Late to the party?
It's a bit awkward to arrive late for a party, especially if it's very late. Walking into a room full of strangers once a party has started can be intimidating or embarrassing because it forces you to interrupt conversations or eat food picked over by the punctual guests.
I was late to a junior high roller skating party once because I wrote down the wrong starting time. When I entered the rink, my friends were already having a good time, and there were no more skates available in my size, so I rented a size 15 skate (about six sizes too big). I was uncomfortable and nervous about joining one of the cliques, and my large skates didn't help.
If you're late to your retirement party, have no fear because all is not lost. If you're in your forties or fifties and have not saved any money for retirement, it may feel like you're doomed to work forever, but that's not the case.
The best time to start saving for retirement is in your teens or early twenties and invest thousands of dollars in high-flying stocks like Amazon or Tesla. An eighteen-year-old investing $1,000 monthly will have about $13 million at age 65. However, this is lunacy because few teenagers have the foresight, wisdom, or money to start investing (except Warren Buffett). When I was eighteen, I didn't have a job, and I only had $60 in my savings account. Besides winning the lottery or inheriting millions of dollars, what can you do to improve your retirement shortfall? Here are a few suggestions.
- Inventory your assets and review your investment holdings. Locate your investment statements for your 401(k), IRA, and brokerage accounts. What do you own? What is the current value of your investments? How are your assets allocated?
- Calculate your liabilities. Identify your debts – home, car, credit card, student loans, etc. to figure out which ones you can refinance, reduce, or eliminate. How much money do you owe to others? What are your monthly payments? What interest rate are you paying on your debts?
- Review your monthly expenses. Where is your money going? Establishing a budget or spending program will help you find excess dollars for savings. In a post-COVID world, you're probably paying for things you no longer need or aren't using, such as a gym membership. Look for items in your spending that can be reduced or eliminated.
- Invest for growth. Stocks outperform bonds, cash, and inflation. Purchase stocks for the long haul, and they will help you make up for the lost time. The 94-year average annual return for stocks has been 10.1%.
- Avoid speculating or gambling. It's tempting to daytrade, buy penny stocks, or purchase options but avoid the urge. If you continually try to hit home runs, you'll strike out often. Speculating with money you can't afford to lose is madness.
- Contribute the maximum amount of money to your 401(k) and IRA accounts. The government allows you to contribute $19,500 to your 401(k) plan, or $26,000 if you're 50 or older. You can contribute $6,000 to an IRA plus an extra $1,000 if you're 50 or older.
- Automate your savings. Establish a monthly investment program into a few mutual funds and a savings account. Automating your savings will eliminate human error and emotions.
- Ignore the stock market. Trying to time the stock market is impossible and a waste of time. While you're building your retirement nest egg, be a net buyer of stocks, notably when they fall.
- Review your progress. A quarterly review of your spending habits will allow you to adjust your plan as needed.
- Work with a financial planner. Your planner will be your guide, accountability partner, and financial Sherpa. Working with an advisor can help you increase returns. A study by Vanguard quantified an advisor relationship can add 3% in net returns.
Your retirement journey may feel insurmountable, but you can do it – particularly with a financial plan. Saving money is akin to starting an exercise routine. It won't be easy, but each day will get better than the next. It's challenging to see results at first, but you will notice significant changes over time.
"Life is a party. Dress for it." ~ Audrey Hepburn
October 15, 2020
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren't suitable for every investor.