Saving for retirement as a late starter. Time is running out.
Retirement is on the horizon.
You are so ready to give up working but you can’t. Because … how will you survive without a pay cheque?
I know exactly how you feel. I woke up one morning in a cold sweat, in a complete state of anxiety, not knowing if I could retire at all. It was the year I turned 47.
Traditional retirement is 65 – 67 years of age in Australia. We can access our retirement account (superannuation or super, as is commonly shortened to) at 60 and the age pension (welfare) from 67. Those are the rules now.
I was burned out from a stressful and demanding job. The thought of working another 20 years was just … panic inducing.
I had no idea how much I had in super. I had to hunt among my folders and paperwork to unearth annual statements, needing account numbers to look up account balances.
What I found was … disappointing.
And nowhere near retirement experts’ estimation of what I need to retire.
So, how do we catch up?
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How can we build wealth?
The ‘formula’ is simple and is the same for everyone, regardless of your age.
Increase the difference between your expenses and income and invest this difference to build wealth.
Investing is the key to building wealth.
But we need money to invest. It doesn’t matter what investment vehicle or assets we choose – investing in shares, property, others – inside or outside retirement accounts. We need to somehow find extra cash to invest. Fast.
The good news is that many of us late starters are earning our peak incomes now. Perhaps, like me, burnout is an issue so we may not want more responsibilities resulting from a higher income. Or we may not have time to devote to establishing side hustles or second jobs.
Increasing income takes time and involves factors outside our control – the bottom line of the companies we work for, the state of the economy, state of our industry etc.
Whereas decreasing expenses is totally within our control.
That is why I recommend reducing expenses as a starting point. The quicker we can increase the difference between our income and expenses, the quicker we can invest and thus the longer our investment has to do its thing.
Lifestyle creep or inflation
Has your lifestyle improved dramatically as you begin to earn more?
It is only natural that we want bigger and better things for ourselves and our family as our incomes improve over the years.
But have you assessed what this lifestyle is costing you?
I would argue that if you live from pay day to pay day, no matter how big your income is, you cannot afford your lifestyle.
Or if you live above your means by borrowing to fund your lifestyle – you definitely cannot afford your lifestyle.
Hedonic Adaptation
Have you ever experienced a heady rush of excitement, happiness and sheer joy after a purchase? Ahem, I certainly have 🙂
How long did this feeling last?
Hedonic treadmill or adaptation refers to humans’ ability to revert back to an original level of happiness after experiencing a positive (or negative) event.
Because we revert to our baseline level of happiness soon enough after our spectacular purchase, we keep chasing that euphoric feeling by buying more or by buying more expensive goods (or experiences).
Mindful spending
Once we understand the concepts of lifestyle creep and hedonic adaptation, we graduate to spending our money mindfully and intentionally.
I know for me; this has been my greatest mindset shift. I am a spender at heart.
Learning what I value and what I don’t has enabled me to spend on things that excite me (e.g., travel) and not spend mindlessly on those that are not important e.g., clothes.
No one has the right to tell you how you should spend your money. But it is prudent to learn about how you spend and why you spend. For example, I know I tend to spend when I am bored. I once bought a plane ticket to Japan because I was so bored at work. An email arrived advertising a discount fare and I bought it, just like that. Now, I learn to leave things in the online cart for 24 hours or more – if I still want it then, I’ll buy it. And I guard against boredom!
Review your expenses
Look through your credit card statements (the more, the merrier) – and examine each expense. Ask one question – can I live without this?
If the answer is yes, cut it out.
If the answer is no, ask – can it be reduced? How can I have the same experience but pay less? What is it about this experience that I value?
For example, I love my coffee so now I make it at home for a fraction of the cost instead of buying a takeaway every day. Unless I’m out with friends because then, I value the social aspect of it.
If it’s an essential expense such as utility bills or insurance, look for better deals from your current supplier or negotiate a better deal with another supplier. I know in the past, I’ve often just let things go and renewed insurance premiums as they fall due because I was too busy (or can’t be bothered) to look for another supplier. Don’t pay the ‘loyalty’ tax – dump your supplier if they can’t give you a better deal and someone else can.
What I find easy to cut are subscriptions that I don’t use very much (or at all) such as Netflix. I merely join up for a month or two and cancel my subscription once I’ve watched the series, I’m interested in.
We don’t have to live on rice and beans (unless you love it, of course!). Simply spending on what we value will free up that extra cash we need to invest. It is not about deprivation – it is learning how to spend our money in alignment with our values.
The other method is to ruthlessly cut out everything that is not essential – then review after say, 3 months and add back what you truly missed. You may be surprised as to what you didn’t miss. (Remember that lifestyle creep?)
But once again, it is not about deprivation – it is about spending on what you value.
Track your expenses
Track your expenses – using apps or a spreadsheet or pen & paper – whatever works for you.
I find that it helps me to be aware of what I spend my money on. And shows me what I need to work on, before it becomes an issue.
And I like having my own real-life data to base my retirement figure on, instead of relying on an estimate from experts.
Saving for Retirement as a Late Starter
Understand your retirement accounts
We are nearer the age when we can access our retirement accounts. So, this has to be a crucial investment vehicle for us.
Learn how your retirement account is invested – what funds are they invested in? What is the expense ratio of these funds – what fees are you paying? And what is the expected return of investment?
Many of us have worked in different jobs over the years – are there any retirement accounts that you’ve forgotten about? Can you consolidate them?
Are there provisions for you to catch up? In Australia currently, the maximum you can contribute is $25k per year. But if you didn’t contribute the maximum in the last 2 years, you can catch up by contributing the balance within a five-year period. Just Google ‘catch up & the name of your retirement account e.g., superannuation or 401k’
Are you eligible for any pensions from a previous or current job? This will greatly decrease the amount you have to save for retirement.
So, how much do you need to retire?
How much is enough?
That is the perennial question.
Some retirement experts suggest that you need two thirds of your current income each year.
But is that true?
I don’t think so.
How much you need to retire depends entirely on how much you spend, not on what you are earning now.
You will know your current expenses from tracking them. But how will your current expenses change when you retire?
For example, commuting to work costs, professional association fees and other work-related expenses can probably be eliminated.
Which expenses may increase when you retire? You may spend more on hobbies and interests such as travel now that you have the time to indulge – factor those into your calculation.
Do you have once off expenses such as renovating a part of your home? Or like me, I have to factor in the cost of a car when I retire as I drive a work car at the moment.
All these factors lead to a best guess retirement figure at this stage.
As you track your expenses, adjusting them as need be, how much you need to retire will continue to evolve. But it is good to have a figure to work towards.
It took me more than a year to come up with a plan and a retirement figure. In the meantime, I worked hard to decrease my expenses and invested regularly.
Think outside the box – saving for retirement as a late starter
Do you have the majority of your net worth in your house? Are you able to downsize and thus release some equity?
Do you plan to remain in your current city, town or even country once you’ve retired? Perhaps, you can move to a different city or country where your money can stretch further.
Is your debt holding you back? For example, can you sell your luxury car, get rid of the loan and purchase a cheaper or secondhand car in cash? Heck, can you live without a car? Instead of paying off that debt, you can redirect the money to investing instead.
Can you explore a different means to fund your retirement? For example, can you start a side business now and continue to work in it once you retire? A business that will provide some income. The bloke that helps me out with my gardening started offering his services after he retired as a banker – it keeps him fit and he gets to work outdoors and be among plants.
Adjust your expectations
Reality is setting in.
Sometimes, even after all our calculations, money saving and debt paying efforts, the figures don’t line up. Then it is time to adjust our expectations.
What were your dreams for retirement? What was it about that particular dream or pursuit that appeal to you? Can you do it differently, in a less expensive or creative way?
Final thoughts on Saving for Retirement as a Late Starter
If you think you have left it too late to save for your retirement, think again.
It is possible to catch up, provided you are willing to make some lifestyle adjustments.
But you do need to take action today.
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Late Starter FIRE
Latestarterfire began her FIRE journey at 47 years of age. She writes about her wins and struggles as a late starter on her blog, Latestarterfire. She is passionate about sharing other late starters’ stories to encourage all that is never too late to start and to learn from each other.