Prepare for Retirement: What to do when you’re a late-starter
Retirement / 3 April 2019, 10:00am / DR. KYLE O'HAGAN
We all dream of the day when we can hand in our notice and leave the ho-hum routine of our 9-to-5 jobs, ready to embrace a life of adventure, traveling and freedom when we retire. We have no problems picturing this future for ourselves – that part comes easily. Yet we tend to have greater difficulty actually preparing for that day’s arrival.
Why is that? Maybe because it’s so far into the future that we think we have more than enough time to make a plan to get there. Or maybe we’re too busy enjoying our current lifestyle to even give retirement a second thought. I mean – how boring, right?
But where does this leave us? A generation of people entering their mid-30’s or early 40’s with a sprinkling of savings, a tablespoon of debt, and a pot full of anxiety. A recipe for retirement disaster.
But don’t fret! It’s not all doom and gloom. Even if you’re a late-starter, there are still ways that you can salvage your retirement to live a comfortable and stress-free life in your later years. Below, I’ve outlined 9 strategies that can help you get back on track without compromising your sanity.
1 | Forgive Yourself for Past Mistakes
I like this quote by Fulton Oursler: “Many of us crucify ourselves between two thieves – regret for the past and fear of the future.”
When you begin to realize that you’ve started saving too late for retirement, it can be hard to balance the regret that you feel about your financial past and the anxiety you feel for an uncertain future. But, this isn’t the time to crucify yourself. It’s the time to commit to yourself.
Accept that maybe you made some silly decisions in your twenties. Grieve the years that you lost in your thirties to prepare to retire. But don’t kick a dog while it’s down. It will only push you further away from your goal.
It’s time to commit. I recently read this great article by Financial Mentor that started with this riddle: “Three birds are sitting on the limb of a tree, and two birds decide to fly away. How many birds remain? If you answered “one,” then guess again. All three birds remain on the branch because deciding to fly away and actually doing what it takes are two different things. Decisions mean nothing until you follow through by committing with real action.”
Forgive yourself for past mistakes. And commit to yourself, knowing that you’re capable of changing your future. The cliche saying is true: It’s never too late to start saving for retirement. Because every little amount you save today is more than you had yesterday.
2 | Do Some Simple Math to Prepare for Retirement
Don’t worry – I won’t be asking you to pull out your dusty, old calculus notes.
But I will be asking you to do some simple math to figure out your financial freedom number. I won’t go into all the theory behind how these calculations were developed, but trust me when I say that they are backed up by science. Don’t believe me? Then you can take a look at this article.
So how do we calculate this infamous number? Most financial experts have come to agree on the 4% rule. The what, you say?
This rule was based on a study done in the United States that wanted to figure out the maximum percentage that a person could withdraw from their retirement portfolio in their first year of retirement, such that the money would never run dry over a period of 30 years, even after adjusting for inflation. The results showed that a 4% withdrawal rate would result in 100% success – hence, the 4% rule.
So how do we do use it? Follow these simple steps:
Calculate how much your annual expenses would amount to in retirement (this is usually slightly less than what your expenses would be today, since you’ll likely not have a mortgage or student loan debt)
Take that amount and multiply by 4% (or, in other words, divide that amount by 0.04)
Voila! Your Financial Freedom Number
I told you it was simple! This is best explained using an example. Let’s say I’ve calculated that I’ll need R400,000 per year (or just over R33,000 per month) to cover all my expenses in retirement. R400,000/0.04 = R10 million. This means I’ll need to have R10 million saved up in order for me to withdraw an inflation-adjusted 4% each year to last me 30 years.
Other simple ways to do the same calculation are to multiply your annual expenses by 25 (R400,000 x 25 = R10 million) or multiply your monthly expenses by 300 (R33,333 x 3000 = R9,999,900).
As a side note: if you’ve started saving late for retirement, it’s going to be more challenging for you to make up the shortfall of years lost. Try to make your annual retirement expenses as conservative as possible, calculating the absolute minimum you’d need to survive each year.
And, a second side note: if you’re totally averse to calculations, take a look at this pretty great retirement calculator provided by 10X investments. It allows you to input your age and pre-tax salary, set your retirement goal and figure out whether you’re on track for a peachy retirement. It also comes with some pretty rad graphics!
Once you know your financial freedom number – you’ve set your goal posts. This is the target you’ll need to aim for.
3 | Focus on “Growing Assets” to Prepare for Retirement
The word “asset” has garnered a little bit of confusion over the years. We define an asset as something that provides financial value to us, which is not far from the truth. But it’s not the full truth. An asset is something that provides us value, but also with the intention of providing future financial benefit. In other words, I only consider something an asset if it GROWS in value over time.
As an example, many people would consider their car an asset. But I respectfully disagree. I encourage you to read my previous article about why I consider it to be more of a liability.
If you’re a late starter, you can’t waste more time investing in any assets. Your focus should shift to investing in those assets that grow. This could include real estate or high-return equities, which can provide above-inflation, compounding returns. If you’re new to investing and confused about what options you have, take a look at my beginner’s guide that walks you through what is available.
But what if you don’t have enough time?
If you’re speeding towards retirement and don’t have enough time to take advantage of compounding investment growth, there are some other considerations you might take:
Consider downsizing your home: if you’ve lived in the same house for years, it’s highly likely that the value you bought it for is much less than what you’d sell it for today. If the kids have moved out and you can comfortably live in something smaller, it might make sense to put your house on the market and funnel the capital gains into your retirement portfolio.
Move to a cheaper neighborhood: in addition to selling your home, you might consider purchasing a new property in a cheaper neighborhood. This will maximize the profit you’d make on selling your house, allowing you to channel even more money into your retirement fund.
Sell the collectibles: do you own any jewelry, collectibles or antiques that might be worth a pretty penny? I understand that sometimes these items hold significant sentimental value. But if you’re seriously concerned about the state of your retirement portfolio, it may be worth it to get a valuation and compare the pros and cons.
4 | Fees Must Fall
I’m sure you’ve heard of the eighth wonder of the world: compounding interest. It’s the stuff of magic when the interest you earn on your investments starts earning you interest on autopilot.
While we prefer to think of compounding interest in terms of investment growth, we neglect to consider that any fees you pay on those investments end up compounding too.
5 | Maximize Your Retirement Contributions
None of us like the idea of receiving less of a paycheck at the end of each month. When taxes and all the bills are removed, it’s depressing to think that over 50% of our income doesn’t even touch the sides of our bank account.
But your retirement contributions should never be viewed as an expense, but rather an investment. Not only is this money “out of sight, out of mind” (which means you won’t spend it), but it’s also very tax efficient.
When you contribute any money towards your retirement annuity or pension fund, that money is tax-deductible. This means you can reduce your taxable income significantly if you reach the maximum. Here is an example:
In South Africa, you can contribute up to 27.5% (or R350,000 per year, whichever comes first) of your income to your retirement as a tax-deductible contribution. This means, that if you earned R600,000 per year and contributed the full 27.5%, your taxable income would reduce to R435,000. This is enough to drop you into a lower tax bracket, which means you’d receive a healthy refund when tax season rolls around.
If you’re a retirement late starter, consider contributing the maximum towards your pension fund. Not only will you put this money out of reach for spending, but you’ll receive a great tax refund that can further boost your retirement portfolio.
6 | Consider Phased Retirement
What comes to mind when you think of retirement? Lazy days on the beach? Traveling the world with your bae? Sleeping in until noon?
These plans do sound great. But they need to be balanced with what you can afford for the remainder of your retirement years. If you’re a late starter, it’s likely that you’ll either need to delay your retirement (worst case scenario) or consider a phased retirement.
What is phased retirement? Quite simply, this involves reducing the number of hours you work rather than retiring fully altogether. Instead of handing in your notice, why not just slow down? In this way, you’d still be earning some income on the side, but you’ll have enough hours in the day to do most of the things you had planned in retirement.
Okay, so what if your employer doesn’t allow this?
Consider using the skills and knowledge you’ve acquired to apply for part-time positions that can provide you time flexibility, but a steady monthly income. If possible, take up a consulting position related to your previous profession. Alternatively, use your skills or hobbies to start your own side hustle (discussed below).
7 | Start a Side Hustle to Prepare for Retirement
If you’re a few years off from retirement, consider taking up a side hustle. Why do you think I’ve started this blog? It’s not purely to use my free time to write about finances (which I enjoy doing!), but it’s an investment in my future, with the goal of making a side income in my retirement years.
Throughout our careers and hobbies, we gain experience and knowledge and skills. Leverage those to start up your own blog, or a small side business, or an online store. The world is your oyster. If you can identify an audience that would want what you have to offer, you’ve got a business.
Quit telling yourself that it won’t work or that it’s destined to fail. You can only figure out what works by trying.
8 | Track Your Spending and Hustle to Save
Remember what I said earlier? Now is the time to commit to yourself.
With more limited time to prepare for retirement, you need to take things more seriously now. What would this look like?
First off, you need a budget. There is no better way to track your expenses and identify your spending habits than a budget that tells you where your money is going each month. It’s the best way to find out where you’re going right and where you’re falling short.
If you can identify those weak areas, you’d be able to better address them, spend less and put the difference directly into your retirement savings. Now is the time to hustle and save as much as you can. There is no room (or time) to spend on luxuries you don’t need. Continually remind yourself of the life you want to live when you’re free of your boss, job and commitments.
If you’re struggling to figure out where to start on your budget, download our FREE financial starter pack, which comes equipped with an Excel budgeting template and printable worksheets to track your investments, debts and financial goals throughout the year.
9 | Every Little Bit Counts
A dollar saved is a dollar earned.
Every little bit counts towards your goal. No amount is too small when you prepare for retirement.
If you were age 45 and decided to invest R100 once-off for the next 20 years before you retire, it would be worth R1,078 (assuming an interest rate of 12% per year with no additional investment). If you managed to find room to save R100 each month, you’d be left with R98,925 over those same 20 years. If you increased that to R200 per month, it would be worth R197,851. Take it up to R500 per month and you’d have a whopping R494,627. And at R1000 per month, you’d have just under R1 million. Do you see the effect of compounding growth on even the smallest amounts?
Track your spending and find the areas where you can squeeze out as much as possible to save. You’d be surprised with what you end up with by the time you retire.
Some Final Thoughts
Just because you started late doesn’t mean you need to give up on a comfortable and stress-free retirement. There are strategies to help you, even if you start in your 30s or 40’s.
Dr. Kyle O'Hagan is a UCT scientist and an avid personal finance blogger. With over 20 years worth of experience in the SA schooling system, he has come to appreciate the value of a proper education and feels that personal finance is an area that is often neglected, particularly at a young age.
O'Hagan is one of Personal Finance's New Voices and his finance blog is called the Saving Scientist.