2910: [Part 1] Starting to Save for Retirement at 40 by William Cowie with Get Rich Slowly on Investing Math

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[00:00:59] [SPEAKER_03]: Starting to save for retirement at 40, Part 1.

[00:01:02] [SPEAKER_03]: By William Cowie with GetRichSlowly.org.

[00:01:06] [SPEAKER_03]: Und ich bin deine Hostin und Personal Finanz enthusiast, Diana Merriam.

[00:01:10] [SPEAKER_03]: Das ist die Show, wo ich von den besten Personal Finanzenblogs auf der Welt.

[00:01:15] [SPEAKER_03]: Und heute ist ein bisschen länger, so ich es in zwei.

[00:01:19] [SPEAKER_03]: So ich bin es in zwei, die erste Parti heute und die zweite Parti heute.

[00:01:23] [SPEAKER_03]: So mit dem, wir gehen jetzt in Part 1 und starten Optimieren.

[00:01:29] [SPEAKER_03]: Starting to save for retirement at 40, Part 1.

[00:01:36] [SPEAKER_03]: By William Cowie with GetRichSlowly.org.

[00:01:41] [SPEAKER_03]: There's something about reaching the big 4-0 that often causes you to reevaluate your direction in life.

[00:01:47] [SPEAKER_03]: And when you do, it's hard to escape the fact that your day of retirement is indeed approaching faster than you ever thought possible.

[00:01:55] [SPEAKER_03]: If you're one of those who eliminated debt and made investing for retirement a habit since your 20s,

[00:02:01] [SPEAKER_03]: there's very little to do other than enjoy your 40th birthday and continue on with what you're doing.

[00:02:07] [SPEAKER_03]: But if you're heading into your 40s, having done nothing to prepare for retirement, the prospects can be downright scary.

[00:02:15] [SPEAKER_03]: Where should you be?

[00:02:18] [SPEAKER_03]: If you miss the opportunity to let time perform its compounding magic on your investments,

[00:02:24] [SPEAKER_03]: you face a problem of simple math.

[00:02:27] [SPEAKER_03]: The compounding approach won't work for you if you get started this late.

[00:02:31] [SPEAKER_03]: If you wanted to retire at age 65 and started at ages 45 and 35 respectively,

[00:02:38] [SPEAKER_03]: investing in index funds with an average return of 8% per year,

[00:02:43] [SPEAKER_03]: $100 a month would yield you approximately $65,000 after 20 years,

[00:02:50] [SPEAKER_03]: as opposed to approximately $162,000 after 30 years.

[00:02:56] [SPEAKER_03]: Now what?

[00:02:57] [SPEAKER_03]: You missed the luxury train to retirement.

[00:03:01] [SPEAKER_03]: It's not pleasant to hear, but it's true.

[00:03:03] [SPEAKER_03]: Although it's not the end of the world, your situation is, shall we say, imperfect,

[00:03:09] [SPEAKER_03]: and you will need to find a way to compensate for that imperfection.

[00:03:13] [SPEAKER_03]: Invest three times more than someone who started 10 years earlier.

[00:03:17] [SPEAKER_03]: The good news is that there are ways to get on track.

[00:03:20] [SPEAKER_03]: The bad news is that none of them are ideal or even easy.

[00:03:24] [SPEAKER_03]: You, therefore, have to decide which one or more of the following impositions of imperfection

[00:03:31] [SPEAKER_03]: you will pursue for your best shot at recovery.

[00:03:35] [SPEAKER_03]: Accept a higher level of risk or get more involved in your investing activities.

[00:03:41] [SPEAKER_03]: Number one, investing more.

[00:03:44] [SPEAKER_03]: The math may be brutal, but it is simple.

[00:03:47] [SPEAKER_03]: Let's say you want to have your investments provide you with 50 grand a year

[00:03:51] [SPEAKER_03]: to pick a random round number.

[00:03:53] [SPEAKER_03]: Nobody knows what prevailing interest rates will be 20 or 30 years from now.

[00:03:58] [SPEAKER_03]: 30 years ago, we were lucky to get a mortgage under 12% per year.

[00:04:03] [SPEAKER_03]: Relatively safe S&P 500 index funds yield 2% in cash dividends these days.

[00:04:09] [SPEAKER_03]: On safe bonds, you can earn something similar.

[00:04:12] [SPEAKER_03]: If those numbers stay unchanged, you would need $2.5 million to provide your $50,000 in relative

[00:04:20] [SPEAKER_03]: safety.

[00:04:21] [SPEAKER_03]: In order to arrive at that $2.5 million number in your 20-year time horizon, you would have

[00:04:27] [SPEAKER_03]: to invest more per month.

[00:04:29] [SPEAKER_03]: Something more on the order of say $3,850.

[00:04:34] [SPEAKER_03]: Like I said, brutal but simple.

[00:04:38] [SPEAKER_03]: Number two, accepting more risk.

[00:04:41] [SPEAKER_03]: Risk is a topic laden with emotions and even lots of opinions.

[00:04:46] [SPEAKER_03]: But we seem to forget that risk is all around us.

[00:04:50] [SPEAKER_03]: We take a risk driving along a highway, believing a simple painted line will keep an oncoming

[00:04:55] [SPEAKER_03]: truck from wiping us out.

[00:04:57] [SPEAKER_03]: The question is not risk or no risk.

[00:05:01] [SPEAKER_03]: It's how much risk.

[00:05:02] [SPEAKER_03]: If you don't have $3,850 a month to invest in safe index funds, you will have no choice

[00:05:10] [SPEAKER_03]: but to assume some risk somewhere along the line to compensate.

[00:05:14] [SPEAKER_03]: Not pleasant, but again, the only way around the brutal math.

[00:05:20] [SPEAKER_03]: Alternative investment example.

[00:05:22] [SPEAKER_03]: One avenue of higher risk might be to rely on a higher return on your investments once

[00:05:28] [SPEAKER_03]: you retire, rather than the 2% we assumed already.

[00:05:31] [SPEAKER_03]: The city of Detroit, for instance, recently issued a new round of bonds for its fire department.

[00:05:38] [SPEAKER_03]: These bonds yield 4.75%, more than double the rate we assumed earlier.

[00:05:44] [SPEAKER_03]: When people hear Detroit, they cringe and run for the hills.

[00:05:48] [SPEAKER_03]: However, those bonds are probably very safe because they will stand before all existing bonds,

[00:05:53] [SPEAKER_03]: and it has never happened that a big city paid zero on their bonds.

[00:05:58] [SPEAKER_03]: Perfect?

[00:05:59] [SPEAKER_03]: Of course not.

[00:06:00] [SPEAKER_03]: But something to consider?

[00:06:02] [SPEAKER_03]: Absolutely.

[00:06:03] [SPEAKER_03]: Especially when you know you have no choice of getting more than $2 million in 20 years.

[00:06:09] [SPEAKER_03]: If you assume that similar deals will continue to become available, a fairly safe assumption,

[00:06:15] [SPEAKER_03]: that affects the nest egg you need dramatically.

[00:06:17] [SPEAKER_03]: Instead of needing to invest $3,850 a month, $1,900 a month might work if you're ready to assume the added risk.

[00:06:27] [SPEAKER_03]: A little caveat about being in this situation.

[00:06:31] [SPEAKER_03]: Before the quick or lazy listeners get on their soapboxes and yell at the top of their lungs that risk is bad,

[00:06:38] [SPEAKER_03]: please note, we are not advocating assuming a higher risk to get rich quick.

[00:06:44] [SPEAKER_03]: As the saying goes, desperate times call for desperate measures.

[00:06:48] [SPEAKER_03]: There are all sorts of reasons someone could find themselves in a desperate situation with their retirement investments.

[00:06:55] [SPEAKER_03]: Number three.

[00:06:56] [SPEAKER_03]: Hear that on tomorrow's episode.

[00:07:03] [SPEAKER_03]: You just listened to part one of the post titled,

[00:07:06] [SPEAKER_03]: Starting to Save for Retirement at 40 by William Cowie with GetRichSlowly.org.

[00:07:12] [SPEAKER_03]: And I'll be right back with my commentary.

[00:07:14] [SPEAKER_03]: Buy low, sell high.

[00:07:17] [SPEAKER_03]: It's easy to say, hard to do.

[00:07:20] [SPEAKER_03]: For example, high interest rates are crushing the real estate market right now.

[00:07:25] [SPEAKER_03]: Demand is dropping and prices are falling, even for many of the best assets.

[00:07:30] [SPEAKER_03]: It's no wonder the Fundrise flagship fund plans to go on a buying spree,

[00:07:35] [SPEAKER_03]: expanding its billion dollar real estate portfolio over the next few months.

[00:07:39] [SPEAKER_03]: You can add the Fundrise flagship fund to your portfolio in just minutes and with as little as $10 by visiting fundrise.com slash OFD.

[00:07:51] [SPEAKER_03]: That's F-U-N-D-R-I-S-E dot com slash OFD.

[00:07:57] [SPEAKER_03]: Carefully consider the investment objectives, risks, charges, and expenses of the Fundrise flagship fund before investing.

[00:08:06] [SPEAKER_03]: This and other information can be found in the Funds Perspectives at Fundrise dot com slash flagship.

[00:08:14] [SPEAKER_03]: This is a paid advertisement.

[00:08:17] [SPEAKER_03]: I have to disagree with the first point in this article about how much you need to retire.

[00:08:23] [SPEAKER_03]: The assumption here is that your retirement income will only come from the dividends on your investments and that you won't touch the principal.

[00:08:31] [SPEAKER_03]: But that is not a requirement.

[00:08:34] [SPEAKER_03]: You can absolutely draw down on your principal in retirement.

[00:08:38] [SPEAKER_03]: The 4% rule is a common rule of thumb for retirement budgeting that suggests withdrawing 4% of your retirement savings in the first year of retirement and then adjusting that amount for inflation each year after.

[00:08:51] [SPEAKER_03]: The rule is based on historical data and is intended to help ensure that you have enough money to live on for 30 plus years.

[00:09:00] [SPEAKER_03]: That being said, if you need 50 grand per year in retirement, that means you'd need your nest egg to be 1.25 million, not 2.5 million.

[00:09:11] [SPEAKER_03]: That's still a lot of money to save if you got a late start, but it's far more achievable than this article implies.

[00:09:18] [SPEAKER_03]: As long as your portfolio is reasonably diversified and your asset allocation is appropriate for someone who is drawing down on it, a 4% safe withdrawal rate is not particularly risky.

[00:09:31] [SPEAKER_03]: It's actually quite standard.

[00:09:34] [SPEAKER_03]: But this was just the first half of the article, so be sure to come on back tomorrow where we'll finish up this post and where your optimal life awaits.