One maxim of life is that it is never too early or too late to start saving for retirement. However, our “Baby-Boomer” generation, the ones that were born in the two decades that followed World War II, have been preparing for retirement, but have, unfortunately, undergone two severe business-cycle reversals in the past ten years alone. Stock portfolios have taken a beating, and home equity values have plummeted, especially if a recent refinancing was used to pay down other debt. Many of these fifty and sixty year-olds are now facing a daunting task – how do you rebuild your net worth in so short a remaining time period?
The simple response to that query is that you don’t. Does that mean that you must continue working until you drop dead? Not necessarily, but you might consider part-time work, if you can find it, or consulting work if you have the skills and network to support your effort. There are a few paths to “quicker riches”, but their probabilities are too low to encompass a broad-based solution for many individuals.
The potential does exist, however, to connect with an “up-and-coming” venture, one that is growing and could be acquired if the principals play their “cards” correctly. A “5%” interest in one of these concerns could translate into a cool $1 million long-term capital gain payday if the firm’s revenue demographics warrant a valuation of $20 million. Small companies are risky enterprises. Only 20% of these attempts will generally survive a single business cycle, and for those that do survive, the ability to be successful can be tied to a variety of variables.
Of course, winning the lottery or getting arrested in order for the state to care for you either has ridiculous odds for success or represents an avenue that no one wants to truly consider. How prepared are we for gearing back and taking it easy? A recent study conducted by the Employee Benefits Research Institute states that more than 50% of the survey respondents had a retirement “nest egg” of less than $25,000. This figure included employee benefit programs, savings and investments, and most importantly, the equity in their homes. A sad commentary on the recent real estate market implosion is that nearly 30% of all of home mortgages are at or nearly underwater, a situation where the mortgage exceeds the value of the home.
In the meantime, stocks have returned to pre-recession valuations, but that fact works in your favor only if you were brave enough to hold your positions in the market. Many did not. Fear persuaded many to accept their losses and transfer to less risky treasury bills, thereby missing out on the rebound that would have made them whole. With this bleak backdrop, what is one to do going forward?
As always, it is never too late to start saving for retirement. It may take more of a current “bite” to supplement social security, and it is prudent to continue working for as long as you can, whether full or part-time, if only to delay the start of your government payments. One little known fact is that your social security monthly benefit increases 8% a year for each year delayed from age 62 until 70. Every little bit helps, but the typical formula states that social security will only cover about 35% of your retirement needs, depending again on your individual lifestyle choices and their impact on your monthly budget.
Another often used formula states that your retirement needs will be 70% of your pre-retirement income, the level of funding required to maintain your current standard of living. The reduction comes from lower taxes and expenses related to commuting to your job, and from more time to find better deals on food and other consumables. Uncertainties will arise, and with living longer, healthcare costs can only escalate over time as Medicare is revamped for the future. The serious fact is that you have to continue saving, even after retirement.
However, the “gloom and doom” about retirement is often overstated. Americans have always learned to be creative and devise retirement solutions that will work. Working and saving may now be lifelong habits.