What to do when your savings don't match your retirement goals

Retirement Planning

by Gary Foreman

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I'm starting over with no retirement. With this economy, there are lots of middle-aged people like me, who through company closings, stupid choices, divorce, etc. have little retirement savings and are seeing a need to kick things in overdrive for a healthy retirement. Personally, my goal is to buy a place, have it paid for, and build Social Security and savings over the next 15 years. I trusted someone, and they blew my life savings. It's my own fault. So I got to get this ball rolling. How do I do it on $10 an hour in an area you can get a home for under $50K?

Sandra is right. She's running a bit behind schedule. And, yes, she has a lot of company. Many 50-year-olds are recognizing that they don't have enough savings for the retirement that they expect and want.

Sandra has no time to waste. She needs to move on a number of fronts at the same time. She'll want to control her spending, acquire a home, and build up her retirement accounts.

First, it will be important for Sandra to keep close track of her spending. Every dollar that she doesn't spend now will be $2 or more that she can spend after she retires. Under normal circumstances, she might attempt to save 5% to 10% of her take home pay. Given her situation Sandra needs to try to push towards 15% or more.

Second, Sandra is wise to want a home without a mortgage by the time she retires. Accomplishing this could reduce her retirement income needs by 25%.

One advantage to the current recession is that it's easier for Sandra to find an affordable home and the interest rate on her mortgage will be lower.

She'll want to look for a fixed rate, 15-year mortgage. That will give her a couple of advantages. First, she'll have it paid off by the time she's 65. Second, she'll get a lower interest rate than on a 30-year mortgage. Finally, the monthly payment won't be much larger than a 30-year mortgage.

Sandra might also want to consider buying a home that would be big enough to take in a paying roommate or even a duplex that could provide an additional source of retirement income.

Next, Sandra will want to maximize her savings, and specifically her retirement accounts. The reason that she'll emphasize the retirement accounts is that they'll allow her to accumulate savings with a minimum of taxes. Also, in the case of the 401k plan, she may benefit from employer matching funds.

Sandra will probably want to know how much she needs to save. There is no "one size fits all" answer, but there is a way to estimate it. Sandra will begin by deciding how much income she'll want after she retires.

Once she has a target income, she can estimate how much savings she'll need to provide that amount of income. A simple rule of thumb is that for every dollar that you'd like to spend you need to save 15. If she can earn 7% per year, she can spend a dollar a year without touching her principal. So if she wants an income of $15k per year, she'll need to save $225k ($15,000 x 15).

How much does Sandra need to put away each month to have $1,000 waiting for her in 15 years? For each $1,000 at retirement in 15 years, Sandra will need to save $4.72 per month from now until then. So, if she felt that she needed to have a $225,000 nest egg at retirement, she'd need to save $1062 per month beginning now. She can find a calculator at Bankrate.com.

Sandra will need to make decisions on where to invest her savings. Two things could have a major impact on how well her plan works.

One threat that all long-term savers need to consider is inflation. We haven't seen much inflation since the late 1970's, but inflation is one way for the government to handle a debt problem, so it is a real concern.

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There's no perfect way to "inflation proof" your savings. One thing that can help is to invest about 10% of your savings in things that would appreciate with inflation (i.e. gold, other minerals).

Also, Sandra needs to keep the proper time frame in mind. She may be retiring in 15 years, but she's likely to live another 30 or 40 years, so she'll want to invest for the long term.

Finally, here's a little encouragement. It will be tempting to think that the job is too big, too difficult, and freeze in place doing nothing. That's the single worst thing that Sandra can do. Yes, it would have been better to start years ago, but the next best time to start saving is today. Even if she can't make her goal, every dollar she accumulates will make her retirement easier.

Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money and he's a regular contributor to CreditCards.com. You can follow Gary on Twitter or visit Gary Foreman on Google+. Gary is also available for audio, video or print interviews. For more info see his media page.

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