You can plan retirement, even at 50
Once you spend, owe less, the path is clearer
(Third of a four-part series).
Finding yourself at age 50 and broke isn’t what you had in mind when you graduated high school. To be fair, you may not even be bothered by your assetless current reality. Not having money isn’t indicative of a bad life or poor choices. Time just got away from you.
All that is in the past. There’s nothing you can do about that; so don’t waste any energy trying to rewrite history. You need your focus here.
The first two weeks of our project were dedicated to cleaning up your financial past (debt) and living a more realistic financial present (lifestyle). We had to start there, because if we didn’t, there would be no chance at a future.
Let’s quickly review some important numbers and details we’ve previously covered. This project is based on a $60,000 annual income. You started by contributing 5 percent of your income to a company-sponsored retirement plan like a 401(k) that has a 3 percent employer match. You then dedicated the first two years of your focus to eliminating consumer debt and, last week, you began your effort to reduce overall household spending by 10 percent. After all this, your estimated take-home (net) monthly income is $3,400.
Now to let you in on a little secret: You’ll be able to pull this whole thing off because, going forward, you will be investing the money you learned to live without over the past two years.
Reducing your expenses by $340 (10 percent) initially went to allowing you to get out of debt over the first two years of this project. During these years you should also have used any tax refunds, bonuses or any other extra income to pay off whatever debt you had. Once you eliminate your debt, or if you didn’t have any debt to begin with, it’s time to redirect the $340 per month you’re no longer spending toward your company- sponsored retirement plan. Remember, you’re already contributing $250 a month (5 percent) to your retirement plan and getting your employer’s $150 a month (3 percent) match. Adding your $340 to your retirement account means your monthly contribution will be $740 a month going forward.
If it takes you two years to get out of debt and you don’t redirect your $340 per month until then, your retirement account balance at age 70 will be approximately $362,174. This total is based on a 7.17 percent annual rate of return, which is the previous 20-year average of a 60/40 (stock/bond) portfolio.
At a 3.5 percent distribution rate and a 20 percent tax rate, your projected monthly income at age 70 from this fund in today’s dollars will be $897.89, or an inflation-adjusted $613.34.
Another thing happened when you reduced your monthly spending by
$340. You just reset your retirement income needs. Your goal is now to replace
$3,060 of income, instead of $3,400. That’s $3,060 in today’s dollars, but
$4,673 in inflated 2038 dollars (at a projected 2.14 percent inflation rate). Yeah, inflation’s the worst. If you’ve never been motivated to drive your lifestyle lower, you will be now.
Before you hyperventilate, your estimated Social Security retirement benefit at age 70 will be $2,443 in today’s dollars, or $3,768 in projected COLA dol- lars. If you’re still awake, that means at your freshly reconfigured current lifestyle, at age 70 you’ll need $4,673 of monthly income and you’ll have $4,381.34 ($3,768 plus $613.34) income available.
Can you imagine how awful this would look if you never made the choice to turn over a new leaf ? Alas, there’s still a shortage. But we’re not done.