Saving and Investing for Retirement Starting at Age 45


Here’s a neat trick to determine how much money you’ll have in 20 years if you invest it in diversified, low-cost stock mutual funds: Take the amount that you are investing per month and multiply by 1000.  For example, if you are investing $100 per month, in 20 years you’ll have about $100,000.  Increase your investment to $500 per month and you’ll have $500,000.  Want to have a million dollars in 20 years?  Put away $1000 per month.

This calculation assumes that you’ll get a return of about 12% annualized from the stock market which only occurs if you invest for many years.  Stock market returns over short periods of time are very unpredictable.  Invest for one year or even five years and you might get 1% or you might get 20% annualized per year.  You might even get -40% as we did back in 2008.  Look at long-term averages, however — those of ten to twenty years — and you’ll see that stock returns fall into the 12-15% range.  It is possible that things will change in the future if the economy stops growing as it has in the past, probably due to something like a massive disaster or changes to the regulatory environment, but using 12% isn’t a bad rule-of-thumb.

To retire comfortably and not need to worry about outliving your money, you’ll want to have about $2.25 M in your portfolio.  That will provide $250,000 to pay for healthcare expenses and another $2 M to generate money to live on.  $2 M in investments would allow you to withdraw about $60,000 per year without seeing the value of your portfolio decline substantially.   This means you’ll still have about $2 M when you die to pass on, so you could take out a little more but then you run the risk of running out of money should you live for a long time.

Generating $2.25 M by the time that you reach 65 if you start from age 45 would mean putting away $2250 per month or about $27,000 per year.  For most people, this would be difficult to do unless they radically changed their lifestyles.  Note also that this calculation assumes you stay fully invested in stocks as you approach retirement.  While the long-term average return is around 12%, there are years with large negative returns.  If you’re fully invested at 64, you’re running the risk of suffering a large loss right before you’re ready to retire and needing to wait another three to five years for your portfolio to recover.  Many people learned this lesson the hard way in 2008 who had to delay their retirement until 2012 or even 2015.

Ways to generate income to invest

One possibility for generating enough money for retirement investing if only one spouse has been working is to have the second spouse return to the workforce after the kids are out of the house, or at least old enough to not require as much attention during the day, then invest most or all of the new income.  If the second spouse’s income is directed entirely to retirement savings, it might be possible to amass enough even with only 20 years to go.

Another possibility is to plan to work another five years and retire at age 70.  You could then reach $2.25 M with a monthly investment of about $1250, or a yearly contribution of $15,000.  If you were to pay off your cars and hold them for several years, trading them in for quality used cars when the time came, you could free up $1250 per month to put towards retirement.

Places to Invest

When saving for retirement starting relatively late, probably the best first choice if it is available is to use your employer’s 401K plan.  Because many employers match at least a portion of your contributions, you may not need to put away the full amount each month.  Investing at least enough in the 401k to get the full employer match is a good first step.

A second place to invest is in a private IRA account.  Here there are two choices, unless you have too large an income to be allowed to use both choices (and if that’s the case, just cut your spending and invest directly in index mutual funds).  The first choice is a standard IRA, where you will be able to deduct your contributions now, but need to pay taxes on the money you withdraw just like regular income.  The second choice is to invest in a Roth IRA, where you won’t get to deduct your contributions so you’ll need to pay taxes on the money earned now, but you’ll get to withdraw the money tax-free in the future.

If you’re struggling to be able to invest enough money, using the traditional IRA will allow you to cut your tax bill, leaving more money to invest.  For example, if you’re in the 25% tax bracket and put $4000 into an IRA, you’ll cut your taxes by about $1000, meaning you’ll only need to come up with $3000.  If you can afford to pay the taxes, you’ll probably end up better in the long run by investing in the Roth since you’ll never need to pay taxes on the earnings on the money you invest.  In either case, spend some time doing some calculations with both options and check with a CPA to verify that you won’t get snared in some tax trap like the alternative minimum tax.  Often a couple of hundred dollars spent on a CPA can save you thousands of dollars in taxes later.

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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