How to get my finances in order this late in the game?
November 10, 2012 6:51 PM   Subscribe

Starting from scratch at 45 years old, what's the best strategy for saving money & planning for old age?

I am 45 years old, single, and have no savings or assets to speak of. My chapter 7 bankruptcy should discharge soon. A clean slate. I earn a salary of $45,000/year in a not-inexpensive city in the Pacific Northwest. I have decent job security and health. What is my best strategy for getting my finances in order so that I can grow old with some dignity instead of retiring to a cardboard box underneath a bridge?

If I am able to keep my expenses to where I can save approximately $1000 a month, can I turn that small amount of money into a useful retirement account this late in the game? My work is probably not portable to a city with a lower cost of living, and I would prefer to stay where I am, but at this point nothing is off the table, including moving to the middle of nowhere and taking an entry level job if that is what it takes. Just looking for some ideas on how to make up for lost time, with limited resources. Thanks.
posted by anonymous to Work & Money (11 answers total) 38 users marked this as a favorite
Consider disability insurance, also taking a second job - pizza delivery?
posted by bq at 6:55 PM on November 10, 2012

As someone who hasn't done a whole lot of retirement planning, I feel like this question is underspecified. Do you plan on being able to keep your expenses around $33-35,000/year for the next 20 years? You're making $45k/yr now, but what will you be making in 10 years? Is your profession in a field with a lucrative career ladder? What are your must-haves for "some dignity"? Is it more like owning your own house, or more like international travel?

Think about developing a sideline business that you can do from home for approximately the rest of your life. For me, this would be copyediting or teaching online, but it could be something craftier or more interactive.

Start exercising as much as you can and eating as well as you can in order to keep your health. Even with good insurance, the degenerative illnesses of old age can do a number on your wallet and your dignity both.
posted by katya.lysander at 8:01 PM on November 10, 2012 [1 favorite]

It may depend in part on how flexible you are willing to be about what you do.

I didn't get my first "professional", post-college job until I was almost 40, because I went to college rather late. However, through some combination of luck, gut instinct, and perhaps the first glimmerings of intelligent planning my brain ever produced, I got a fairly lucrative degree instead of the more ideological one that was my first inclination. I assumed a mountain of student loan debt to do it, but the interest rate on that is below what I can reasonably hope to gain through even pretty conservative 401k investments. Plus, my earning potential increased dramatically. I currently live in what I consider the middle of nowhere, but I also consider it an intermediate-term strategy so I can go somewhere more desirable later.

People often advise against going back to school at the stage you're talking about, but given the changing economy, there are quite a lot more "non-traditional" students doing it anyway. My experience as one of them was almost entirely positive. As for re-entering the workforce, contrary to popular belief I have found the combination of my age and the recency of my degree to be a marketable trait. Think about it - more life experiences, and resilient enough to succeed at something new. Plenty of employers would respond well to that.

In this day and age, with higher life expectancies and higher retirement ages, 45 is the new 35.
posted by perspicio at 8:48 PM on November 10, 2012 [1 favorite]

Also, Mr. Money Mustache is an enjoyable site, full of useful articles like this one.
posted by perspicio at 9:33 PM on November 10, 2012 [1 favorite]

You can use a retirement savings calculator to get a quick and dirty answer to this. You can use the Social Security Quick Calculator to get a similar quick and dirty estimate of your expected social security benefits.

How much of your income do you spend now on living expenses? I am assuming that your $45k salary is before taxes, then you should be taking home about $35k if in Washington, then you say you could save $1k per month, so you would be living on $23k per year.

So using the info you've given me and the calculators I linked above:
- You are making $45,000 and you are spending just over half of that on living expenses and will need to continue spending that much after you retire. So you want to replace 55% of your current income.
- Let's be a little pessimistic and say you are going to retire at 62, the earliest age you can start getting social security. The calculator says you'd get ~$1,000 per month.
- Now be optimistic, and say you'll live for 30 years after that.

According to the Kiplinger calculator, you need to be saving just under $1000 per month to retire in 20 years and receive ~$25k per year from your savings and social security combined. However, they recommend you plan on 80% income replacement, mostly to cover increasing health care costs as you get older, and to cover that you would need to be saving $1700 per month. So is there any way you can increase your income by $1000 per month, to add that extra to your savings?

Also important: do you have health insurance? Will you be able to save an emergency fund on top of this $1000 per month or is that included? Does your job offer a 401k with matching, or would you be managing all of this yourself?

Obviously this is all very back-of-the-envelope, not-real-prediction numbers. As katya mentions, if your cost of living is going to go up or your salary, then this isn't very relevant. But my intention was to show you some rough predictions and that $1000/month is in fact a very useful contribution, even 'this late in the game'. The more the better, obviously, but this will probably keep you off the streets in your old age.

As for 'how to make the most of limited resources': make sure you are using tax advantaged accounts. A 401k is afaik considered the best form of retirement savings because it is tax deductible contributions, then a Roth IRA. You absolutely do not want to be keeping your money in regular taxed accounts.
posted by jacalata at 9:51 PM on November 10, 2012 [4 favorites]

Just chiming in on the 401k/IRA issue: definitely take advantage of your company's 401k if you have that option, at least up to the company's match. You can also go with an IRA -- the annual contribution limit is $5000 ($6000 once you reach age 50), so if you're saving $1000 a month, you could contribute to both a traditional and a Roth.

Do make sure you're putting some cash away in savings for emergencies, too, so that you can get to it easily/without penalty (as would happen if you take an early withdrawal from an IRA or 401k) and without having to run up debt on a credit card.
posted by scody at 10:37 PM on November 10, 2012

the annual contribution limit is $5000 ($6000 once you reach age 50), so if you're saving $1000 a month, you could contribute to both a traditional and a Roth.

I'm pretty sure that the maximum for 2012 is $5000 total. That is to say, you can contribute to a traditional IRA or a Roth IRA or both, but combined the total is $5000. You cannot, say, contribute $5000 in a traditional IRA and also $5000 in a Roth IRA. See this IRS topic for more information on limits.
posted by Houstonian at 2:14 AM on November 11, 2012

In the broader scheme of things (since you do ask about whether it would make sense to take a lower-paying job in a lower COL area, to which the answer is, IMHO, no): it's a good idea to think about securing and growing your income for the long run. Are you in an industry or sector that is in demand and growing? Are you thinking about career growth opportunities and obtaining the skills needed to capitalize on them? Keeping your eyes open for those opportunities that may come up outside your current employer?
posted by drlith at 6:17 AM on November 11, 2012

Expenses tend to grow to consume available funds. If you have a 401(k) available, throw the MAXIMUM possible at it, not just up to the company match. It's like a one-time pay cut, if you're doing it in an existing job, which is why the best time to do it is right away when you get a new job. It then becomes like taxes, money you technically make but don't see, except that you're paying your future self. If it never hits your checking account, you never get the opportunity to spend it or think about it or miss it - it'll be there for you when you retire though.

Are you throwing money away on rent? Wherever you end up, remember that buying is usually a better deal. Your landlord's paying property taxes and probably a mortgage out of your rent, plus presumably some profit. Your landlord probably ISN'T going to drop the rent once the mortgage is paid, it becomes more profit. On the other hand, if you buy a place that you like, you will end up owning it sooner or later. In our case, we have been throwing substantial extra cash at the principal, and will shortly be done with the mortgage, at which point our housing cost (mostly property taxes) will become about half what I was paying for a decent two bedroom apartment in the '90's. That's a big win for magically reducing living expenses in the future. The bank will tell you that you can afford a place up to $X, but that number has sometimes been as high as 3X-4X your annual salary. When I was growing up, 1.5-2X was the very rough rule of thumb as to how much you could/should afford. So if you buy a house, you might strategically set it up so that the mortgage is done right about the time you want to retire.
posted by jgreco at 6:38 AM on November 11, 2012 [2 favorites]

I would look hard at your expenses. One really useful tool is the book Your Money or Your Life by Robin and Dominguez. It details a system for figuring out where your money is going and helps you to eke out as much as you can for investing. They recommend some pretty conservative investments, such as Treasury bonds, but also recommend seeing a "fee only" independent financial consultant or planner.
posted by WorkingMyWayHome at 4:36 PM on November 11, 2012

You should also make sure you are investing in a way that your returns aren't being eaten up by fees. "A Random Walk Down Wall Street" gives you a great overview.
posted by akgerber at 4:45 PM on November 11, 2012

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