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Preparing for Retirement When You’re Starting Late

Everyone knows that you’re supposed to start saving for retirement early, but that doesn’t always happen. In fact, if you look at the numbers, it’s actually pretty rare. Most people are woefully unprepared for retirement, but you can change that.

Preparing for retirement is a lot like planting a tree. The best time to do it was 20 years ago. The next best time is right now, and the first step is pretty simple. You need to start throwing money at your investment accounts. You need to save as much as you can bear.

Now, normally, I always say that you need to plan everything out and have everything in place before you take any concrete steps. In this case, however, you know that saving as much as possible is going to be a big part of the plan, so you might as well start while you’re still figuring everything else out. This is not the time for paralysis by analysis. You want to start stuffing money into your savings – and remember, if you’re 50 or older, you can put more into your 401k(k) and IRA accounts than younger people.

Once you’ve started saving, you need to figure out everything else, including if you need to save even more. The place to start is to identify where you are financially, and how much you want and need to spend in retirement. You need to know where you’re starting from, and where you’re trying to go if you want to have any hope of figuring out the path to get there. A common way of approaching this is to base your planned post-retirement income off your pre-retirement income. Alternatively, you could try and create a budget to plan out exactly what you want to do, and how much it will cost to accomplish. As you might imagine, this is a lot more work, but it does allow you more specificity. However you approach it, this is a crucial first step. Most people simply have no idea what they need to do to be able to support their retirement, and this means that it’s impossible to plan appropriately.

But the number (or numbers, since your income probably won’t be constant through retirement) that you come up with will drive everything that we do from here.

And the biggest driver of your financial plan is going to be your savings rate. We’ve looked at how important this number is in the past, but the less time you have to save, the more important your savings rate is. There’s two big reasons for this. The first is that you just don’t have all that much time to save money – and you can’t do anything about the money you haven’t saved. The other reason is that you don’t have as much time for your investments to do their work. The magic of compounding can do wonders for someone who started saving when they were 25. It’s not going to be able to do nearly as much for you, so you can’t offload as much of the work onto the markets as other people might have been able to.

Let me be clear, this doesn’t mean that you should load up on the investment risk and hope for good returns. It’s tempting to hope that the markets will be able to help you out – stocks do have higher returns than bonds, and a couple of really good years could make it a lot easier to meet your retirement goals. Markets do tend to go up  (that’s why we invest) but there are no guarantees in the short run. A couple of bad years could decimate your portfolio, and your hopes for reaching your retirement goals. For example, imagine if you were thinking about this back in 2007. A lot of people’s retirements were drastically altered in 2008, when the S&P 500 Index dropped by almost 37%.

You need to work within the confines of your risk tolerance. You need to stick with a portfolio that will allow you to stay disciplined through whatever the market decides to throw at us, and that starts with the ratio of stocks to bonds in your portfolio.

There are no short cuts to preparing for retirement. It’s a lot of hard work, and it’s even harder if you have to play catch up. But it can be done. And (after getting serious about saving) a great way to figure out where you stand is to take part in our Retirement Income Challenge! During this free challenge you’ll discover how your personal approach to retirement income, how close you are to reaching your retirement goals, and how to keep moving towards the retirement that you want. Sign up now to reserve your spot and get started!

Are You Ready for a Challenge?

Register to attend our FREE 4-Day Retirement Income Challenge event on March 4th – 7th from 12:00 – 2:00 PM ET each day.

Click below to learn more and reserve your spot!