Retirement savings should begin the moment you start earning income. The more time your money has to earn interest, the larger your nest egg will be. But what if you’re a late bloomer? What if you’re 40 and just getting started?
Here are three steps to follow if you’re getting a late start on saving for retirement.
1. Identify how much you’ll need to retire
The first step is to calculate how much you need to retire. General guidance is to have $1 million saved; however, the dollar value may vary based on your current income and your plans for retirement. If you plan to maintain a high standard of living, your target number will need to be higher than someone who only needs to live on 50% of their current income.
There are a variety of websites that can help guide you in this calculation. Two of my favorites are Vanguard and Fidelity MyPlan Snapshot. Play with the variables required until you get to your customized number. Be as realistic as possible. Otherwise, you’ll be setting yourself up for failure.
2. Create a financial plan
Now you know how much you need, it’s time to figure out how to get there. Your financial plan should include your short term and long term strategy. Start with what you have now – that’s your beginning figure. The retirement calculator utilized in the above step one above gave you the variable of how much you need to contribute each year.
Your short term strategy should identify how you will meet this annual contribution over the next one to three years. For example, if your current withholding from your paycheck is not sufficient, you’ll need to find a way to increase your income or reduce your expense. Your long term strategy will cover how you will increase your contribution over time. As an example, you may consider downsizing your house to reduce your expenses to free up money to contribute each month to your retirement.
3. Consider the idea of phasing out your retirement
You want as much time as possible to allow your contributions to earn as much interest as possible. The more time, the better. Ideally, you want at least 20 years. If you’re starting to save for retirement and you’re in your 40s, you’ll may need to consider delaying retirement until you’re in your sixties. Again the retirement calculator utilized above should help you determine the age you should be when your nest egg reaches the desired amount.
If you can’t delay retirement until then, consider a phased approach. At some point, reduce your hours down to part-time. As you get closer to your retirement age, your monthly expenses are expected to decrease. Your mortgage is paid off, and your children are financially independent. As such, you should be able to reduce your income but maintain your current level of savings. Phasing your retirement age will allow you more time to generate interest on a higher balance.
Are you a late starter? Or did you plan for retirement as early as you could? Let us know in the comments below.