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A plan of action for those who are approaching retirement age with little saved.
I get some really interesting reader mail through the Contact page. By far the most common question I get is a variant of the below:
I’m 53 years old and through a combination of unforeseen medical expenses/helping ailing parents/life kicking me in the butt/decisions I wish I hadn’t made, I have nothing saved for retirement. Am I screwed? Where do I start?
There’s a lot there.
I’ve hesitated to answer these kinds of emails directly because I don’t have a silver bullet for how you can have a luxurious retirement budget in your ideal city that allows you to retire right on time without sacrificing anything. No one does.
But I do think a framework exists that puts you in control of all the variables and allows you to review and select among the options available to you. That is a slightly longer process to describe than an email would fit, so that’s what I hope to cover here.
I don’t know what led up to this situation. There are some legitimate circumstances for a person to end up in a situation with no savings – things such as a major medical procedure that turned out not to be covered by insurance. There are also myriad ways someone ends up in a situation like this that are completely avoidable – profligate spending, lack of awareness, etc. To me, the first step is to acknowledge that what has happened is in the past, and that you must leave it there – in the past.
There’s a lot of work ahead of you. You need your energy to build and implement a plan that’s going to require consistent work and effort. So don’t waste it beating yourself up for what you should or shouldn’t have done in the past. We’ll come back to your experiences insofar as they are helpful in informing you how to change your behavior going forward, but self-flagellation in and of itself isn’t going to help anyone. I don’t care. You shouldn’t, either. You judge yourself from here on out based on what you accomplish of the new plan.
Secondly, I do wholeheartedly believe there is a decent chance you’ll be able to build a workable plan for your situation and still live a happy life.
Humans are incredibly adaptable. If you are reading this, you probably live in a developed country with strong infrastructure and a wealth of options. The plan you ultimately hammer out is probably not going to look like the retirement you are envisioning at this moment, but it doesn’t mean it won’t end up being just as good if not even better. It’s just going to be different and you’re going to need to be open-minded and change the way you think: you came to this article because what you want and the timeline you want it in is not feasible – something needs to change about the equation to make it all balance.
If you don’t already have a single pane of glass view into all your holdings, get started now. You want to be able to see your net worth and your expenses every day at a moment’s notice. You improve only what you measure, so you want to make sure this information is at your fingertips. The steps below will suggest tactics to optimize these two metrics, but you need a good way to track them first. My favorite is a free service called Personal Capital. They offer their dashboard tool for free where you can hook up all your accounts to see everything from a bird’s eye view, and it comes with automatic benchmarks like how your cash balance compares to others’ portfolios, how your expense ratios on funds purchased compare to industry standard, etc.. They monetize by eventually trying to upsell you on wealth management services and offer you a free consultation with their advisors, but you can always decline the consultation. If you want to learn more, you can check out how I use their system here.
Setting The Goal
You will need to figure out how much you actually need to retire and work backwards from there. Once you have a draft, you can iterate to the right final plan.
Start by building yourself an empirically-based retirement budget. In this walk-through, you’ll figure out how much it would cost to meet your basic needs, and layer discretionary purchases on top. You may even find that your needs are lower than you expect because you will pay zero income taxes – score!
You will likely have two or three iterations of your budget. The first one always comes out with an eye-popping number. Then, as you see the trade-off of all the luxuries you’ve built in against the grand total, you will pare things down and eventually come to something that feels workable.
Target Nest Egg Number
Once you have a well thought-out budget, you can determine what your target nest egg number will be. This article will walk you through the research which helps you determine what safe withdrawal rate to use. If you want to skip right to the punchline, you can divide your budgeted amount by 4-5%, or .04-.05. The target safe withdrawal rate I recommend through that post (3%) is geared towards early retirees who are aiming to keep their nest egg growing in perpetuity – because they might live 40 or 50+ years longer, a plan which has any chance of requiring drawdown is dangerous. With a shorter retirement period, you can probably afford to use a higher withdrawal rate of 4-5%. You now have your target number.
There is only one major modification you may wish to make to the exercise above. To the extent that you believe you can retire on social security, you should include your estimated annual social security income out of the total expense number before dividing by that .03 figure. The social security payments will cover that amount, so the nest egg you need to amass only needs to cover the balance.
To get a sense for how long it will take you to reach your new goal, you can use an estimate of annual return from your investments and annual savings from your income to get a sense. This chart will help you get a rough idea of how long it will take to get to where you’re going.
Wondering what input for estimate portfolio growth? It will really depend on what strategy you pursue, but assuming you are using a standard low cost index fund strategy, you can look at historical data for a rough sense and maybe subtract a few percentage points if you want to be extra conservative.
The compound annual growth rate of the S&P 500 over the past 10 years, for example, has been about 7.7%.
Let’s say you do all this and it spits out a timeline you don’t like. 20 years to reach your goal. You’d be 70 at that point! What next?
Dimensions of Freedom
You have five levers you can pull if you are unhappy with how the current equation is balancing out.
At its core, you achieve retirement by balancing the following five things:
- Year To Retirement
- Savings Per Year Leading Up To Retirement
- Growth of Portfolio
- Expenses In Retirement
- Income In Retirement
Years To Retirement
You can decide to work longer before retiring. This is the one most people use. Instead of retiring at 50, they want a luxurious life so they work until 60. Saving a high percentage of their salary seems impossible, so instead of targeting a retirement of 35, they decide to retire at 62. Fortunately you’re on an early retirement site, so we are generally not in favor of sacrificing more years of our lives. This is definitely an option and for some is the most palatable option. If it is not palatable to you, read on. We are a community that really focuses on the next four.
Savings Per Year Leading Up To Retirement
This is where you’ll see a lot of the FIRE community focus. If you can get your savings rate to an extreme level, retirement in 7-9 years is a definite possibility. Savings is driven by two factors: income and expenses. Most people generally find cutting expenses to be the easier option because it can be implemented immediately whereas earning more income requires time and often new skills as you build up a book of business or fight for a promotion at work. You’re going to need to comb through the archives on various earnings and savings strategies to determine what’s feasible for you. But as inspiration, here is a chart on savings rate and years to retirement. Know that many of us in the FIRE community have successfully been able to save 70%+ of our incomes, at incomes ranging from $40k to six figures a year.
Savings Rate (Post Tax & Tax Deferred Account Contributions)
|Years Until Retirement|
Note: For more detail including assumptions for this chart, click here.
Catch-Up IRA Contributions
If you are over the age of 50, know that subject to certain income requirements you are able to contribute an additional $1k per year to your IRA or Roth IRA above the usual limit, and an additional $6k above the usual limit to your 401k, all tax-advantaged. This is a nice tool to use to stash your extra savings.
Growth of Portfolio
Where will you deploy your portfolio once retired? If you are able to keep your money deployed in higher-yielding categories like stocks vs bonds, you may be able to thread the needle much sooner on your retirement needs. There’s no free lunch, though, and that means you are taking on more volatility and risk in your golden years. Many advisors suggest you have the majority of your money in more conservative asset classes like bonds by the time you retire. Bonds as a group typically yield 3 pts+ less than the average performance of a low cost index fund of stocks. 3 pts can be the difference of doubling the amount of money you can spend in retirement, which for someone who has started saving late can be the answer.
Ultimately this is a lever you can use, but you have to walk through the very real risks you will be taking in trade. If you happen to be the unlucky generation that sees a huge recession or dip while you’re retired, and you have the bulk of your money in stocks when it happens, you could easily see your net worth halve. At that point, your only recourse is to pray for a quick recovery and tighten your belt. You are playing the odds by going with this strategy. I won’t say it’s for everyone.
An asset class I tend to like better post-retirement is real estate. Real estate is hyperlocal, which means its performance as an asset class varies significantly depending on the geography you’re investing in, but there are numerous cities where you can see 8%+ returns on a rental property. These take some amount of work, but if you’re struggling to thread the needle on your retirement and want a higher yield than you can get in bonds (and thus are able to withdraw more money per year relative to your nest egg’s size), real estate is an interesting prospect. Most folks can get behind the relative safety of rents not moving significantly from year to year. That plus a locked in expense level of property taxes and a mortgage, and you get pretty clear visibility on your returns on the holding.
Expenses in Retirement
This is probably the most widely used lever for retirees who are late to the savings game. Because you have full control over your spending throughout retirement, people generally feel most comfortable building a strategy around controlling expenses vs the other levers at play.
You may have to get very creative to drop your expenses to a level where you can retire with only a few years’ savings. This may involve moving to a state or area that is not your ideal location. You may need to keep an open mind to considering things like living in a motorhome for your retirement, or living car-free. Fortunately there are tons of frugality blogs to introduce new ideas to you.
I realize this will be a compromise. But we’ve discussed at the beginning of this article that finding the right solution for your retirement when you are decades behind the game will require some sort of compromise.
One particularly interesting happy medium for some early retirees is to go abroad and take advantage of the extremely low cost of living in other countries to be able to maintain a standard of living in retirement that they are used to or dreaming of. This is called geographical arbitrage. You can consider places like Guatemala, Thailand, Argentina, Malaysia, and the Philippines. There are entire communities of expats who share their experiences abroad to help you decide if it’s right for you. And if healthcare is a concern for you as you select a place to live, you may be surprised to discover that your healthcare options can be extremely affordable and high quality in developing countries – as an out of pocket payer, you can receive the best care from private doctors. It’s all about information and research, and I’d encourage you to delve into the region-specific expat communities to see if this is for you. If you’re looking for a place to start your research, check out this list of places to retire on a budget.
Income In Retirement
Can you supplement your retirement years with some side income? The world is an exciting place for part-time and freelance work. The advent of online marketplaces like Upwork as well as on-demand contractor roles with companies like Uber (driving) and Rover (dog sitting) can help you make ends meet. My favorite side hustle is to start a blog. If you’re able to slate in $5k-$30k in side income, this will drastically reduce your nest egg target for retirement.
There are other options to generate cash if you are unwilling to pick up a side hustle. If you own your own home, you might consider taking out a reverse mortgage. A bank will essentially let you take out cash against the equity of your home. When you pass away, the bank then owns the property, but you are guaranteed a place to live for the rest of your life. This is a way to tap into your savings in a way that helps cushion your retirement years while preserving the thing you care about most – having a place to live and call your own in retirement.
Expected Withdrawal Rate
All of the levers above essentially all combine to help you determine one thing – how much you’ll need to draw against your nest egg per year, or a withdrawal rate. If through investing in higher yield but riskier assets like stocks you are able to increase the withdrawal rate you think your nest egg can support without depleting, you will need a much smaller nest egg to retire. If you are able to lower the amount you need to withdraw each year, you will likewise need a smaller nest egg to retire.
For those retiring after 50 or 60 years old, you can likely use a higher target withdrawal rate than you hear discussed in early retirement circles. For those of us who may well have 50+ years of retirement ahead of us, the concern is much higher that we select a conservative withdrawal rate in order to keep the nest egg perpetually growing/healthy in size. With a shorter retirement period, you have more visibility into the nest egg still lasting for your needs even if you begin drawing more than the nest egg throws off each year (i.e. the nest egg begins to shrink). Where conservative early retirees may target a withdrawal rate of 3%, you may feel comfortable with a 4%, 5%, or even 6% withdrawal rate after reading the comprehensive research on past portfolio performance.
There has been some interesting research done in the retirement advisor community around what spending strategies in retirement can help improve the safe level one can withdraw from their nest egg. One which I’d like to highlight here is called a variable spending strategy. You can read more about it from retirement researcher Wade Pfau here.
If you are over 50 and just starting to save for retirement, there are plenty of tools at your disposal. You will want to take a preliminary cut at a retirement budget and target nest egg. But the real work will be in analyzing the five degrees of freedom you have to find the combination that best fits your situation. Compromise will be required, but there will be a set-up that works for you. It just requires iteration.
Where are you in your path to retirement? Are you leveraging any of the degrees of freedom in unexpected ways to accelerate retirement day?