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How late is too late?

How late is too late?

| April 04, 2016

"Better three hours too soon than a minute late." - William Shakespeare

We're currently going through the top 8 rules of thumb and how to apply them. We recently covered the 4% rule and this week we'll take some time with another rule of thumb:Save 10% of your take home pay for retirement. The math seems simple enough: Make an average income of $100k, saving $10k per year, after 40 years of working (25-65) and an average 8% rate of return, you end up with $2,500,000 which, with the 4% rule of thumb distribution rate at $100k per year income, add social security and employer 401k match, that's sitting pretty for retirement. Right? Not always. 

For this to work, you must start your career saving 10%!!! Almost no one starts saving 10%. There's always unending excuses. And think of how many financial setbacks the average person run into... How about college for the kids? Does anyone enjoy their toys too much? And we can't forget procrastination... You'll start next year right? Then the next... Then the next... Until you're so late in the game, that retirement just doesn't seem like it's even a remote possibility. Sound familiar to anyone? It should, considering the average retirement savings of american workers between 55 and 65 currently have about as much as their annual salary - according to the Employment Benefit Research Institute(www.ebri.org). That's the average and that scares me. Who reading this wants to be the average? 

Waiting is expensive! Take a look at our insights blog on the cost of waiting to see how expensive:Is waiting to invest really worth it? Over a longer time period you can plan to save and invest, the less you potentially need to put away for a financial goal. By waiting later in life, you end up with less time over which to save. Even worse is this quickly increases the amount you need to save per year. Worse still, there is a point when that goal is un-achievable and you have to run plan B... Now what?

When is it too late?  This all depends on social security, potential inheritance, income, and how much you can curb your spending and increase saving. Again, the longer you wait, the more difficult goals can become to the point where they are impossible to reach. For example, pretend you need $75k income for retirement and earn 8% on our investments. Further assume $20k social security per year at full retirement when you're 66 years old, and you make an average $100k per year. You will need to provide for an additional $55k per year income. Using the 4% rule of thumb, you need to save $1,375,000 to have $55k/year income. It's probably too late when we can only meet this goal by saving 100% of our income. For this scenario that is 9.64 years, which would mean starting at 56 years old. It's also most likely too late when we need to save 50% of our income which would take 15 years. That means starting at age 51. Though some of us could make the necessary sacrifice if it's that important. How about 25% of our $100k income? Especially if we can get tax benefits? It may not be too late at 22 years before retirement... Think about that? At 44, do you want to save 25% of every dollar you earn? Are you already 44? Have you saved enough?

Silver lining: We're assuming an 8% rate of return, which is strong but not out of reach. Taking on more risk could increase return a little. We also aren't taking into consideration spousal social security, employer 401k match, inheritance and much more. Everyone's situation is incredibly different and rules of thumb are only meant for broad guidance, not accurate advice.  We're more than glad to run through scenarios to help find out what could work. 

What if you're too late? Remember plan B? What will your later years of life look like? Do you want part time employment permanently? Consulting? Go work at a garden store to exercise your green thumb for retail wages? When you can maintain some sort of income in retirement, you can reduce what you need for your "magic number" and that can give you some manageable options and hopefully keep you from succumbing to what the average person in retirement is looking forward to. Plan B is a much longer conversation.

Moral of the story, it's not too late until you've waited too long. Until exploring all of your options, there's no reason to capitulate - we will give you advice so you can find out what your options and outlook is. And don't forget... There's always plan B.