD forced me to learn the art of memorization and also with me being such a numbers type person, there’s no way I can just forget in a manner that most people tend to forget. I am a nerd by far as compared to a free spirited person as Dave Ramsey put it. But then I also been through so much hurt within my first 25 years of my life, all of that hurt forced me to take things into my own hands and don’t allow anyone to do much of anything with it.
I’m currently in my twenties and I have no intent on putting off my investments for the future. My wife and I are nearly out of debt and we’re already thinking about how to prepare. I actually opened up a question to my readers regarding the investment ideas. Take a look!
@LifeandMyFinances – I’ll check out your link. I think it’s great your getting an early start!
the only way i know how to catch up is by turning on more faucets of income. unfortunately, most people are in the category of “late starters”. but, better late than never I suppose
I think it’s great you are planning for your retirement and tracking your progress. I’m right in the middle of helping my mother get on a budget who is working a few years past retirement and is in a complete mess financially. She didn’t plan much at all and as a result she’s suffering + panicking and I’m splitting hairs doing my best to help her get her act together. It’s never to early to start planning and putting money aside in a 401k, especially if you get company matching. Planning is so important!!
@Charlie – It’s great that your mother has you to help her. But this is exactly the reason I need to start NOW or I’ll be in a similar situation and possibly no great son to help!
15 to 20% of your income is an outstanding contribution rate. You will catch up in no time.
@BuyLikeBuffett – That’s my hope, that investing more than 5-10% I should be able to catch up a little bit.
38-40 is still young imo. You have 20 years to save up big, and then live another 20-30 years in retirement god willing.
Also, when you were younger, you also lived it up and spent your money ,so that counts for a lot too right? Overall, so long as you are happy, that’s all that matters.
@Financial Samurai – That’s true. I plan on working at least another 20-25 years, then that does still leave plenty of time to work part-time or switch gears and do something else. I’ve been trying to convince my husband that the Peace Corps would be great when we’re in our 60’s. He’s not buying into it. ;)
Hi Jennifer, You highlighted an important point, save in the way that makes the most sense for you. The most important point of saving for retirement is to do it! I started saving very very early, but the past is irrelevant. What’s important is to start saving now, wherever you are. Your blogging is a solid indication of your discipline, you’ll do fine!
@Barb – Thanks for that advice. I think you make a good point that there’s no need dwelling on the past, as long as I prepare for the future today!
You are exactly right. You can’t dwell on the past. Don’t get me wrong, your past makes up who you are, but other than learning from the past, you can’t do anything with the past, so no sense of dwelling or using what if scenarios as they will only haunt you. You must do what you need to do here and now with what you have to work with before it’s time.
When I first started working straight out of college, I didnt’ participate in the company’s 401k because I just couldn’t think that far ahead into my future. I enjoyed receiving fatter paychecks every two weeks. Now, when I think about that, I feel so stupid. Not only did my company match the contribution, the average annual rate of growth itself justifies investing for retirement.
[…] House posted at Yakezie about Strategies to Help People to Catch Up on Retirement Saving. Useful stuff for those of us who didn’t think about their personal finances in their […]
Alternative: Sell everything and move overseas
@L. Marie Joseph – That’s one alternative I’ve thought about. Thanks for including that!
My basic story:
In my 20’s, income was such paltry small amount, there was no way I could save for retirement as I didn’t even have enough for necessary living expenses for all of my 20’s. As a matter of fact, it wasn’t until I was 30.4 years old when income finally went up, which then it was when I was 31.1 years old when I was finally going into the retirement plan after having to deal with the dire financial straits issues I had to face head on. As such, in my case, it wasn’t cause I thought of retirement being too far out, but rather I didn’t have the means to do it until Dec 2001. Even with me looking back that far back, I can still be truthful about that as I know I didn’t have the financial means to be able to do it until then.
But then how did I know about retirement funding and it’s importance?
For me, I more or less knew about it even from early on, but rather it wasn’t from any one source by itself. For me, it was the combination of different sources:
Having literally lived in survival mode with JUST CHILD SSDI, no fun experience at all. That right there was the start of the ground work for me not to be living like that as an elder.
Having been through Accounting (that’s including all courses through the Junior year of College Accounting, though the administrators of the colleges don’t want to admit to it) at the vocational high school (Genesee Area Skill Center in Flint, MI) for 6 of my 25 credit hours in high school, which also included some basic computer stuff though I was already outwitting them in the computer stuff even before having it in the class, that gave me the basic foundation of how it was going to work financially.
My computer skills (mostly on the software side as most can’t even come close to what I do) definitely has given me an edge, which I use that to my advantage big time. With this set of skills, it’s allowed me to get very technical and very precise with regards to how things work in the economic world, tax world, stock market world, what ever the case may be. With this very precise calculation and with where computers are these days, it only take me minutes per day to do my financial stuff, or even up to 1 hour per week to do it. As for when I do my annual budgeting process, believe it or not, I had the annual budget process 100% completed within a 3 week time period that included working overtime at work. I have that process setup to be done within a 2 month window, but given how much easier that process has gotten (partly cause I been doing it, so I have a much better idea of what to expect, but partly cause a lot of the ground work has already been laid out from previous years of doing it), it doesn’t take nearly as long to get that 2 year annual budget process completed anymore.
In 2001, that’s when I switched everything from paper to Excel cause paper was no longer working out for me.
In 2003, that’s when I ultimately ended up doing a massive self study of retirement taking into account the various risks factors both during retirement years (That was initially done first so as to get to a retirement amount in the current day’s money), and then also the various risk factors during employment years.
Given how important it meant to me to live relatively comfortable in retirement years, but also know there is no such thing as a guarantee of retirement, I didn’t like the statistical 95% confidence interval (2 standard deviations on a normal bell curve) as they would say in statistics so I went to the 98% confidence interval (3 standard deviations). It was only at that point which then had me setup some rules in order to have that 98% chance including meaning 25% of “Actual Gross Earned Income” must go to countable savings for a period of 40 years.
Life issues was thrown right into my face as initially it came up as 25% must go to retirement contributions, but that obviously couldn’t happen, so ended up coming up with a compromise for those of us that went to school up to the age of 24 or 25 years of age.
Up to the year of your 30th birthday (though for me, it was even a bit later to get out of school as none of my credits had transfered, which really was a major bummer given I learned nothing new in those first 2 years at the university), you primarily can only focus on getting your debt from college in control. If you don’t do that, then you won’t make it in life too easily to be able to save for retirement. Of course, this 5 year time frame, your income may not be high enough to really allow you to be able to save for retirement either.
During this 5 year period, you need to be working your way to meeting this 25% of “Actual Gross Earned Income” to countable savings goal rule as once you reach 30, you will need to do that to have a 98% chance to retire relatively comfortable.
I don’t know about you, but with the stats stating only 1 in 4 households retire relatively comfortable, that doesn’t sit well with me. I definitely don’t like that story. It means the average person isn’t doing nearly enough. As such, I also turned to other sources (having to do some research of my own taking notes as I can and jotting them down in the computer as I’m much better at typing than I am hand writing and much faster with much higher accuracy), so as I can see how I compare to others and am I making the cut.
What are my main sources for such comparisons?
EBRI (www.ebri.org)
This site gets at employee benefits and basic retirement information. While it’s doesn’t cover everything, it certainly is a good source for a lot of different things.
http://www.marketwatch.com
I use this site to help me keep up with the economy (thus how I get a feel for how things are going in the economy as a whole), but it also provides other information from time to time as I gather them and incorporate them into my financial files.
FRB: Survey of Consumer Finances (http://www.federalreserve.gov/pubs/oss/oss2/scfindex.html)
This site gets into more depth of people finances and I use this data as a major source for setting up the data.
I also use the census data for setting up the age ranges for those that are the head of households.
With all of this, I have within one worksheet, a 20 bucket percentiile break down of 11 different categories (1 controlled category which is the age, and 10 independent categories about where people are at). This then allows me to see where our household fits in. As new data comes in, I have to establish the new data into this one worksheet, which can take some time for certain things while other things, it can be fairly straight forward. Of course, the one aspect I find not so easy to take into account with these sources, how much of households resources are before tax based vs how much of it is after tax based? I very seriously pose that question given how much income taxes can eat up one’s assets, so it can paint a very different picture if it’s before tax based from that if it’s after tax based.
One thing people say, when ever you get a pay raise, apply that full amount of the pay raise to your savings. I have one basic problem with a such statement. Such statement ignores the impact of inflation on one’s goods and services. For me, I would rather see one apply a partial of that pay raise to one’s savings and the rest of it go to their household needs that has increased in cost including between 5% and 10% of that raise net of taxes go to entertainment expenses. However, I still apply the 25% of actual gross earned income amount to go to countable savings at a minimal with me shooting for 40% of actual gross earned income to go to countable savings, so as to be able to cover for those bad years.
Percentages can be misleading. If I earn $1000 this year and save 50%, it’s not really much. Anyone can advise a dollar range we should be aiming for?
True, but at that low of a rate, how long can you last? I know I was making only $4,000 annually for about 6 years in the 1990’s, and to this day, I’m still indirectly paying for that via the debt that has carried over.
Not only that, but there are years when you may be bound for having bad financial situations, so that’s why I say for the good years, you shoot for 40% savings so when those bad years do happen, you still have that 25% savings covered with the “BANKED” savings from the good years.
My story is more like you than some of these other financially savvy young people. My first adult job was in the military and of course, they don’t have a 401K. When I left there, as a struggling young family I thought it more important to use my money on the mortgage, child care, etc. I also thought there was lots of time. I seriously started saving in my mid-30’s so I’ll never catch up to some people in my age group. However, I won’t be break either.
I have nothing apart from debt (oh maybe I have $400 in a retirement plan somewhere).
I am hammering the debt right now and intend to be paid off by June (hope I should say). Going to take a lot of work but I think it can be done.
Next up will be some serious savings and then retirement. I am nearly 30 so am late but am sure I can get it done.
Little House, I can’t get over how you said you are pushing 40’s!! I remember your pic and you looked so young there- like 20’s :) You must share your secret on “how to look young on the cheap” with us sometime :)
I recall that you work as a teacher, right? Don’t teachers get a really good pensions? (Because here in Canada, public servents get pensions that are pretty hefty- about 80% of your average income)
I’m with Mike. Unless you’re planning to travel a lot during your free time, a part time job doesn’t seem like the worst possibility, especially if you enjoy what you do
[…] I know, for one, that I can’t count entirely on my pension, which is why this year one of my goals (or resolutions) is to open a retirement account. I’m still debating between a 403(b) or a 457(b) and at some […]