A Late Bloomer's Guide to Saving
There's plenty of time to catch up with these surefire strategies.
By Mary Beth Franklin, Senior Editor
From Kiplinger's Personal Finance magazine, January 2007
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"Life is what happens while you’re busy making other plans,” John Lennon wrote. Baby-boomers closing in on retirement with nest eggs that are a few zeroes shy of what they need to live comfortably know all too well what he meant. As the vanguard of the 78-million-strong generation turns 61 in 2007 (a year away from the age when many Americans retire), some will have to alter their financial strategies in the wake of job layoffs, investment losses, the kids’ college bills and unforeseen family expenses that made them put their savings on hold.
If you count yourself among these late bloomers, don’t panic. You can still afford to retire. It will mean ramping up your savings and stretching out your timeline. But here’s the good news: With increasing life expectancies, you still have plenty of time to get it right.
Start a new career
Jerry Hays spent his whole career as a small-town banker—until a few years ago, when a national bank bought the savings and loan where he worked. He was offered another job if he was willing to relocate, but Jerry didn’t want to leave Bloomington, Ind., where his family has lived for five generations. Since then, he has worked as a mortgage-loan officer at another bank—which is a few rungs down in salary and prestige from his former position as assistant vice-president.
So at 59, Jerry decided to launch a new career. He is now a broker for reverse mortgages and life settlements, linking providers of financial services with seniors who want to tap their home equity or sell their life-insurance policies to raise cash. In a way, Jerry is a poster boy for retirement today. In a recent survey of Kiplinger’s readers, three out of four said they plan to continue working after retiring from their current career.
Fortunately for Jerry, he had a home-grown adviser to guide him and his wife, Jeanne, through a sometimes difficult transition. His son, financial planner David Hays, of Comprehensive Financial Consultants, recommended that they sell their big house and use some of the profit to fatten their retirement savings and fund the new business. Jerry and Jeanne sold their home for about $400,000 and bought another for less than half that price, cutting their monthly housing costs from $2,000 to $800.
Although things didn’t turn out the way Jerry had planned, he’s excited about getting in on the ground floor of a new business. “I always thought I would retire at 60,” he says, “but here we are starting over with a new house and a new career.” In two years, he says, “I hope I can look back and say this is the best thing that I ever did.”
Stay on the job
Extending your career by even a few years can have an enormous impact on your retirement nest egg. It gives you more time to save for retirement, delays the start date for collecting Social Security (which boosts your benefits), and reduces the number of years you’ll have to rely on your savings.
Let’s say that at age 65 you’re earning $100,000 a year and have $500,000 in savings. If you work just two more years and save 15% of your salary each year, you could boost your annual retirement income by 28%. This example, supplied by T. Rowe Price, assumes that your salary increases 3% each year and your investments earn an average of 8% a year before retirement and 6% afterward. If you work six years longer, you could more than double your annual income after retirement.
One of the biggest concerns for current and future retirees is the cost of health care, particularly now that so many companies have reduced or eliminated retiree health-insurance benefits. But disappearing retiree health benefits may have one positive effect: More people may work until age 65 to qualify for Medicare, instead of quitting at 62, when they are first eligible for Social Security benefits but may have to purchase individual health insurance.
Today, more than half of all workers start collecting Social Security payments at 62, even though their benefits are permanently reduced by about 25%. Benefits can be cut even further if a Social Security recipient continues to work and earns more than $12,960 in 2007.
But basing your retirement plans on working longer could be a gamble. “The big assumption is that both you and the job market for seniors will be healthy,” says Rande Spiegelman, vice-president of financial planning for Charles Schwab. A more prudent course is to cut spending now and boost savings while you can, rather than being forced to do so later. Otherwise, says Spiegelman, “it could be like going from driving a BMW to riding the bus.”