Q: Joe, I am 48 years old and have not yet made any plans for my retirement. I realize that I should have started years ago, so I am anxious to begin investing. My wife and I have a good income ($7000 a month take home pay). We also have $25,000 in credit card debt and owe another $40,000 on two cars. Where do we start?
A: By recognizing the problem and asking for help, you have already started. The three keys to your success are:
- Agreement with your wife,
- Willingness to make sacrifices, and
- Utilizing the power of focus.
Once these are in place, the following plan will put you on the path toward retirement:
Year One: Focus on getting out of debt.
Your income is your greatest financial tool, but not if it is flying in all directions. Your strategy is to create a positive cash flow now so you will have money to invest later. One great way to do this is to sell your cars, buy beaters and use the money you were paying on the cars to get rid of your credit card debt. Is selling your cars a radical thing? Is driving a beater risky? Perhaps, but being 48 years old with no retirement plans is risky and requires some radical measures. Will your friends and family think you are weird? Probably, but “normal” in America is broke, so embrace your weirdness with a smile. With the added cash flow from your sold cars (I am guessing about $1,000 a month) added to the payments you are already making on your credit cards (probably another $1,000 a month), you should be able to pay off your credit cards in about a year. Of course any extra cash flow you can squeeze from your budget will only accelerate the process.
Year Two: Focus on your emergency fund.
You need a minimum of 3-6 months of expenses set aside for emergencies. Your positive cash flow just from getting rid of your debt should be about $2,000 a month, so in another year you should have about $25,000 in that fund. This is a very minimum, so don’t start investing until your emergency fund is in place. The average family experiences a major disruptive event in their lives in any given ten year period, so you need to be ready for life to happen to you. Keep your emergency fund apart from all other funds but liquid enough to easily access. And agree with your wife exactly what constitutes an emergency.
Age 50 to age 65: Focus on investing for retirement.
With no debt and a great emergency fund, you are now positioned to invest. You can start by investing that $2,000 a month cash flow you created by getting out of debt, but make plans to also invest half of all future pay raises. With 5% annual pay raises, your pay will double by age 65, meaning you would be investing $5,500 a month at that time. It is therefore not out of reason to expect a retirement nest egg in the neighborhood of $1,000,00 by age 65.
If you keep doing what you have been doing, you will keep getting what you have been getting. But sacrifice today, coupled with focus, will help you retire with dignity.