What to do when you wake up to the fact that you will be living off the soon to be barely existent Social Security when you retire? You’ve got kids, a mortgage, and other bills you can barely squeeze in and now you come to the realization that the prime saving years of your life are rapidly passing you by. Is it time to take drastic action? Is your spouse on board? How far are you willing to go?
When I finally got around to getting my first professional job, after college and grad school, working fun but not lucrative jobs, and volunteering in the Peace Corps, I just signed up for the default retirement plan option, probably 3% of wages in a conservative investment, and forgot about it. It wasn’t until a few years later, now married and with a kid on the way, until I finally started to think that maybe someday I would want out of the rat race and that, if I planned to do so before being eligible for Social Security, it was going to take severe and drastic actions and a whole hell of a lot more than 3% of my wages. Hopefully, some of our pain can be your gain if you decide to make the Big Push and get caught up. So read-up and learn-up, I can get you started and suggest some strategies to get ahead.
Preparation
The first step is a realistic look at where you are at and why you are there. Also critical is analyzing the resources that you have on hand, i.e. your time and labor, those of your significant other, the savings and assets you have to date, and your current rate of savings. Bloomberg has a retirement calculator that can help you calculate how much you will have upon retirement based upon various assumptions. It can also help you figure out what you will need to come up with to achieve the lifestyle that you want when you retire.
All hands on board
90 something percent of readers are or will be in a long-term relationship and the absolute, most crucial element for them is whether their partner is on the same page as them. This is especially true if one works for wages and the other doesn’t; after all, you can’t expect the stay-at-home partner to be as excited or interested in retirement as the working one. My only real recommendation is constant and open communication about life goals and to make every financial decision beyond the trivial as a couple. If your partner is pushing for more spending and new baubles now while you are trying to cut back to put more into savings then you will be swimming against the tide.
What are you willing to sacrifice?
You absolutely have to make sacrifices, there is no way around it. It is going to cost you some combination of time, money, and effort no matter how you do it. The amount of pain in sacrifice you put in the short term will be directly proportionate to the reward that you receive in the long term.
A hard look at where the money goes
Do you keep track of and categorize your expenses? If you don’t know what you spend and where the money goes you will have a difficult to impossible time coming up with the necessary cash for savings. Even if your strategy is to make more money, IT WILL FAIL if you cannot maintain or reduce your expenses. This doesn’t mean hours each week balancing checkbooks or making sexy pie charts, with most money software like Mint it is almost effortless to track the money spent with credit and debit cards and in checks. Of course, its not the tracking that makes the difference, its the analyzation and utilization of the information to make better financial decisions.
Strategies
- Spouse gets Job – If you are a one income family with two adults the most obvious solution is for the other member to return to the workforce. This will only be effective, however, if a large portion of the money they make goes towards the savings and retirement plan. Since, as previously mentioned, a spouse that wasn’t working before isn’t likely to be as motivated toward saving for retirement, it is essential that the couple keep communications open and plan together for life’s big financial decisions. Two incomes also gives you the advantage of being able to take advantage of two different retirement plans, significantly increasing the amount you can save and also taking advantage of any employer matching or other retirement contributions.
- Second Job – A second job, well thought out and done appropriately, can not only bring in extra money for savings but can also advance your career, open new doors and even give you the chance to try out new jobs or careers on a part time basis without fully committing yourself. Done poorly it can still bring in extra cash but at the cost of wearing yourself out from overwork, distracting you from your true calling, and distancing yourself from loved ones who struggle to find time with you. Quality opportunities are more often made than found, and you will usually, unless your profession happens to be in great demand, have to put some effort into encountering them. Aggressively seek out opportunities that complement your current vocation and studies and then build upon those. Currently Ramit Sethi of I Will Teach You to Be Rich is running an excellent series for those who are interested in earning some cash on the side.
- Start a Business – For many owning their own business seems ideal, a chance to be their own boss and master of their own destiny, not to mention becoming Bill Gates rich. Indeed it is possible, if improbable, especially if one is in a field that is rapidly growing and changing and presents new opportunities. Most of us would be satisfied with rather lessor fortunes and, with good ideas and plenty of sweat, can achieve success in our endeavors and drastically increase our net worth. The own-business plan does have several drawbacks that need to be taken into consideration: first, usually a great deal of effort has to be made for what is, in the beginning at least, a very uncertain reward, second, most businesses require some capital up front which we are already lacking in, and third, many people find that their business becomes very much like the job they were trying to avoid only without the benefits of a certain paycheck and the support of bosses and coworkers. Steve and his wife at My Wife Quite Her Job did just that and, while not exactly rubbing shoulders with Bill Gates yet, they are a long way toward achieving their financial goals.
- Downsizing – Another important possibility is cutting back on the money you spend, drastically. This sometimes requires lifestyle changes that can be abrupt and shocking. Think about how much you need to set aside, add an additional 20% for contingencies, and then sit down with your significant other and figure out how to cut some of the fiscal fat from your budgetary diet. My personal belief and experience is to think big, don’t dither trying to save up a latte a day’s worth of spending but look at anything that requires monthly expenditures, the house, the cars, utilities, insurance, cable, and anything else not yet paid off. Most people are risk adverse, and have an aversion to realizing losses because it is tantamount to admitting failure. What they often don’t account for are the extra costs, premium gasoline and expensive parts for the fancy foreign car, the maintenance, utilities, and furniture of the top-of-their-budget house and so on. Often selling out and moving down is the real long term bargain. If you really want to get dramatic, try living on what you would receive in Social Security given current expectations, that can be a real shock to the system and a motivating force! Visit J.D. at Get Rich Slowly for fantastic advice on budgeting, saving, and living frugally. The fascinating thing about downsizing is that people often find that they actually enjoy their lives much more after the initial shock wears off. No time is taken away from your family and a huge amount of stress can be lifted by not having financial problems and by not having the pressure of keeping up with the Joneses. Taking vacations by camping out and visiting national or state parks or visiting family can be much more rewarding than cruises, resorts, and amusement parks. Also, some people actually have fun by thinking of creative ways to cut costs.
This simple article can only touch upon this incredibly important and timely issue. So help us out, have you started the Big Push? Can you share ideas that I have overlooked?
