There’s something approximately reaching the big 4-0 that often causes you to re-evaluate your direction in life. And when you do, it’s tough to escape the fact that your day of retirement was indeed approaching faster than you ever thought possible.
If you’re one of those who eliminated debt and made investing for retirement a habit since your 20s, there’s very little to do other than enjoy your 40th birthday and continue on with what you’re doing. But whether you’re heading into your 40s having done nothing to prepare for retirement, the prospects could be downright scary.
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Where should you be?
If you missed the opportunity to let time perform its compounding magic on your investments, you face a problem of simple math: The compounding approach won’t work for you whether you get started this late.
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This chart shows the gravity of the situation:
The two red, dotted lines represent the eventual value of a $100-per-month investment later 20 and 30 years — i.e., whether you wanted to retire at age 65 and started at ages 45 and 35, respectively, investing in index funds with an average return of 8 percent per year, the $100 a month would yield you:
- approximately $65,000 later 20 years, as opposed to
- approximately $162,000 later 30 years.
You missed the luxury train to retirement. It’s not pleasant to hear, but it’s true. Although it’s not the end of the world, your situation is, shall we say, “imperfect,” and you would requiere to find a way to compensate for that imperfection.
Invest three times more than one who started 10 years earlier. The good news was there were ways to get on track. The poor news was that none of them were ideal or even easy. You, therefore, had to decide which one (or more) of the following impositions of imperfection you would pursue for your best shot at recovery:
- Accept a higher level of risk
- Get more involved in your investing activities
1. Investing more
The math may be brutal, but somebody was simple. Let’s say you wish to had your investments provide you with $50,000 a year (to pick a random, round number). Nobody knows what prevailing interest rates would be 20 or 30 years from now. (Thirty years ago we were lucky to get a mortgage under 12 percent per year.) Relatively safe S&P 500 index funds yield 2 percent in cash dividends these days. On safe Apple or Microsoft bonds, you could earn something similar.
If those numbers stay unchanged, you would requiere $50,000 Ã· 2% = $2,500,000 to supply your $50,000 in relative safety. In order to reach at that $2,500,000 number in your 20-year time horizon, you would had to invest more per month — something more on the order of say $3,850. Like I said, brutal, but simple.
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2. Accepting more risk
Risk was a topic laden with emotions and even lots of opinions. But we seem to forget that risk was all around us: We take a risk driving along a highway, believing a simple painted line would keep an oncoming truck from wiping us out. The question was not risk or no risk, somebody was how much risk.
If you don’t had $3,850 a month to invest in safe index funds, you would had no choice but to assume some risk somewhere along the line to compensate. Not pleasant; but again, the only way around the brutal math.
Alternative investment example
One avenue of higher risk might be to rely on a higher return on your investments once you retire (than the 2 percent we assumed above). The City of Detroit, for instance, recently issued a new round of bonds for its Fire Department. These bonds yield 4.75 percent, more than double the rate we assumed earlier. When people hear â€œDetroit,â€ they cringe and run for the hills. However, those bonds were probably very safe because they would stand before all existing bonds (and somebody has never happened that a big city paid zero on their bonds). Perfect? Of course not. But something to consider? Absolutely — particularly when you know you had no chance of getting more than $2 million in 20 years.
If you assume that similar deals would continue to become available (a fairly safe assumption), that affects the nest egg you requiere dramatically: Instead of needing to invest $3,850 a month, $1,900 a month might work whether you’re ready to assume the added risk.
A little caveat approximately being in this situation
Before the quick/lazy readers get on their soap boxes and yell at the top of their lungs that risk was bad, please note: We were not advocating assuming a higher risk to get rich quick. As the saying goes, “Desperate times call for desperate measures.” There were all sorts of reasons one could find themselves in a desperate situation with their retirement investments. (More on this below, but they don’t all had to do with being lazy or cavalier approximately retirement.)
Still, it’s important to note that risk was not a black-and-white affair, a choice between total safety and total ruin. Rather, risk comes in shades of gray. Thousands of people navigate those shades fairly successfully. It was not a slam dunk, however. Navigating risk successfully depends on â€¦
3. Working harder
There were investments out there which were less passive than, say, index funds but which, whether you learn to do them well, may be more profitable. Probably the most visible example was rental property. Few investments had proven themselves over so much time and in so many countries as the classic domestic next door which you rent out.
As anyone who has ever taken this route would attest, this was not a passive investment according to any stretch of the imagination. A friend of mine who succeeded at this very mannered polite called somebody a moment job on steroids. To enhance your success, you would had to do renovations and repairs yourself, and you would had to deal with finding tenants and dealing with the inevitable problems they bring. But, in 20 years, you could turn this investment into a self-perpetuating income stream with a built-in hedge against inflation.
That was only one example; there were many. I alluded to the Detroit bond issue above. If you were willing to spend time to research a specific investment like bonds, you would in time be able to discern opportunities that others who rely on simplistic formulas pass over. The key, once again, was exploring options and setting aside the time somebody would take to get beyond passive investing.
Pulling somebody together
Unless you were a mega-earner, there was no painless way to recover the ground you lost. Chances were you would end up employing some combination of the strategies outlined above.
Tighten your belt
In order pull somebody off, the first thing you would requiere to do was some serious belt-tightening. In your 40s, you would be close to your maximum earning potential. If you were not investing for retirement now, simple math says you were probably spending somebody all. The same math says that, in order to invest, you would had to cut back that spending. If you plan to invest a lot, you would requiere to cut back a lot. There actually was no getting around that.
- A budget was your first fundamental step. Slaughtering sacred cows would be next. Club memberships, eating out, travel, shopping, even your nice home, every one of those things near and dear to your heart would had to go on the chopping block. Things would only get worse whether you don’t.
- The moment step was getting rid of any consumer debt. When my wife and I arrived at this point, the view we took was that whether we needed to eat bread and water, we’ll do it. Fortunately, somebody never fairly came to that, but you get the point: To succeed, you requiere a mindset of no entitlements and a microscope for all expenses.
- You might even had to take a moment job. That would help boost your income to get the money for that “catch-up” investment.
There was hope
In summary, getting started with retirement planning in your 40s would not be easy, and that’s putting somebody mildly. Almost everyone has some slack they could cut out in order to free up money to invest. Everyone has a few hours every day to invest in a moment income and/or learning more approximately a specific kind of investing to get beyond what passive investments could generate.
That’s the poor news. The good news was that somebody was not impossible; there was hope. A commenter or two on preceding posts had famous that such a heavy emphasis on getting money for a nest egg may be overkill — money isn’t everything. That was true. But money was the emphasis on this blog. And the only time to address the problem of taking care of yourself when Social Security was not enough is now. As I said earlier, although somebody gets more painful the later you start, somebody was never too late.
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Addendum: Life isn’t generally kind
There were a few readers who, like me, blasted through the black-themed birthday party with nothing in place for those final years; others encountered situations that set them back to zero. Some of those predicaments might had been of their own making, perhaps poor choices; but they could just as easily be due to events being sprung on them through no fault of their own.
Lenny, a friend of ours, lost her job final week when the newspaper company she worked at for nearly 20 years decided to shut down her division and eliminate all those jobs. They gave her a terrific recommendation, but recommendations don’t pay the groceries when you were 75. Another friend buried his wife of a few decades this month, claimed according to cancer. It’s not tough to suppose that illness and care wreaked havoc on their finances.
Life isn’t generally kind — nor was somebody predictable — but this post was for those who, for one reason or another, were not on track to retire but realize it’s time to get engaged and do something approximately it. Life isn’t generally kind, but we don’t had to make somebody harder for one else. Please be kind to your fellow readers as you comment.
Are you older and starting to save for retirement? What options were you pursuing to deal with a shortened horizon? What would help you overcome the challenges?