Retirement Investing Advice For Late Start Investors

by Jacques Sprenger on 2009-11-1316

When did you start saving for retirement? Think you’ve missed the boat because you didn’t get a chance to invest early?

Reality Check For Those Nearing or Approaching Retirement Age

For many of us who are 65 years or older, we live by our social security checks. In fact, this is literally the situation for a third of seniors who’ve reached retirement age, according to government reports. A good number of people rely completely on social security and wouldn’t survive without this help. We can thank the New Deal of Franklin D. Roosevelt for its creation in 1935: this was really a huge step after the catastrophic crash of the stock market in 1929.

Whenever Wall Street goes through some volatility, we wonder about what happens to those who’ve invested most of their savings into stocks, mutual funds or any other risky financial instrument. The most appropriate answer I can think of? They are going through hell, and if they are over the age of 50, they may well panic and sell for a significant loss. This is all the more reason why many seniors rely so much on their fixed income stipend from the government.

work vs retirement
Awesome image by Mark Stivers

Our social security payments depend on how much we’ve earned before retiring. It ranges from 28.9% for the high salaries all the way to 55.9% for those making an average of $16,739 a year. A wife who has not worked outside the house will receive about 50% of her husband’s entitlement. Social security income doesn’t really seem like much, given the conventional wisdom that we would typically require between 80% to 90% of our pre-retirement income to live on once we do retire. Therefore, it would certainly help if we had a secondary source of income, such as a pension plan and /or personal investments.

Retirement Investing Advice For Late Start Investors

But what if you are one of those investors who is worried about not having enough when you finally hit your retirement years, say because you started investing later in life? AARP’s site offers some valuable advice to those between 50 and 65 who have to scramble to find other sources of income:

1. Look Into A Reverse Mortgage. If you have equity or if you have finished paying for your house, you can obtain a reverse mortgage, a financial instrument advertised by a well known actor, Robert Wagner. You get money for your home and you don’t have to pay it back for as long as you live there. Please check the AARP site for details, and weigh all the pros and cons before reaching a decision.

2. Go Back To Work (or Never Quit Working).Working past retirement” doesn’t necessarily mean that you are going to say hello to incoming customers at Wal-Mart, although any job is an option. If you have accumulated skills and knowledge that many companies value highly and if your health permits it, don’t be afraid to apply for a job you know you can do well. Or see if you can find an income-generating activity that you’ll be able to enjoy no matter what age you are. For instance, you can consider checking out the online universe for opportunities: you may not realize it, but there are a lot of online work options that abound. I’m actually a freelancer, and I’m a grandfather of 4, still hitting the keyboard (and having fun)!

3. Be Frugal. By learning to cut unnecessary costs from your budget, you may find that you can get by with less of your pre-retirement income than you normally thought. By learning to conserve and by developing frugal habits, you may realize that instead of 80% to 90% of your previous annual salary (or income) to live on, you’ll only require 60% to 70% (or less!) of this income for your living expenses.

4. Avoid Risky Investments. For people over 50, risky investments are an absolute NO-NO. Take a good look at what happened to the stock market this year. Millions of people have lost a lot of money. Even mutual funds, with their diversification, have taken a hit. Ask your financial adviser or do your own extensive research to seek out safe and productive investments.

5. Believe That It’s Never Too Late. Maybe you’re a fifty-something, and you still have another 10 to 15 years of hard work and saving opportunities ahead of you. But you need to find out how much you’ll need (and how long you’ll live) during your later years: well you can check out this page (from CNN Money) for some helpful resources and to see if you are saving and investing enough for your retirement. There are calculators there that will let you know how much you’ll need to save and how much your assets will need to grow to support your lifestyle.

It’s never too early or too late to develop a retirement plan. Unless you are on Bill Gates’ last will and testament, you should do what you can to prepare for the future, no matter where you are in life right now. Something is always better than nothing.

Copyright © 2009 The Digerati Life. All Rights Reserved.

{ 16 comments… read them below or add one }

Rob Bennett November 14, 2009 at 6:17 am

Working a few years longer makes a huge difference in the numbers. So I think that’s good advice.

I also very much agree with the advice to avoid risky investments. I have elsewhere seen those who are behind advised to take on more risk as a way of catching up. I see that as asking for trouble. That’s a strategy I have seen many play in poker, rarely to a good result. To take on more risk when you are already worried is to invite desperation. If anything, the late starter should be a bit more risk averse.

There’s one simple investment strategy that could have a huge payoff without requiring the investor to take on added risk, IF (and only if) the investor first does enough homework to understand it. I believe that we are likely to see another stock crash in the next few years, one that will take valuation levels for stocks down to one-half fair value. When we get to one-half fair value, the likely 10-year annualized return is 15 percent real (just as the long-term return is horrible when stocks are priced as they were before the crash, it is amazing when they are priced super-low). You can make up a lot of ground by investing heavily in stocks after they have fallen to low prices (investing heavily in stocks while they are falling to low prices obviously does not work out nearly as well).


Financial Samurai November 14, 2009 at 6:57 am

I wonder sometimes whether once people hit 60, whether they realize this is it, they get to retire, and don’t because they are having too much fun working.

At 60, one could assume you have a lower stress job, or maybe a super stressful job because you are a very powerful figure in your organization.

It’s really the journey for me TO retirement that I relish. I’m afraid that once I turn 60, I’ll feel sad, b/c that means 60 years of my life is over which I’ll never get back. Hence, I mentally in a way think I’m 60 already and only have 18 years left to live on average (78 yrs avg life expectancy) and run with things every day!

Financial Samurai

John DeFlumeri Jr November 14, 2009 at 9:20 am

I live in a retirement community. I’ve met a few senior citizens that are “just about getting by” on $1200/month social security. They all say they weren’t prepared for retirement!

John DeFlumeri Jr.

Funny about Money November 15, 2009 at 4:28 am

I can’t even imagine how you could live on Social Security alone. You really would have to be dining on cat food…assuming you could afford it.

In the first year of my forced early retirement, SS will allow me to earn only $14,160. So Social Security plus that amount, which I will have to cobble together with part-time work, will add up to about $28,000 — gross. Net will be around $22,400, if I’m lucky.

My expenses, pared to the nubbin, are more than that. Financial manager wants me to hold off drawing down savings for a year, because he thinks (hopes!) in that time my investments will recover what they lost in the crash.

It’s extremely distressing. One minute I think I may JUST make it; the next I figure I’m going to have to sell my house and move to a dreary retirement community, where housing is cheaper and taxes are lower. Thank heaven I’ll only have to get through a year of this…and that during the current year I managed to set aside $10,000 in emergency savings. Once I can draw something from savings I should be OK…but by then I can earn more, under Social Security rules.

“Earning more” is not all that appealing. Some of us really don’t WANT to work until we drop in the traces. Between you & me, neither teaching freshman comp nor editing mind-numbing technical and scholarly copy come under the heading of “fun.” Nor does waiting tables or greeting customers at the Walmart, my other options.

kenyantykoon November 15, 2009 at 4:30 am

i started actively investing immediately i hit twenty and i hope that i will not have to go through the hell that most seniors around me have gone through vis-a-vis their financial security. I have seen many retire to less than satisfactory lives because of bad investments and other things. While i hope to retire at a certain point in time, i am hoping that i keep enjoying my work as immensely as i do now so that if it is to retire, it will not be out of necessity but out of pure free will. Whike still in my twenties i find a lot of useful information in this post like “believing that it is never too late”- sometimes i also feel that i have wasted valuable time

Financial Samurai November 15, 2009 at 9:36 am

@Funny – Just wondering… $28,000/yr from SS + part-time works seems pretty good. Is it possible to sell your place, get more money from your house and rent for cheaper?

Also, I’m assuming you have retirement savings throwing off risk free interest-income to buttress the $28/yr? Or am I wrong…

Best, FS

Todd R. Tresidder November 15, 2009 at 11:31 am

I wrote an article called 27 Ways To Catch Up On Retirement Savings For Late Starters that your readers might find useful. It takes the ideas in this article and expands on it providing many additional strategies. Hopefully it helps.

CreditShout November 16, 2009 at 10:56 am

I’m so glad that I started reading financial blogs at a young age;) It really is amazing how much of a difference it makes if you start saving around 20 over even 25. I’m not expecting social security to be around in my golden years so starting to save now is almost a necessity for a lot of people my age, although many won’t realize it until its almost too late.

Red November 17, 2009 at 11:28 pm

I believe that we are likely to see another stock crash in the next few years, one that will take valuation levels for stocks down to one-half fair value. When we get to one-half fair value, the likely 10-year annualized return is 15 percent real.

Redwater November 17, 2009 at 11:29 pm

Thank heavens I’ll only have to get through a year of this…and that during the current year I managed to set aside $10,000 in emergency savings. Once I can draw something from savings I should be Ok,but by then I can earn more, under Social Security rules.

Paul November 19, 2009 at 11:33 am

Very cool article.

Sara Bee November 19, 2009 at 11:59 am

I retired 11 months ago, at age 62. I had planned to work until I was 65, but between declining health and increasing dissatisfaction at work, I retired early. I had done some careful planning and felt pretty good about what my situation would have been retiring at 65. I had to scale back to get out three years early.

I have been very lucky. I was able to get a pension based on 20 years work for my last employer. Over my lifetime I had been able to save a bit over $125K. When the market got volatile early in 2008 I moved everything to fixed investments so I missed that gut wrenching drop suffered by so many.

I have also been unwise. I didn’t start saving until I was in my 40s. I don’t hear much about the real estate bubble in the 80’s any more, but I wound up having to short sell a ‘creatively financed’ house and pay the bank the $25K loss over the next 10 years. I did get whacked by the dot com bubble because I was greedy. I eat out WAY too much. I could have taken better care of my health and worked until I was 65 or even later.

I had hoped I wouldn’t have to tap my nest egg for a few years. Murphy’s law anyone? I had to replace my roof at $12K. My emergency fund took a big hit because a family medical emergency cost me a little more than $4K for travel and to contribute my share of necessary financial support. I also had a $500 car repair and had to replace my hot water heater for $950.

All that aside I’m finishing my first year od retirement only a little worse off than I thought I would be. I had expected major expenses, expect more in the future, and mentally deducted almost half my nest egg for those things. I will be able to rebuild the emergency fund in about 10 months. I don’t think I’ll need to tap the nest egg for living expenses for several more years. I’m no shining example, but I think I’ll be OK.

My heart breaks for those who have to make it on social security alone. I know many just couldn’t generate the income or avoid the pitfalls to do any better.

On the other hand I have a friend who has put herself in an awful mess. She took the path of least resistance in the work world and never made anywhere near what she could have. She never got a pension, and hardly saved anything. She thought she could work forever. Her social security is $400 a month less than mine. Her mortgage payment is triple mine. Her credit card debt almost equals the balance on my mortgage. And now, at age 68, she is finding that she really can’t work forever.

Any advice I have would be the same readers have already been given, stay out of debt, live beneath your means, start saving early. My story may give some an idea of the outcomes of 40 years worth of life events and decisions which have resulted in a retirement lifestyle somewhere between opulence and poverty.

John @ Curious Cat Investing Blog November 28, 2009 at 7:06 am

I think it also makes sense to work longer (maybe part time). The current retirement ages were set 70 years ago. Life expectancy has increased a great deal and working longer makes sense. Now many people work well past retirement years. They are often people that love what they do but it shows it is perfectly possible for many people. With the spending people want to do in their 30’s, 40’s and 50’s they have to expect trade-offs (working longer). Or they can spend less in those years and save more, but if they don’t (as in your example) working longer is a good option. Though it is not a good retirement strategy because you may not be able too, we may have a very bad economy…

Jason Hommel December 22, 2009 at 5:11 am

With a lot of “baby-boomers” retiring soon, it’s a valid concern if social security can cover all of it. That’s why I agree that it’s good to have a back-up. Even if it’s working, it’s good to invest in something that doesn’t rely too much on the economy. There’s also the question of the investment being liquid. If you’re going to invest in something, it should be as liquid as money itself because you’ll never know when you’re going to need it.

Silver September 18, 2010 at 1:05 pm

Look through the things you have that you don’t want that may have value. Have a child or grandchild help you have a yard sale or sell them online and put the proceeds in a savings account and relax knowing you made some money any you won’t have to deal with the things later.

Silicon Valley Blogger March 14, 2012 at 10:49 am

Just read a recent report on a study conducted by MetLife that states that the average age for those seeking reverse mortgages has gone down to 71.5 years (basically, the early 70s). That means relatively younger people (more borrowers are in the baby boomer age range of 62 to 64) are opting for reverse mortgages, which to me, is another way of using your house as a “piggy bank” or ATM to cover liquidity needs during your later years. But it could be a reasonable option as part of retirement financing, according to experts.

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