How to Avoid Retiring Broke (Part 1 of 3)
I could barely hold back my tears.
A close friend suffers from such severe health problems he can barely get out of bed each morning. Sadly, he will have to work until the day he dies.
He doesn’t have good insurance and has next to nothing saved for retirement.
It’s with this friend in mind that I decided to write this three-part series on securing financial freedom to help you ensure you don’t end up in the same boat as my poor friend…
And for our first installment of our three-part series I will share six must-dos that will make all the difference in whether you retire in a penthouse or the poorhouse.
The Key to a Comfortable Retirement Is This…
As with any type of financial planning, the No. 1 key to your success is starting as EARLY as you possibly can.
Most folks I know that are nearing retirement are stuck financially between a rock and a hard place. They have kids at home or in college, and these folks are getting run ragged between careers and raising a family.
I’m in my mid-50s now, but I was there not so long ago.
It can be a struggle to save money. And I know firsthand how unexpected expenses — car repairs, dental work or a new roof for your home — can really crimp your lifestyle and put a dent in your savings.
Here are the six things that you absolutely need to do to secure your financial future at this stage in your life.
6 More Tips to Retire on Your Terms
Let’s get right to it…
Tip #1: Build a $5,000 “rainy day” fund. This is the very, very first thing that everybody in their 40s needs to do. Put this money into a 100%-liquid, 100%-safe parking spot, such as a savings account in your local bank/credit union or a high-yielding money market account.
For a list of the highest-yielding parking spots, go to www.bankrate.com.
Tip #2: Pay off your smallest debt first. Your goal is to become debt-free by the time you retire. What I recommend is that you attack your debts with the smallest dollar amounts first (most likely credit cards) and move up the debt ladder from there.
Most “experts” suggest that you pay off the debt with the highest interest rate first. I disagree… The feeling of accomplishment and pride that you’ll get from completely eliminating a debt — even a small one — is contagious and motivates you to pay your second-largest debt… and so on… and so on.
Tip #3: Put a non-negotiable 6% into your 401(k). You are allowed to save up to 15% ($19,000 maximum) in your 401(k). The reason I say 6% is because most companies will match 50 cents on the dollar up to 6% of your salary.
In short, you’re giving yourself a free 3% pay raise by doing this; make sure you grab it!
Tip #4: Make extra mortgage payments. The largest debt most Americans have is the mortgage on their home. If you want to be debt-free by the time you retire and you’re 40, then consider a 15-year mortgage loan, not a conventional 30-year mortgage.
If you can’t swing the higher monthly payment, at least start chipping away at your mortgage. Add an extra couple hundred bucks to your monthly payment. Whatever that amount is will go directly to reducing your mortgage balance.
Tip #5: If, AND ONLY IF, you have tackled the above four steps, then bump up your 401(k) contribution higher to 8%, 10%, 12% or even 15%.
Again remember you must first build that emergency fund and pay off all your nonmortgaged debt, and then when you are well on your way to paying off your mortgage… start maxing out your 401(k) contribution.
Tip 6: Public, NOT private, college for the kiddos. One of the most destructive financial moves I see parents make is to put themselves into the poorhouse to finance their children’s college education. Of course, education is the best investment you can make, but I highly recommend you send your children to an in-state public university instead of a pricey private college.
Talk openly to your kids when they are young and tell them that unless they earn a scholarship, they are going to a public university.
And yes, both of my daughters attended public schools (Florida State and UCF). Both received fine educations, and my eldest just graduated last week with great career prospects!
Of course, everybody has unique circumstances and there is no such thing as one-size-fits-all fix when it comes to personal finance. But the six must-do tips I outlined above will put you on the path to financial independence and freedom faster than any other methods.
No, it won’t be easy.
Spending money is fun. Saving money is hard work.
But you just have to do it. Later on, you’ll be glad you planned ahead. You’ll be able to make the very most out of your golden years.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch