Originally seen in USA Today and The Indianapolis Star
Note: This column is the first of a four-part series on how to retire successfully when starting from scratch at age 50.
I think it was the fourth person’s story in two weeks which tipped the scales.
Two weeks ago, I met a 50-year-old woman who made a solid income but had more or less saved nothing for retirement. A couple of days later, I met a man who was her financial mirror image. A week after that, I met another 50-year-old man who hadn’t saved a figurative dime. Then, like some sort of Dickens ghost conjured from beyond, I met yet another 50-year-old woman who had nothing.
At this point, I felt sad, scared, mad, and more than anything, challenged. Challenged to find a reasonable strategy for a 50-year-old American to go on a great 20-year run to end their career — and then live a respectable retirement.
Over the next four weeks, I’m going to share that strategy with you.
Although my plan is realistic, it’s intense. But why wouldn’t it be? A 50-year-old has had roughly 30 years to build a financial foundation, and if that foundation doesn’t exist come 50, then that person has only 20 years or so to build the missing foundation and the walls and the roof and the moat and everything else a person needs to survive decades without work income.
Since the average annual income of the four people I recently encountered was $60,000, that will be the income I use to illustrate my plan. So, for the next four weeks, you’re a 50-year-old earning $60,000 annually.
Depending on what sort of cost-of-living adjustments or raises you’ll be given by your employer, you will earn somewhere between $1.2 million and $1.6 million over the next twenty years. No pressure, but this million and change must help you clean up whatever financial past you have and provide you a sensible lifestyle for the next 20 years, all the while building sustainable income to support you from the day you retire until the day you move on to post-retirement (death). Piece of cake.
The plan has four parts — or three if you aren’t starting with consumer debt. However, I very rarely see an asset-less 50-year-old without consumer debt.
So, it’s a four-part plan. The four parts involve debt reduction, asset accumulation, lifestyle shrinkage, and home ownership. All four parts intermingle with each other, but we’re going to tackle them as independently as possible.
The first part of your plan is a two-year cleanse. Financial prunes, if you will. You might not like the taste, but you’ll love the results. These two years will be the most challenging. Why? Because you will need to do a hard reset. Your two primary tasks are to pay off your consumer debt and contribute to your company-sponsored retirement plan.
Time is your friend when it comes to growing your nest egg. You need to get money set aside now so growth can occur. If you don’t have a company-sponsored retirement plan — such as a 401(k) — start a Roth IRA.
You will need to contribute 5 percent of your income to your company-sponsored retirement plan (hopefully activating at least a 3 percent employer match). At the end of your initial two-year period, those contributions (along with the match) will equal approximately $10,000. If you’re already contributing more than 5 percent, excellent. Don’t reduce your contribution. Instead, turn your focus to the second task of getting rid of debt.
Upon contributing 5 percent of your income to your retirement plan, paying taxes (I’m using Indiana state income tax rates), and paying for health-care coverage, your monthly take-home pay will be approximately $3,400. This $3,400 is your everything — your lifeblood.
Currently, your $3,400 is being asked to do too much. These next two years are about shifting that paradigm. You will need as much of that $3,400 as you can muster to eliminate your consumer debt.
Paying off debt requires a serious commitment. If you’re merely interested in getting out of debt, it won’t happen. You will need to significantly adjust your spending habits to accomplish these tasks, especially the debt-reduction goal. This may involve getting rid of a car that has a high monthly payment, changing your dining and shopping habits, and eliminating vacations and entertainment spending.
Then redirect all of those monies toward your lowest balance debt until it’s eliminated, then attack the next lowest debt until it’s vanquished. The key is to pay minimum payments on all of your debts, except the lowest balance debt. Your goal is to destroy the lowest balance debt with as big a payment as possible. Kill it with fire. Rinse and repeat. I’ve found this methodology has the lowest failure rate, although you may pay more interest than using other debt-elimination techniques.
If you learn $3,400 isn’t enough to eliminate your debts, hasn’t been enough in the past, and won’t be enough in the near future, then this is your opportunity to say enough is enough and change your reality. When you learn that you don’t have enough money and you need a second (or third) gig, get one. Doing the hard thing is what this two-year period is all about. Honestly, it’s now or never. You don’t want the hard part of your financial life to be later. Trust me. If the difficult part comes later, it will stay difficult in perpetuity.
Be sure to direct all of your additional earnings toward debt elimination. If you don’t, you’ll grow your lifestyle and make your problem worse.
Still wondering how in the world you can make massive financial changes to your current lifestyle, which will lead to the absence of consumer debt and one of the greatest financial comeback stories of all time?
Next week we’ll tackle lifestyle shrinkage. I agree, that doesn’t sound very fun. Next week I’ll show you how to start living your retirement lifestyle right now. See. It’s all in the eye of the beholder. Where you see prunes, I see dried plums.
Ready to see part two in the retirement series? Click here for, A look at how your current spending habits affect your retirement planning.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.