All of us wish that we had some of the wisdom we’ve accumulated just a tiny bit earlier. Whether it’s to spare ourselves having said something embarrassing, or looking wistfully at our empty bank accounts and saying, “if only…”, the curse of hindsight is that it always seems too late. And so, I can imagine that readers older than me might look at our plan with a certain degree of frustration. I know, because every time I read a blog espousing the same ideas written by a 25-year-old, I feel with the same sense of frustration.
If only! If only I had just started saving a little sooner I’d be retired… twice!
The thing is, I know that I have at least one reader out there who isn’t sure retirement is ever possible for them, and the ship to early retirement island has already sailed. Let me tell you: This blog is for you too. In fact, it may be even more for you, because you’re the kind of person who needs drastic, immediate help.
New Plan: Same as the Old Plan
The great news is, almost all the advice in this blog still applies. Just as a 35-year-old wanting to retire at 40 needs to reduce spending and save aggressively, a 65-year-old wanting to retire at all needs to reduce spending and save aggressively. The difference for a reader near or at retirement age is that they may need to make fundamental changes in their lifestyle and consider alternate ways of eliminating debt. The good news is that Social Security and other social safety net programs might be immediately available.
There are two ways to achieve your goal: Spend Less and Earn More. I would be lying if I said this was going to be painless. It’s not. You’re going to need to make some sacrifices, and odds are they’re going to be uncomfortable. The fantastic news is, if you’re still earning money, and if you’ve worked hard all your life, there’s still a very good chance that you can enjoy a wonderful retirement.
You Are Sick, and Your Finances Are The Disease
Your spending, debt, and lack of savings are a cancer, and they are killing you. Right. Now. If you do not treat your finances as seriously as you would treat a cancer diagnosis, you cannot ever become well. I am the doctor of spending, and I am rushing you into emergency surgery. To survive, you must follow my prescription.
Step Zero: Take Social Security
If you are old enough to take social security without the government reducing your benefit while you work, do so immediately. The government calls this “full retirement age,” and as of 2015 that is age 66. At full retirement age, you will no longer be penalized for working. Social Security is a benefit you have paid into, most likely for your entire working life. This is your money, and it’s time to collect.
If you are a non-working spouse, and you have not worked enough years to get a Social Security benefit, log on to the SSA web site and find out how many credits you have. Call Social Security and find out how many more years you would have to work to get some sort of benefit. If you are anywhere close, get a job and get enough credits to get at least the minimum payment.
Do this. You’re going to need all the income you can get.
Step One: Cut Your Spending to the Bone
If you are still working because you can’t give up an extravagant lifestyle, you need to stop right now. You cannot afford it. If you are only barely getting by because you cannot give up cool toys and fancy cars, then who will take care of you when you can no longer care for yourself and you haven’t saved anything?
I don’t care what your neighbors, friends, or coworkers have recently purchased– even if you have the money in your bank account, if your retirement is not fully funded, then you cannot afford it. Trust me, you do not need to give gifts to your kids. I am your kids, and I am speaking from the heart when I say that your ability to care for yourself is the very best gift you can give us.
- Start tracking your spending. Trust me, you have tons of “small” spending that seems incidental at the time, but adds up quickly. Get an account at Personal Capital or Mint, or use Quicken or YNAB. Connect all of your savings, checking, investment, and credit card accounts to get a realistic view of your financial picture.
- Cut cable off entirely. I’m sorry, you just can’t afford it. The good news is you may be able to switch to streaming options for a fraction of the price of your cable bill. Check out the cord cutting infographic for details on what to do.
- Replace any mobile phone plan with a plan provided by an MVNO. If you are under contract, you have two options: buy out your contract (see how many months it will take you to break even on an MVNO Plan) or switch to a provider like T-Mobile which will buy you out of your contract. Regardless of which option you choose, you may not spend more than $50 a month on mobile service. Try to spend $30 or less per month. Use Wifi instead of mobile data whenever possible!
- Sell or turn over the keys to any vehicle on payments. You cannot afford car payments. If you have to pay a nominal amount to break even, do so. The only vehicle you may to own is one which you own outright, and which gets a minimum of 30 miles per gallon. Buy used, direct from the vehicle’s owner, and not from a car lot.
- Save every watt of electricity and drop of water you can. Replace all your light bulbs with LEDs or Compact Fluorescent Bulbs. Turn off lights when you leave the room. Leave nothing running. Turn the Heating and Cooling way down. Run a fan instead of air conditioning. Put a bucket under the faucet and catch the water when you warm up the shower, then use it to water plants or wash the dishes. You get the idea. You cannot afford a cent over your minimum power and water bills, so take drastic steps to cut them.
- Stop eating out. Yes, completely. I told you this wasn’t going to be easy. You cannot afford to go out. Your kids or your friends may occasionally treat you to dinner. Learn to say thank you and accept it.
- Stop buying stuff. Aside from food and transportation costs, you are not allowed to buy anything. No toys. No gifts. Nothing. Your kids understand. You cannot afford to treat yourself, and you have not “earned it” until your retirement is fully funded.
- Sell stuff. Great news! You have a lifetime of accumulated stuff. The bad news is nobody wants to trade that stuff for food and shelter. Get rid of it on EBay, Craigslist, or Freecycle. Become a lean, mean, stuff-free machine. Get every dollar you can out of anything you haven’t touched in a year or more.
- Stop Supporting Others. This is probably the hardest step to stomach, which is why I saved it for last. If you have non-minor children who you are supporting, then you need to explain that you aren’t going to be able to do so any more.
Please be frank with your children in discussing why. Let them know that you’re making changes because you’re not sure how much longer you can work, and because you don’t want to become a burden on them. Explain that for the near future, you will be attending to your finances so that you can care for yourself in retirement. If your kids are even a little compassionate, they will be completely behind this plan.
Step Two: Eliminate All Consumer Debt
The good news is, your cancer is responding to treatment– but you haven’t beaten it yet. You still have the tumor of debt eating away at your insides. Until that’s gone, you can’t begin to recover.
Sit down with the most recent statements from every single debt you have. Order the statements from highest to lowest interest. Now take every single dollar freed up in step one and blast the debts, starting with the highest interest. You cannot afford to “debt snowball.” You are facing an emergency, and you are going to face it by being smart and courageous, not by making yourself feel good.
Address things like payday loans, credit cards, auto loans, and loans owed to family (likely in that order, but check first). You do not have to pay low-interest student loans as aggressively as the rest, and you do not need to pay down your mortgage until you have planned what to do about it in step four.
Step Three: Crank Your Investments Way Up
Once all of your high-interest (anything over 5% or so) debt is paid off, you are in remission. You are not slipping away any more, but you are also not getting ahead. You need to develop an investment strategy, and fast.
I strongly urge you to read the following articles from this site:
How to Retire Early – An infographic about the journey you are on. Most of this will sound pretty familiar. Pay close attention to the sections on investing. This is exactly what you should do, especially the fund choices and taking advantage of every tax-deferred account you have access to. Cram every dollar you can into your 401k, your HSA, your IRA, and anything else that will save you on your tax bill. If you’re over 50, take advantage of catch-up payments and save even more off your taxes.
How Will I Know When I’m Ready to Retire Early? – The good news is you don’t need to save up as much as described in this article. A 4% Safe Withdrawal rate is only for a portfolio that has to last indefinitely. I don’t know how to put it more gently, so I’ll just say it- your portfolio probably doesn’t have to last fifty years. You might not even need fifty years. You’ve already reduced your expenses, so consider your new, lowered rate of spending as a baseline for retirement survival. You and I both want you to enjoy your retirement, but get yourself to the point where you have at least enough to cover 10 or so years of survival. Also, you probably shouldn’t use a 75% stock asset allocation. You should probably invest weighted much more heavily towards your bond fund– perhaps even 50% Stocks, 50% Bonds.
Step Four: Consider Drastic Lifestyle Changes
There’s no sign of the cancer, but we still need to talk about changing your life to live comfortably and happily in the future.
You may already think that you have cut your lifestyle way back, but I need you to consider a few more major changes. While it’s possible that you could sit in your home throughout retirement, wasting away and barely surviving, what if you could embark on a totally new path?
- Consider selling your home. If you are sitting on equity, it is doing you no good. Determine whether selling and moving into a rental will allow you to free up cash. Freeing up the equity in your home may be what makes the difference in paying off the last of your debt.
- Consider moving to a lower cost of living area. Move out-of-state to a place where you could spend even less.
- Consider a move out of the country. You are not too old, and you are not dead. If you set your mind to it, you can learn a new culture, a new language, and live like a king or queen in literally dozens of countries where the weather is great, the government stable, and the flights back to the US are direct and daily. In Central and South America, Southeast Asia, and even some places in Europe, Social Security income alone may allow you to live in a large apartment with a paid cleaner, cook, and gardener. Look yourself in the mirror, and ask: “Have I really had my last adventure?” If the answer is “No,” or even “I’m not sure,” look into the many places that have sizable expat communities and a wonderful quality of life abroad.
A huge element in favor of an international move is that excellent medical care is available in many inexpensive retirement destinations at a fraction of the cost of the US. Private hospitals in Mexico, Costa Rica, Thailand, Spain, and countless other places around the world provide American-trained, English-speaking doctors for pennies on the dollar versus their cost in the USA. Look into the quality and prices of the care you will receive, and you may find that you need far less than you anticipated.
- If you owe more than your house is worth, consider walking away. This is a hard one to write, but if I were giving this advice to my own parents, and they owed more than their house was worth, this is what I’d want them to do. If you live in a non-recourse state (check first!) then the bank is not able to come after you for the difference between what you owe and what the house is worth.
Remember that your mortgage contract is just that: a contract. It clearly spells out what will happen if you decide to stop paying your mortgage. The mortgage is secured against a physical asset. The bank has accepted that if the owner is unable to pay, or decides not to pay according to the terms of that contract, then the asset becomes theirs. Simple as that. They considered the asset adequate compensation in lieu of payment. It’s business, and you have decided to allow the bank to exercise that clause. End of story. Remember that there are consequences for your credit if you walk away from a mortgage, so be absolutely sure that it’s something you need to do before acting.
Look Ahead, Not Back
The most important thing to say in this article is that just because things seem hopeless right now doesn’t mean it has to stay that way. The only person who can make you shrivel up and die is you. If you implement an aggressive plan and have some resolve left, you can absolutely retire. Exercise flexibility, face the challenge, and be flexible. Don’t fear change. Nurture new dreams and consider whether bold actions like a move out of country might not actually be a great adventure.
This is the honest-to-goodness sincere advice I would give my own parents. I don’t just want you to survive– I want you to thrive.
— Dr. Vagabond