Retirement savings: Tips for the late starters

I know this may be hard to believe but sometimes as I sit at my desk at work I day-dream about retirement. Traveling the world, escaping winter and enjoying the good life. Yes, I’ll surf through a couple of travel sites, look at vacation properties and think about all the wonderful place my wife and I will go when we leave the rat race.

Then I flip my gaze to the other monitor and see my investment account. What a beating it has taken in the last year. Well it’s been taking a beating since 2008. To be really honest, in the last 10 years it hasn’t seen much growth at all.

I’ve been lucky though, as bad as the recent recession has been my pay has gone up, debt has gone down, we have a home, we have our company pension plan and we have our savings. For some the recession has left them with mounting debt and exhausted savings. As spending shifts to credit cards to cover everyday expenses, debt mounts and the conversation about retirement savings takes a back seat.

As we approach our 40s we enter our peak earning years and we should be well on our way to reaching our long-term savings goals. But for some, this is a time to start all over again. So with a new year only a couple of weeks away now is a perfect time to discuss getting our savings goals back on track, especially for those starting late in life.

If you are among those how have totally exhausted your savings, as your income stabilizes your goal should be to build an emergency cash savings first. Some in this position my feel that any money left after covering expenses should be used to make extra debt payments. I know you are committed to ridding yourself of debt but keep that goal in perspective. For now those extra amounts should go to an emergency savings account – I suggest saving 3 months living expenses – then rebuilding a retirement savings fund. Safety first.

I know that I’ve said that 40 is the new 30 and this is true in almost every case. But when it comes to retirement savings 40 is 40. Time is of the essence. So here are my tips for late starters or re-starters.

Start now

If you are 35 with zero saved right now and you want to save a million dollars by age 65, you need to save $671 per month. If you have saved $50,000, then that monthly payment is $304 per month.

Now, if you are 45 with zero saved and you want to reach a million by age 65, you’ll need to put away $1,698 per month. If you’ve saved $100,000 already your monthly payment is $861.

See what a difference starting now makes.

No, really don’t wait. Start right now!

Delays are costly. Consider this, a 40-year-old begins contributing $3,000 per year into a retirement savings plan and continues to do so until retirement at 65. Assuming 9% annual growth (seems like wishful thinking but lets assume). At 65 he will have $254,102 saved. Now lets say that instead of making that first investment at 40 he spends some time doing research, talking to friends, talking to professionals and basically hemming and hawing. He then ends up not making that first investment until a year later. Well by age 65 he’ll have just $230,369. A $23,733 penalty for his late start.

Hit the max and hit up free money

Some employers match your retirement contributions up to a certain limit. To add $1,000 a month to your account, you may have to contribute only $500 to $700 depending on your company’s matching formula. You should aim to hit the maximum and collect all that fee money.

Take a long look at your expenses

Its time to make some tough decisions on expenses. Now that you have a little more income you’ll want to treat yourself again and return to how life was. To meet your goals you’ll have to make some sacrifices.  It may be time to get rid of those “beyond-your-means” expenses, like the third car, premium cable package or your [gulp] seasons tickets. Cutting down the extra expenses will create room to put away cash into a retirement fund.

Have a plan (that starts right now)

I’m not a financial planner. For a specific financial plan that suits you please consult a professional.

With that being said, starting with zero in savings you can put away $1 million in 20 years with this simple savings strategy that you can implement right now. You can adjust the numbers up or down to meet you savings goals.

Begin by saving $500 per month this year, starting January 2012. Next year and every year after that increase the monthly savings by $100. So in 2013 you are saving $600 per month, 2014 you are saving $700 per month and so on.  In twenty years you’ll have $1 million.

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