In my early 50s and little set aside for retirement; what should I do?

A reader wrote in the other day asking for some advice: I am in my 50’s and have only XX,000 for retirement, I was on track until a serious medical condition drained my retirement funds. I have no idea what to do and do not want to work forever. Can you help me or point me in the right direction? – “N”

Thanks for your question “N” – I like to answer these as often as I can – I would rather help you for free than have you go waste money on a financial adviser or the likes. That’s not to say that can’t provide value – rather that it’s better to learn this stuff on your own and take control of your financial situation -and you don’t need to be a college grad to see how simple it really is. To answer your question I first want to tell you, you’re not alone. Many people your age haven’t suffered a stroke and had to deal with all of those additional health related expenses, and they still haven’t saved a dime at your age. Fortunately, you can still setup a retirement plan right now on your own that will help ease your mind (or make you realize how serious you need to get). Because I already wrote about this on another website, I’m going to copy my work from that article and share it here (it doesn’t exactly describe your situation but it certainly applies to you):

From my article written on ManoftheHouse.com:

“Wells Fargo Survey Says 80 May Be the New 65 for Retirement Age” a recent Business Week article proclaimed. Given that life expectancy for Americans is now at around 78, the new survey statistics are downright scary. I’m looking forward to traveling the world before—and after—retirement, without financial worries. No doubt you, too, are looking forward to some days of ease after a long career of working. But there’s no guarantee. My late grandfather worked until he was in his 80s as a mechanic. Climbing in and out of greasy engines was not likely the way he envisioned his last years.

Still, setting up a a simple retirement plan right now will go a long way to helping make your golden years truly golden. Far too often, people make retirement planning, like investing, way more difficult than it should be. Begin with writing down your age and how much savings and/or investments you currently have. Then, pick an age you want to retire, determine how much money you will need when you retire, and work backward to determine how much you need to put away and/or invest from each paycheck.

Keeping it simple will provide you with a decent starting point to determine if when you want to retire is aligned with when you will be financially able to do so. After this simple exercise, if you determine, based upon simple calculations, that your retirement age isn’t possible, readjust your assumptions. Pick a different retirement age or determine how much more you will need in additional savings and investments each paycheck.

You can always reevaluate down the road as you get closer to retirement to determine if you’re on track. Instead of getting tied up now in excruciating detail surrounding your retirement with taxes and inflation and social security income and such, start with the basics, make some assumptions, set some goals and milestones and put your saving and investing on auto-pilot.

A Scenario

Let’s use a fictional situation to explore the questions about saving for retirement. Meet Mike. He’s 30 years old, he hasn’t saved a dime yet and he wants to retire at 50. He makes about $50,000 a year. Is his plan retire even feasible? Here’s what Mike should do to find out: estimate how much it will cost for him to live after retirement and how long he believes he will live after he retires. Then he must estimate how much he can sock away and invest.

Mike determines that to keep his current lifestyle in retirement he will need about $2,000 per month or $24,000 per year. He believes his house will be paid off by 50, and his expenses will go toward paying for utilities, medical expenses and occasional travel. Based upon the current male life expectancy of 75, he expects to need that same amount of income for 25 years. However, he wants to build a cushion of 10 years in case he lives to 85, so he will need $24,000 per year for 35 years or $840,000 by the time he hits retirement.

Keep in mind, this is a very basic approach. You could make it much more complicated, but there’s no need right now. Our goal is to complete a high-level evaluation of a basic retirement plan that you can create on your own.

Mike determines that based upon his current bills he can put away about 10 percent of his take-home pay to invest each month—about $400 or $4,800 per year. Is this enough to allow him to retire at 50 if he needs $840,000 dollars? Doing the math with this simple calculator (assuming an 8 percent historical annual return on investments in the stock market), the answer would be no. In fact, Mike would be well short.

Another option: Mike could enter his goal of $840,000 and have it calculate how much he would need to save and invest (he would need to invest $18,355.86 per year to meet that goal).

Since Mike realizes there’s no way he can save that much each year, it’s back to the drawing board. Given his hope to retire at 50, investing only $400 per month is not going to cut. It’s probably time for Mike to make a more realistic goal based upon his ability to save and invest.

How Much Should I Be Saving for Retirement?

He decides he’ll retire at 60, meaning he would only need funds for 25 years instead of 35 and would have far more time to save. If he stuck with his $400 per month investment, he would only need $600,000 at retirement (based upon his post-retirement needs of $2,000 per month to live, or $24,000 per year and 25 years, so $24,000 X 25 = $600,000). Let’s run the numbers and find out what’s happened.

Mike is much closer now—he’s only off about 55k from reaching his retirement goal. By tweaking how much he invests each month or by working for an additional year, Mike will have a solid, basic retirement plan in place. Drop the numbers in the alternative way to find out exactly how much more Mike will need to invest over the $4,800 each year to retire at 60. As you see below, Mike will need to bump up his investments by about $500 per year to meet this goal.

As you can see, it’s not difficult to determine a basic retirement plan that tells you how much you need to put away and invest each month until your retirement. Stick to your plan and you should be able to beat the latest gloomy odds and enjoy the life you can imagine.

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