Planning for Retirement: Building $1 Million Nest Egg from Scratch at 50
If you haven’t begun planning for retirement yet and you’re in your 50s, it’s understandable that you may be worried. However, follow the below advice, and you can still save $1 million in time.
Get on a Budget Immediately
It is absolutely essential that you create a budget for yourself that will help you reach $1 million by retirement. One of the worst pieces of retirement advice that is often repeated for some reason is that you don’t need a budget to reach your retirement goals.
Keep in mind, too, that you’ll need a budget once you retire, as well. Statistically, you’re actually likely to increase your spending once you reach retirement, so having a budget in place – even if you end up adjusting it – will go a long way toward protecting your nest egg.
Set Aside 20% of Everything You Make (at least)
As a rule, planning for retirement should entail setting aside 20% of your income. A big reason why is that Social Security is going to take a major hit within the next decade or so. The Social Security Board of Trustees even released a report to this effect. By 2033, they said that taxes would only be sufficient to cover about 75% of SS benefits.
People who ignore this when planning for retirement could be in for a very serious shock when they finally hit 65.
The same report didn’t seem very optimistic about Medicare. Unless something is done, many of you may be financing your healthcare – at least partially – during your golden years.
Sadly, even the old standby of pensions doesn’t seem long for this world. Their deterioration has actually been occurring for decades now.
“From 1980 through 2015, the proportion of private wage and salary workers participating in defined benefit pension plans fell from 38% to 15%, according to the U.S. Bureau of Labor Statistics. DB plans are the traditional pension plans that your father or grandfather’s generations were accustomed to, but now they’re as rare as a gold watch at retirement.”
You simply can’t expect that the mechanisms used by generations past to save for retirement are still going to be relevant. This is especially true if you’re just beginning retirement planning at 50 and want to hit $1 million. Saving 20% of your income is the very least you must do.
Don’t Spend Your Raises
Between now and when you finally quit work for good, you’d be wise to do everything you can to get as many raises as possible. However, instead of celebrating by buying yourself something nice, this extra money will go right into planning for retirement.
Some of you may think that you’re at a point in your careers where earning raises is unlikely. There may not be any more opportunities for promotion ahead. Any raises you do receive may not account for much, either.
First, a bit later, we’re going to show you investment options you can use to make the most out of every penny, so raises can still be very helpful.
Second, even further down, we’re going to introduce you to the gig economy. Therefore, even if you’re 100% right that there are no more raises coming down the pike, don’t worry. You still have options for pulling in extra income.
Change the Habits That Brought You Here
Unless you’ve found yourself in your 50s without any retirement savings by some seriously unfortunate event, it’s time to take responsibility for the situation and plan accordingly.
There are some habits you’re going to have to change in order to build a $1 million nest egg by the time you retire.
Some of these may involve guilty pleasures like smoking or drinking regularly. It could mean giving up luxury items like cable and eating out.
Chances are, though, that planning for retirement at this stage is going to require even more drastic changes.
For example, you might have to change your relationship to money. An honest appraisal of how and why you spend the way you do will help a lot in this regard.
Rethinking your habits will help, but you can do even more where planning for retirement is concerned by simply downsizing your life. Think about the things that require the largest portions of your budget and see if you can erase them.
For example, do you and your spouse both need cars? Could you sell one and put that money toward retirement? Doing so would also mean saving on car insurance. The chances are that you wouldn’t buy as much gas, either.
If you’re really serious about planning for retirement so you can reach $1 million, consider living in a smaller house. Again, selling your current home would definitely give you a huge infusion of cash. You would also lower a number of other expenses by moving into something smaller.
Downsizing can definitely be a tough decision to make, but many people end up finding it very refreshing and wish they had done it sooner.
Pay Yourself First
One way you may need to change how you look at money is to pay yourself first.
Maurie Backman at Motley Fool describes this habit as:
“Many people fall behind on savings because they’re just not in the habit of making it a priority. A good way to ensure that your savings don’t fall by the wayside is to arrange for a portion of each paycheck to filter into a retirement plan before you get your hands on it. If you make your savings automatic, you won’t miss that extra cash, and you’ll eliminate the opportunities you’d otherwise have for spending it.”
If planning for retirement is going to require putting aside 20% of every paycheck, you’ll have to adopt this new mindset of paying yourself first. Make your savings just as much a priority as paying your mortgage or buying groceries.
Leverage Tax-Free Saving Opportunities
Getting a late start on planning for retirement means you need to avoid as much overhead as possible. You need to put as much money as you can into your retirement plan; anything else is a distraction from this goal.
This includes taxes. Fortunately, there are plenty of ways you can set money aside without losing a large chunk of it to Uncle Sam. Some popular tax-free saving strategies include using an IRA (especially a Roth IRA). Bonds can also be helpful in this regard, but we’ll cover that in more detail later on.
Play Catch Up with Your 401(k)
Speaking of investment opportunities to help with planning for retirement, don’t forget about your 401(k). Next, we’ll cover bonds, which are the best investment vehicles for retirement, but 401(k)s are great, too.
If you haven’t been paying into yours, now is the time to start. Even if your employer doesn’t match you for every penny, whatever they provide is worth it. You’re literally receiving free money just for planning for retirement.
“Catch up” provisions are valuable opportunities available to those who haven’t been making the most of their 401(k).
“If you are over 50, you can contribute an additional $5,500 to these plans, except IRAs where the catch-up limit is $1,000. Starting from scratch and assuming typical returns you can save $500,000 in just 10 years by maxing out your 401(k) including the catch-up benefit.”
That would get you halfway to your goal! So, take every penny you don’t absolutely need and put it toward your 401(k).
Invest in Bonds
Planning for retirement must involve investing, especially for those of who started late. We already mentioned that IRAs are a great vehicle to use for reaching your goals.
However, you need to think about what you’ll actually invest in with that IRA. While options abound, bonds are the best for retirement.
Stability. Bonds are less likely to lose money than stocks are. So, buying some bonds and some stocks can reduce your portfolio’s losses during stock market declines.
Income. Bonds pay interest regularly, so they can help generate a steady, predictable stream of income from your savings.
Security. Next, to cash, U.S. Treasuries are the safest, most liquid investments on the planet. Short-term bonds can be a good place to park an emergency fund or money you’ll need relatively soon.
Tax savings. Certain bonds provide tax-free income. These bonds usually pay lower yields than comparable taxable bonds, but may provide higher after-tax income to investors in high tax brackets.”
For best results, leverage bonds into a ladder. A bond ladder is fantastic for planning for retirement because it provides you with a consistent form of income that you can then continuously invest. At any time, you can decide not to invest, of course. If you need the money, you can just keep it. Otherwise, take your earnings and make more from them.
As we already covered, bonds are extremely stable, too, so there’s very little risk involved in taking this approach.
All you do is invest in bonds with ever-greater maturity dates. This is where the “ladder” reference comes from. As time goes on, one bond will become due after the next, like rungs on a ladder.
Get Rid of Stocks
If you’re like a lot of people, planning for retirement has entailed investing in stocks. That’s not necessarily a terrible strategy when you’re in your 20s and 30s. Stocks are extremely risky, but at least at that age, you have time to adjust your strategy and recover from even large losses.
When you hit your 50s, and your retirement age is in sight, though, this is no longer the case. In your particular situation, investing in stocks is a horrible idea. One bad swing from the market could be enough to completely clean you out, turning a tough situation into an impossible one.
Take a look at your portfolio and consider selling any stocks unless they’re performing extremely well and show no signs of doing otherwise in the near future. Then, take that money and put it into a bond ladder as we recommended above.
Consider the Gig Economy
I’ve talked about the gig economy on this site before and, specifically, how it can help with planning for retirement.
It’s worth bringing up here again because many of you may need the help to retire with $1 million if you’re in your 50s and haven’t begun yet.
In case you’re unfamiliar with the term, the gig economy can be defined as when:
“…temporary, flexible jobs are commonplace, and companies tend toward hiring independent contractors and freelancers instead of full-time employees. A gig economy undermines the traditional economy of full-time workers who rarely change positions and instead focus on a lifetime career.”
Everyone can participate in the gig economy. If you’re currently working, you most likely have a skill you could use after hours to help people, too. That could be your way of earning some extra income to put toward retirement.
Even if you don’t think you have a particularly marketable skill, it’s not hard to learn one. You could become a freelance writer or take up graphic design. You could even do something far simpler like mow lawns or employ a favorite pastime like gardening.
The point is that, when it comes to planning for retirement, every little bit counts. Unless you’re making good money and can afford to put aside more than 20%, you’re going to have a really tough time hitting $1 million without some extra money coming in.
Just as we recommended with your raises, the extra money from the gigs you work shouldn’t be spent on anything other than helping you with planning for retirement.
Get Started Today
Planning for retirement is always a lot of work. If you’re in your 50s, it’s going to take even more work to retire comfortably. However, if you’re hoping to build a $1 million nest egg in the next decade or so, you must begin working toward this goal right away.
Now that you know what to do get busy. Start applying the above advice this very moment.