Imagine being 55 with no retirement savings and $10,000 in debt. That’s obviously not a very comfortable place to be, especially if you want to retire at a reasonable age.
Unfortunately, this is exactly the spot that Gaby finds herself in. Gaby is 55 years old and has worked her whole life, but has just recently received a salary bump that puts her annual income at just over $100,000.
She has no savings, though, because she was raising her kids and sending money to her mother back home in the country she emigrated from. She didn’t really think much about retirement and spent more than she should, but now she’s hoping to retire in the next decade and has had a major wake-up call that she’s in serious financial trouble.
Unfortunately, although she’s a homeowner, she has $0 invested for retirement and has that $10,000 debt she’s dealing with, so she’s understandably worried about whether she can actually make retirement happen.
So, is it possible for Gaby to save enough when starting from $0 to have a retirement free of financial worries?
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How much retirement savings do you need?
The number one thing Gaby needs to do is to figure out how much money she will need to save for retirement. This is critical to determining how much to invest each month, no matter how old you are or how much you have in the bank.
A recent Northwestern Mutual study showed Americans think they’ll need $1.26 million to retire comfortably. (1) That’s not necessarily the correct number for everyone, though, since it varies based on past income as well as financial goals.
It’s a good idea to assume you’ll need to save 10 times your final salary by the time you’re 67. So, if you are making $100,000 like Gaby, you’d want to figure out what you’ll likely be making come retirement and multiply that number by 10.
If you assume a 2% annual raise, for example, Gaby’s $100,000 salary would have grown to $126,824 by age 67. Following this rule, Gaby would need a little over $1.26 million saved for retirement.
Of course, since Gaby just started making $100K, she may not need that much. If she wants to find out her specific number, the best thing to do is make a retirement budget — especially since she is only a little more than a decade out and can make a reasonable guess on what she’ll spend in retirement on things like medical care, food, transportation, entertainment and other costs.
Since Social Security replaces around 40% of pre-retirement income, she’ll need her savings to replace at least another 40% or so in order for her to be on firm financial footing.
Since Gaby only recently started making $100K, and Social Security benefits are based on average wages over your highest-earning 35 years, her benefits won’t be $40,000 per year, but instead will be closer to the $23,712 average annual benefit. (2) If she collects $30K in Social Security but needs $70K based on her budget, she’d need $40,000 more in income from savings.
Assuming she follows the 4% rule for safe withdrawals, she’d multiply $40K by 25 to find out she needs a $1-million nest egg to make those savings last roughly 30 years.
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Is it possible to save enough to retire when starting from $0 at 55?
Once Gaby knows the total amount she needs, it’s time to break that big goal down into smaller ones.
Let’s say Gaby wants to retire a little bit earlier, at age 65. She’d need to save a pretty substantial amount each month to get from $0 to $1 million in a decade. The specific amount depends on the return on her investment she expects. For example:
- If she earns an 8% average annual return, she’d need to save $5,752.46 per month
- If she earns a 10% average annual return, she’d need $5,228.78
- If she earns a 12% average annual return, she’d need $4,748.68
Even with the most aggressive portfolio, she’s still looking at saving over half of her monthly income. Ultimately, this is probably impossible and Gaby is going to need to make much bigger cuts to her spending or delay retirement. While this is disappointing, the key is for Gaby not to wait any longer and to get started investing aggressively today by:
- Tracking her expenses to see where she can reduce costs
- Cutting as many unnecessary expenses from her budget as possible
- Setting up automated savings to make sure she is investing
- Choosing a good mix of investments that help her earn reasonable returns while limiting risk
- Potentially working a side gig to be able to invest more
If Gaby can manage to invest 30% of her income, or $30,000, annually, she delays retirement until 70, and she works with a financial advisor to help her earn 12% average annual returns, then she will end up in a decent position with just over $1.1 million saved.
When combined with Social Security, that should give her a decent retirement nest egg — especially since she’ll substantially increase her Social Security benefit by working another 15 years at her $100K salary.
Ultimately, Gaby should have started earlier and it’s going to require a lot of sacrifice to get back on track. This sacrifice will come now, as she needs to cut spending and save aggressively. It could also potentially come later as she may have to delay retirement, scale back her expectations, or both.
Gaby’s story is a great reminder that starting early gives you a big advantage — but it also shows that if you’re willing to invest aggressively and work a few extra years, you can still catch up and build a solid retirement nest egg.
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Northwestern Mutual (1); Social Security (2)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.