There is a Chinese saying that goes, "The best time to plant a tree was 20 years ago. The second best time is now."
This is true of retirement savings as well. No matter when you should have started, your best choice is to start now. Why?
Nearly half of all families have zero retirement savings. Of those who have some savings, the median savings amount is $5,000. That means they are not going to have enough money to retire. And not having any money in your later years is a frightening prospect.
Social Security pays an average of $1,368. That is $16,416 per year, so if you are counting on that for your retirement income, you are in for an unpleasant surprise. And remember, that figure is only an average. You could have much less to live on.
Your best defense against an unpleasant retirement is meeting with a financial advisor now to see how you can get started investing money for your later years. A balanced, level-headed approach can give you a comfortable future and peace of mind.
How Much Money Will You Need?
The "rule of thumb" is that you should live on 4% of your savings per year, so that you won't deplete all your money. That percentage allows your investments to grow to make up for what you have taken out. So, if you figure 4% as your starting place, you get a good idea of how much savings you will need.
Four percent of $1 million comes to $40,000 per year. Four percent of $2 million is $80,000. Think about the lifestyle you want, and you can see that you are going to need some significant savings if you are going to live on 4%. So, investing money now is your best chance at having a comfortable retirement.
Let's look at your other options.
Boosting Your Social Security Income
Each person's full retirement age is different because the Social Security Administration uses a formula. But let's say your full retirement age is 66. If you wait to start drawing your benefit until age 72, you will get a much larger monthly check.
Here's how it works. At age 66, you get 100% of your benefit. As an example, assume that is $1,400. If you wait until age 72, you get 132% of your benefit. In our example, this means you will receive $1,848 per month. So you would get about $448 per month more.
But here's the catch. By taking your money at age 66, you get that income for a longer time. In the scenario above, starting at age 66 would give you $32,256 in income. You sacrifice that if you wait until age 72.
Working During Retirement
This is the option many Baby Boomers are looking at as they realize they don't have enough money to retire. A part-time or full-time job can make up for the lack of income from investments. There is a lot to recommend this approach. It provides more money, keeps a person busy and productive, and makes for a better lifestyle.
The downside is you will miss out on travel, leisure, and lavishing gifts on the grandkids. And at some point, you won't be able to work anymore. Working in retirement postpones the inevitable day when you have to face not having enough money to live on.
If you work with a financial advisor to invest part of your earnings from a job, you stand a better chance of having some money to live on in your later years.
Lowering Your Lifestyle Expectations
You can find a lot of articles about the best places to retire. Almost all of these articles focus on how you can live cheaply. If that is your only choice, you have to take it. But it does mean being geographically isolated from your extended family and counting pennies for the rest of your life.
It is very difficult to cut back on expenses enough to make a significant difference in your cost of living. Groceries never go down in price, rents always go up, and activities like golf come with their own costs.
Some retirees do succeed in finding a cheaper way to live in another country. That means you travel once during retirement-to the place you are going to live. You will be unlikely to save enough with your new lifestyle to travel the world.
The Dangers of Running Out of Money
Having no money is dangerous. Many elderly people have to choose between food and prescriptions. Some have to get their medical care from clinics, and others become isolated because they can't afford to go anywhere. This isn't just about numbers. It is about human beings being able to survive and live in a way they are used to.
The worst part about this situation is that it is unnecessary. You don't even have to know much about investing to avoid being broke during retirement. All you have to do is find a mentor.
What Your Financial Advisor Will Help You Do
A financial advisor will sit down with you and learn about your lifestyle, your earnings, your expectations for retirement, and your current expenditures. From there you can begin making changes that can lead to a future you want.
Your financial advisor will show you how to discipline yourself to invest monthly. There is most likely an extravagance you are spending money on right now that could be the source of money to invest. A disciplined approach means investing each month without fail. Advisors call it "paying yourself first." One of the best ways to do this is to set up an automatic withdrawal from your checking account. Each month on the same day, a set amount will go into your investment fund.
Set Goals and Objectives
Once you have your investing running on automatic pilot, you can make some realistic plans. Your advisor has enough experience to know how your investments can grow. Based on that, you can set goals and objectives you plan to reach through the years. Your advisor can show you how to change your investment strategy as you approach retirement, moving from a growth style to an income style. This is all done gradually and will be part of your goals.
Balance Your Portfolio
Investments can rise and fall in value. That is why you don't want to put all of your money into one type of investment, such as stocks. You can learn how to take a balanced approach. This means keeping your risks as low as possible. Your financial advisor will teach you how to spread your money among different types of investments so that if one drops in value, the others will most likely make up for it. Over time, this can lead to a steadily increasing portfolio.
The Bottom Line
There is an old puzzle that asks, "Would you rather be given $1 million as a lump sum or be given a penny one day, two pennies the next, four pennies the next, and so on, doubling the amount you get each day for 30 days?" If you choose the second option, you will end up with almost $11 million. Eleven million dollars from doubling your pennies.
Investing is like that. You don't double your money every day, but you can earn money through interest and capital appreciation of your savings. A wise financial advisor can show you how to put your money to work making money, so that you don't have to be one of the people who are frightened about how they will live in their retirement years.
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