It's easy to dismiss the idea of getting old while still young. Who cares about loud concerts while eardrums are sharp or healthy eating while metabolism is high? Eventually, though, the decisions for “someday” become decisions for now.
Many people reach their 40s or 50s before seriously considering how they could be free from the obligation to work for the rest of their lives. Where their 25-year-old selves thought that retirement sounded a bit dull or pedestrian – or just too far away to matter – the 45-year-old starts to think that it might be pretty nice. There may still a passion for meaningful work, but it would be great if working were a "want to" and not a "need to".
A 2019 report from the Federal Reserve revealed that nearly a quarter of all Americans had no retirement savings, while only 42% of people ages 45-59 and 35% of people between 30-44 felt prepared for retirement. Many small business owners, self-employed professionals, and freelance workers will face this question without having set enough aside.
Fortunately, though, you can make time your ally by taking action now – instead of waiting until a “someday” that may never come. Here are three tips to help you increase your retirement next egg.
1. Use tax-advantaged accounts: Certain investment accounts, such as IRAs, 401(k)s, and HSAs, make it easier for workers to save for retirement by allowing money and investments to grow tax-deferred – any gains, dividends, and interest received are not taxed while assets are held in the accounts. The amount that would have gone to taxes is allowed to grow and compound, increasing the overall returns.
Contributions to Traditional retirement accounts (the most common type) also allow for a current-year reduction in taxable income, though any distributions in retirement are taxed at normal rates. Roth accounts, on the other hand, allow no current-year tax benefits, but all distributions in retirement are tax-free. HSAs – Health Savings Accounts – offer a unique triple tax advantage: contributions reduce current-year taxable income, assets can grow tax-deferred, and distributions for qualified medical expenses are tax-free.
2. Extend your time horizon: Simply put, having more time to reach a goal makes planning simpler and more manageable. Waiting even a few extra years to retire can allow your investments to continue compounding – a potentially huge difference to the overall size of your nest egg. On the contrary, the shorter the amount of time a person has to reach a goal, the more things have to go exactly right for it to work.
Let's say, for example, that a 45 year old needs $50,000 per year to cover living expenses, adjusting for inflation as needed, and that life expectancy is about age 90. That person could afford to retire at age 65 with current retirement savings of about $318,779.* However, delaying retirement until age 67 – just two extra years – drops the present-day requirement to $266,324.* That means our would-be retiree can save over $52,000 simply by waiting a couple of years!
3. Adjust spending to increase saving: The key to all financial success is an incredibly simply maxim – spend less money than you earn. The difference between what you make and what you spend represents all the money you will ever have to achieve your goals, and increasing that difference is the key to reaching those goals faster.
What's more, lowering your cost of living now will reduce the total amount needed to retire. Returning to our example above, what if our ambitious 45 year old lowered living expenses to $45,000 or even $40,000 per year? Reducing the income needed to cover expenses could allow for a lower nest egg target, an earlier retirement date, greater comfort during retirement, or all three!
Lowering expenses now also lets you "audition" a life with limited income options – when Social Security and retirement accounts are the only means of income. What would it look and feel like to live on a restricted income? If your quality of life does not suffer, then you will have found an amazing shortcut to improving the path to retirement. If reducing spending does significantly impact quality of life, on the other hand, it's best to find out now – while there is still time to revise your retirement targets.
The fact is that no matter what unique financial questions, concerns, or challenges you have, getting started early makes the process simpler and more manageable – and waiting makes it more complicated and difficult. Sure, it would be nicer if you had a fat retirement account already waiting for you, but it’s never too late to start making better decisions. The sooner you take action – the sooner you let go of what was and embrace what could be – the easier everything becomes.
To borrow from an old proverb, the best time to plant a tree was 20 years ago; the second best time is now.
Ready to take control of your financial future with a Fee-Only, fiduciary advisor as your guide? Reach out now to get started. It's your future – but we can help you along the way.
Timothy Iseler, CFP®
Founder & Lead Advisor
Iseler Financial, LLC | Durham NC | (919) 666-7604
Iseler Financial helps creative professionals remove stress while taking control of their financial futures. As both advisor and accountability partner, we help identify current strengths and weaknesses, clarify and refine your long-term goals, and prioritize understandable, manageable, and repeatable actions to bring long-term financial well-being. Reach out today to take the first step.
* Assumes an average annual return of 8% pre-retirement, a 4% rate of return during retirement, and average inflation of 2% per year.