Simple Debt-Free Finance

I got a comment on one of my other posts a few days ago from a reader named Renee.

She’s in her early 40′s, newly married with no debt and no retirement savings. She was wondering if I had any advice on the best way for her to start saving TODAY.

Well, it turns out that I do have some advice – so much so that I figured it best to respond in a full post, as comments are too limiting. Besides, maybe this will help others as well.

Look on the bright side.

First off, it’s important to realize things are not as bad as they may at first seem.

Being on the other side of 40 with little or no retirement savings isn’t the end of the world. It’s not too late, but time is running against you. It’s always easier to start saving and investing at an earlier age, because you have time on your side. Time to let your savings accrue interest and grow faster than the rate of your deposits.

Renee is actually ahead of the game in one way – she’s frugal. She’s paid for her wedding completely, and only buys things she can pay for today. As a result, she’s got zero debt and that is an incredibly powerful thing on her side.

Also, many people saw their nest eggs decimated by the 2008 crash. Many of these people had a lot of wealth tied up in the stock market, but it was paper wealth that was gone in a flash. Many of these people had to start over again after the crash but unlike Renee, they also have the burden of debt weighing them down.

Being debt free means that Renee has more of her income available to invest.

Tips for saving for retirement after 40.

First, it’s important to remember 2 things:

1. I am not a professional, and only sharing my own experience and knowledge that I have learned on my own. You should consider speaking with a professional financial planner before taking any serious action.
2. “saving for retirement” is really a misnomer. You cannot afford to retire on traditional savings alone. Your savings account, or CDs will not get you what you need to retire on. You need to invest.

The most important Step.

The single most important thing you should do is to educate yourself. I’m talking about investing terminology, but also in terms of getting an idea of where you are and where you need to be. Without a destination in mind, you will never meet your savings goals.

To be able to retire, you’ll need a plan. It’s that simple.

The question is whether you are creating the plan yourself, or if you will work with a professional planner. Either way, it will benefit you greatly to have an understanding of the basics of investing. I recommend getting a copy of Stock Investing For Dummies from your library (it’s free!) and get an idea of how interested in investing you really are and go from there. That will be a big part in deciding whether to do more yourself, or just turn everything over to a professional.

You should understand the following terms at a minimum:

• IRA, 401(k), Roth IRA

• Tax deferred accounts vs. Taxable accounts

• Mutual funds

• Expense ratio

• Yield (dividends)

• Blue chip vs. small cap

• Asset allocation

Figure out where you are and where you need to be.

In order to get to where you need to go, you’ll need to figure out where that is. Check out the Retirement saving calculator at Bankrate.com.

That should give you a ballpark idea of how much you’ll need. To be conservative, use the following values:

• Inflation: 4%

• Return: 6%

• Time to retire: 20 years

You’ll also want to determine when you think you can stop working full time. You’ll likely be working until early to mid 60′s, so that still gives you about 20 years. Work backwards to see how much you’ll need to invest each year to meet your goal.

Take action.

Make sure you use your 401(k)/403(b) if you get an employer match - it’s free money!

Don’t let fear guide your action.

Don’t avoid stocks – you’ll need the growth, especially with starting later. Just don’t invest in individual stocks.

Share your future.

Renee is newly married, and it’s important to talk things like this over with your spouse (whether you’re a newlywed or have been married for a while). Money problems don’t just go away because you retired, and if you don’t consider your spouses plans before then you could be on the road to a very unhappy retirement.

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