The Personal Finance Podcast - What to Do If You Started Investing Late (Turn Your Retirement Around!)

Episode Date: May 5, 2021

052 What to Do If You Started Investing Late (Turn Your Retirement Around!) Got questions? Ask me on Instagram Here. @mastermoneyco This is the fastest way to get a response from me.  Sponsors Thanks to our sponsor Manscaped (Manscaped.com) for sponsoring this episode of the podcast. Use code PFP20 at checkout for 20% off + Free Shipping! Want to Support the Show? Follow on Spotify or Follow and Leave a 5-Star Review on Apple Podcasts! Today We Discuss:  Understand How Much You Need to Save How to Save More  Should You Pay Off Debt First Why You Should Forgo Your Kids College Savings  Why it is never too late.  Savings Rate Chart More Episodes You Will Love:  How Much Money You Need to Retire (and Why it May be Less Than You Think) How to Automate Your Money - The Set it and Forget it System Why Understanding Your Savings Rate Will Change Your Life (and Allow You To Retire Early) How and Why You Should Track Your Net Worth  Check out all the Stuff I Recommend!  M1 Finance Best Place to Invest  Personal Capital Free Wealth Management and Budget App  CIT BANK (Best Savings Account) Best Personal Finance Books: The Simple Path to Wealth - J L Collins  The Millionaire Next Door - Thomas Stanley I Will Teach You To Be Rich - Ramit Sethi  Rich Dad Poor Dad - Robert Kiyosaki ** Some links may be affiliate links and we earn a small commission at no extra cost to you. We only recommend products we truly believe in.  Check us out on social fam!  Twitter Dollar After Dollar Instagram Learn more about your ad choices. Visit megaphone.fm/adchoices

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Find your advisor at IG Private Wealth.com. On this episode of the personal finance podcast, we're going to talk about what to do if you started investing late. And today on the personal finance podcast, we're going to talk about what to do if you started investing late and how you can turn your retirement situation around. If you have any questions at all about this episode, follow me on Instagram at Dollar. a F-T-R dollar. And follow me on Spotify, Apple Podcasts, or whatever podcast player you listen to. And if you want to help the show out, leave a five-star rating and review on Apple Podcasts. It truly means the world to me if you can do that.

So today, as I stated, we're going to be talking about what to do if you started investing late. And if you started investing late, we're going to turn your retirement situation around. And if you're young, this is a fantastic. episode to listen to because it's going to show you the true power of how much you can get ahead if you start investing early. The earlier you can invest, the less you have to save each month to hit the same goals as someone who starts investing later. And you see charts all the time. Someone who starts investing in their early 20s has to save a quarter of what someone who starts

investing in their 30s has to save to get to the same level in retirement. And it's so extremely important, no matter what age you are now, to get the ball rolling, to start investing if you haven't started investing. It's never too late. So maybe you're in your early 30s and you're just getting your stuff together. That happens to a lot of people. Or maybe you're in your 40s and you just never buckled down. Or maybe you're in your 50s and the panic just set in. Or maybe you have parents who never started investing. And you've realized after listening to this podcast, you have to invest to be able to keep up with inflation and retire with a comfortable retirement. If you have parents like that who have never started investing, send them this episode because

this is going to cover all the pieces that they need to understand to start building wealth, to start building retirement because it's never too late. Are you going to have to work harder? Most likely, you're going to have to work a lot harder than someone who started in their 20s if you're starting in your 30s, 40s, 50s. But it's never too late to start investing. Just understanding that it's never over. It's never over.

The longer you wait from today, the harder it's going to get. The more days that pass, the less time you have to save for retirement. And if you're one of those people that says, I'll just do it later. I'll get to it later. Each year that you lose is another year that you don't get to put your dollars to work for yourself. And each year that you lose is actually a massive, massive difference on how much you have to save each and every month.

And if you're getting older, you're getting closer to retirement and you haven't started, Starting now will be a million times better than just trying to live off Social Security for the rest of your life. Because living off Social Security is no way to live in retirement. This is your wake-up call. This is your wake-up call to start investing now,

to start getting your finances together, bootstrap down, put the work in so that you can retire comfortably. This is your wake-up call. You have the power to change and nobody else. You have the power to change your retirement. You have the power to change your retirement situation. Maybe you're saying to yourself, I want to retire in a couple of years.

You have the power to make changes now because every change you make is going to make a massive difference once you get to that point. So let's get into the steps you need to take if you started investing late. Let's turn your retirement around. So the first thing that we want to get into when we want to play catch up, when we want to start investing if you started investing late, is that you've got to understand that retirement is not an age. Retirement is not an age that you hit. Retirement is a number. So if retirement is a number, here's the epiphany. Getting to retire is just a math problem.

And it's a very simple one at that. Now one thing that I want to show you guys, and I'll leave a link to it in the show notes, but it's at dollar after dollar.com slash savings rate chart. What this chart is going to show you is what percentage of your salary that you need to save in order to reach retirement and how many years it will take based on that percentage. So, lot of times you'll hear people say, oh, save 10% of your income over time, and you'll be able to retire comfortably once you get to retirement age. Well, saving 10% of your income, as you show, as shown in this chart, will take you 51 years before you retire. Saving that measly 10% is never going to work. And folks who needs to play a little bit of catch up, this chart is going to be

perfect for you because you could say, hey, I'm going to retire in 20 years. How much do I need to save? Well, if you want to retire in 20 years, you need to save 40% of your income. You need to save 40% of your income. Now that may sound drastic to some of you who are just turning your finances around. Saving 40% of your income may sound crazy. But the question is, how bad do you want it? There's a couple of ways that you can do this. There's a couple of ways that you can hit reaching 40% of your income. And we'll talk about that here shortly. But understanding that you can accelerate your timeline, you can accelerate your timeline so that you can actually retire at the time you want to retire. And understanding that it's just a math problem,

retirement is a number. What do I mean by retirement as a number? The savings rate chart will show you, but at the same time, let's say you want to retire with $80,000. Well, the way to retire with $80,000, if we're using the 4% rule, is that you need $2 million to be able to retire

with $80,000 every single year. That's the safe withdrawal rate. So your goal, if you want to retire with $80,000 a year, is you've got to get to $2 million invested to be able to do that. If we have an episode on the 4% rule, I'll leave a link to that in the show notes as well. Because it's a fantastic episode if you're wondering,

hey, what the heck is the 4% rule? But basically what that means is to draw down safely and preserve your investments, preserve your capital. Studies have shown that if you draw down 4% of your portfolio every single year, that you'll be able to preserve that capital through your entire retirement. And so that's where that number comes from. So every million dollars that you have is $40,000

that you can live off each year. So if you want to be a big baller and live off 300 grand, you're going to need a lot more money than you think. A lot of people don't understand that. So starting as early as possible so that you can hit these points is extremely important. Now, if you have a short timeline, you can look at this chart and see what that is. But let's say you want to retire in 10 years. That is very much doable.

But if you want to retire in 10 years, you're going to have to follow a closer model to what the fire movement does. That means financial independence retire early. The fire movement is the ones that brought the high savings rate to the forefront. Because the high savings rate is what gets you to retirement that much faster. So if you want to retire in 10 years, you need to save 65% of your income. Now, that may sound crazy to you. And if it does, but you need to get there in 10 years, I challenge you to dig into the fire

movement. There's a bunch of great blogs out there that will teach you how to do this. And we'll have a bunch of episodes on the fire movement coming up because I think it's a fantastic option for a lot of people. But understanding how to get aggressive with your savings rate will allow you to retire on the timeline that you need. So take a look at this chart because it's fantastic for you to see how your retirement can unfold right in before your eyes. And if you want to get in depth and you want to hear more about this savings rate and how your saving rate impacts your retirement, we did another episode on this exact topic. So I'll leave a link to that

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and see how much you can save. That's policy genius.com. Number two, if you're in debt, you need to get rid of that debt so that you can reach your savings maximums. So as we talked about in the first point, we want to increase our savings rate. So to reach your savings maximums,

you've got to get rid of every single leech that sucks your savings away from you. And debt is the biggest contributor to that. Debt will take away your savings so that you can't save as much as you potentially could in any other situation. So getting rid of that debt will be a massive benefit for you. So we've had episodes on how to pay down debt faster.

And there's a number of ways to do this. But my preferred way is what I call the debt wrecking ball. And that is you pay the highest interest rate balanced debt first and then move your way down. So what does that mean? That means let's say you have three accounts that have debt in them. So let's say you have a credit card that has $5,000 in debt. You have a student loan that has $20,000 in debt,

and you have a small personal loan that has $3,000 in debt. And let's say that credit card has a 19% interest rate, the student loan has a 7% interest rate, and the small debt has a 2% interest rate. Where you're going to pay that credit card first and pay the minimum balances on all the others. But you're going to aggressively pay down that credit card so that you can get rid of debt faster.

Speed is the name of the game when it comes to paying down debt because debt is an emergency. So it's not the lowest balance that you pay down first, it's not playing any of these funny games. It's getting rid of debt as fast as possible. Because the only thing debt does is crush your savings rate. So getting rid of this debt as fast as possible is one of the only reasons you should ever try to even consider delaying investing. But I think you should invest and pay down debt at the same time. At least invest something because there's a massive gap if you do both than if you just pay down debt. So if you're just

getting started investing, if you're just getting started with getting your money right, then look at eliminating your debt as soon as possible so that you can increase the amount that you invest and start building wealth. Start increasing your net worth because as you pay down debt, your net worth will go up. And once you see your net worth start to rise, it's extremely motivating. As we talked about the net worth episode, it's extremely motivating to see your net worth rise. So do everything in your power to get rid of that debt so that you can increase the amount that you're saving and investing so that you can hit your retirement goal faster. Number three, if you have kids, this is a big one for you to understand.

Because retirement always comes before saving for your kids college. Now, a lot of people look at me like I'm crazy when I say this. But you have a choice to make. I know you want to provide for your kids. That's one of my main goals in life is to provide my two boys. But you have to understand this. Your kids will have options when they go to college. They'll have options to get student loans if they need to.

Now, that's probably the last resort that you want. but they do have that option. There's no retirement loans out there. There's no loans for you to be able to retire. They can get scholarships. Last I checked, there's no scholarships in retirement. So you need to take care of yourself first before you take care of your kids college.

The way I always like to describe this is when you're on an airplane and the oxygen mask drops if your airplane is crashing, who do you put an oxygen mask on for first? You put it on for yourself so that you can help others like your children. The same situation goes for saving for your kids college or your retirement. You save for your retirement first with the excess money that is left over, then you can save for

your kids college because your retirement cannot be funded by anyone else but you. That's the key point that you have to understand. So making sure that you take care of yourself first is a huge step that you got to put at the forefront, especially if you're behind on your savings goals. If you really haven't started investing and all you've done is save for your kids college, you have to start investing for yourself. You can forego the kids' college, leave it in a 529 or whatever you have it in,

and move forward and start aggressively going after your retirement. Number four, maximize the amount that you're saving. So you need to take advantage of every advantage that you can get. It's time to play catch-up. So you're going to have to reduce your spending in areas that don't bring you value, especially if you're not saving enough money and allowing yourself to invest enough money

to hit the retirement age that you want. You're going to have to make some sacrifice. And that's part of money if you're not increasing your income. You're going to have to make some sacrifices and spend less. So reducing your spending will allow you to increase your savings rate, which will allow you to put more dollars to work for your retirement so that you can retire faster. It's very simple to say, much harder to execute. But look at areas that don't bring you value.

This is what we talk about all the time. Let's say you go out to eat every day with your coworkers, but you really don't care about going out to eat with your coworkers. And that amounts to $400 every single month. Because if you think about $20 a meal, five days a week, that's $100, four weeks in a month,

that's $400. If you invested that $400 instead, over the course of 30 years, $400 a month amounts to a million dollars. So making sure that you're making conscious choices about your spending so that you can save every extra dollar to start investing is imperative.

Next, make sure you're getting your employers 401K match. If you don't know what a 401K matches. It's an offering inside your 401k where your employer will match the amount of money that you put up up to a certain percentage. A lot of times it's like 3%. Your employer will say, hey, if you put 3% of your income into the 401k, we'll match it at 3%. It's 100% return on your money. It's free money. So you have to take advantage of that because you need as many advantages as you can get. Then make sure you're investing in retirement accounts. Accounts like your 401k, your Roth IRA.

Both of these are magnificent for people who want to retire. Why? Because they have tremendous tax advantages. For example, your 401k, you don't have to pay taxes on the money that you contribute to 401k, you only have to pay taxes when you pull the money out. But in retirement, usually your taxable income is much lower because you're not making money. So it's a great advantage to have. And the Roth IRA is the opposite. So in the Roth IRA, you contribute after tax money, it grows tax free and you pull it out tax free. So getting your 401k match, investing in a Roth IRA and then with excess cash after you max out a Roth IRA you can go ahead and put more back into the 401k. The way to make savings effortless is to automate your savings. What does that

mean? You automatically transfer every time you get paid, you automatically transfer the amount that you want to save every single month into your brokerage account or into your savings account so that you don't even have to think about it. It just gets done because if you're relying on your willpower and you've come as far along as you have without saving, you can't rely on your willpower. You just can't. You've already proven that you can't do that. So automating your savings rate will be a tremendous benefit for you. And then the biggest thing is to increase your income with the sole goal of saving more.

If you're behind on your retirement saving, increasing your income will be a major catapult for you because the more income that you can produce, the more money you can save. And if you pair this with reducing your spending, the gap. between how much you spend and how much you save continues to grow. And growing that gap is what's going to be a massive rocket ship for your investing. To the moon, as they say. Because increasing the amount that you're investing over time is going to be life-changing for you. Number five, you have to maintain the right asset allocation.

So what the heck is asset allocation? We're going to have a full episode on asset allocation coming up. But it just means how much you have of each type of investment. So stocks, bonds, real estate. And here's how this works. If you have a long time horizon, let's say you're in your early 30s and you have a long time horizon

before you feel like you want to retire, then having the majority of your investments in stocks is a much better idea. Why? Because they gain more over time. And as you get closer to that retirement age, maybe adding some bonds in would be a good option for you.

And if you understand how to invest in real estate, you know how to run your numbers, you understand local markets, then real estate investing may be awesome for you, as well. A nice asset mix between stocks, bonds, and real estate as you approach retirement is a fantastic retirement plan for you. Think through your investing plan. What type of asset allocation do you want to have? And there's a number of factors that come into play with this. Some of it is what is your risk tolerance? Meaning if the market dropped today, would you freak out

and panic? Because if that's the case, then you need to increase your bond exposure. But if you understand that over time, the market goes one direction if you look at that, you look at the market over the long term, it goes up historically. And what that means is that if you just stay patient and you look at your account less, specifically if the market goes down, just don't even look at your account. Because over time, the market goes in one direction. Here's what I always tell people to do. Take the stock app in your phone, go to the S&P 500 or go to the total stock market, turn your phone sideways, and what direction does that chart go? Put it on the maximum amount of time that your phone will allow you to put it on. The chart goes one direction. It goes up.

Yes, it'll go up and down if you look at the short term day to day, month to month, year to year. But over the long haul, the market has always gone up historically. So understanding your tipperment and understanding yourself as an investor is a major factor when it comes to determining your asset allocation. Number six, invest your excess cash. So sometimes what a lot of people do is when they start investing late, the problem was that they've just been saving their money in a savings account or stuffing it under a mattress or throwing it in a safe.

If you're stuffing it in a mattress, you're probably a drug dealer. If you're storing it in a safe, you're probably born in 1932. But hoarding cash is not a good thing to do with your money. Because you need your money to work for you. Your money can work way harder than you ever can. And once you understand that, the light bulb is going to go off. And you're going to understand you can open up a world of wealth once you understand that your money can work a thousand times harder than you ever can.

So what you need to do is if you've been hoarding cash for long, period of time, you need to work on your financial education. Listen to this podcast, read finance books. There's a bunch of them out there that you can look through. I've got a bunch of recommendations. I'll leave some in the show notes. But understanding that your money can work harder than you can and getting comfortable with that idea is how you can start investing additional cash. Because if you leave your money in cash, every single year, inflation is eating into your buying power. Inflation's eating it up every single year because inflation historically has gone up in the last 20 years, 2%. So if you're saving your money and cash and getting a measly 0.5% interest

rate in a savings account, guess what? You have a negative 1.5% return because inflation is eating up all that interest. You have to invest your money. If you don't invest your money, you're going to retire broke because cash will only last so long. You have to invest your cash to get ahead. The only two reasons why you want to keep cash is for your short-term savings goals. So things like vacations, weddings, home remodels, down payments for a house. Those types of situations you want to save that money in cash. You don't want to lose that money in the market and let the market take a dip after you invested that money and then that money is cut in half because anything with a short time horizon should not be invested. Or your emergency fund.

You also do not want to be investing your emergency fund. Keep that in a savings account so that you can have that money when emergencies arise. Those are the only two situations you should be hoarding cash. Other than that, you should not have cash for anything else. And then number seven, if you're over 50, take advantage of catch-up contributions. So catch-up contributions are one of the best things to do if you're over 50. So at the time we're recording this, people who are over 50 can contribute an additional $1,000 a year to a Roth IRA on top of the standard $6,000. For 401K participants, the catch-up contribution limit is $6,500. So you can contribute an additional $6,500 on top of the $19,500.

And every single year, it seems like these catch-up contributions keep going up. So over time, you're going to be able to invest even more money over time. So taking advantage of these catch-up contributions is massive because the more money you can get to these retirement accounts, the less you have to pay in taxes over the long haul. So make sure if you're over the age of 50 to look into taking advantage of catch-up contributions. And the last thing I want to hit on is if you started investing late, don't beat yourself up. It's not worth looking into the past and saying, I wish I did this. I wish I did that. Use it as a learning moment. Use it as a teaching moment. Teach your kids. Teach people around you

that you made a mistake. But don't look back and beat yourself up. All you can do is move forward. That's all you can do. And so all you can do right now is focus on what you can control because it's never too late to start investing. It's never too late to start working towards retirement. There are countless people in the fire community who are retiring in seven, eight, nine, 10 years because they're accelerating their savings rate. They're doing things differently than everyone else so that they can have better results than everybody else. Getting your money together today will absolutely change your life.

It'll set an example for people around you. It'll set an example for your kids. It'll set an example for your grandkids all the way down the line. And it opens up options for you. That's why the biggest thing that we talk about. about in this podcast is that money equals freedom. Why? Because you have freedom with your time. You have freedom to do whatever you want with your time, with your energy and everything else beyond. Because having freedom with your time is the ultimate wealth. This is why we build wealth so that you have

freedom with your time. So do it for your kids. Do it for your family. Work your butt off and get to your first 100K because everything before your first 100K is all just savings rates. It feels like you're churning and grinding and working hard. But after you get to 100K, compound Indra starts to work for you. And as that little snowball starts to grow, it's going to start spitting off cash. And as that cash starts spitting off

and you reinvest that cash back into the market, it's going to grow bigger and larger and larger. And over time, your money's going to be working way harder than you can. But you have to get it started. You have to plant the seed. You have to get the ball rolling. And there's no better day

than today to get the ball rolling. This is your chance to change your family's future for generations. It's your chance to actually do something with your finance. You're never too old. It's never too small amount of money to start investing. Just get started today. Because the sooner you start, the sooner you can start building wealth for you and your family's financial future. If you have any questions about this episode, hit me up on Instagram at dollar a F-T-R dollar.

Follow me on Spotify, Apple Podcast, or what, Whatever podcast player you love listening to this podcast to you. And please, if you want to support the show, leave a five-star review on Apple Podcasts. It truly does help the show. Thank you guys so much for listening, and we'll see you on the next episode. Thank you guys so much for listening. And if this is your first time listening, consider subscribing so you never miss an episode. And share this episode with a friend.

And don't forget to leave a rating and review on iTunes as well, because our goal is to bring as much value to you as possible. And we're trying to spread this message that money can buy freedom. That's what money is there to do is to buy more freedom. So thank you again so much for listening, and I hope you have a great day. Frozen lasagna, medium power, 15 minutes. Sounds like Ojo time. Let's play.

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