If you've forgotten to save for your retirement, you're facing an incredible uphill battle when it comes to your financial future. The longer you wait to get started, the tougher it is to amass enough in cash and investments to last you the rest of your life.
Somewhat understandably, few of us managed to save much of the money we earned from our summer-holiday jobs as teenagers. So, for people who are starting to invest later in life, time may not be the ally it once was, but there are still ways to build a comfortable retirement nest-egg from a delayed start.
First, plan to invest
No matter how little working time you have left, you should be investing. Even if retirement is just around the corner, remember that you're not just tucking away cash for the day you retire, but rather looking for money to help get you through the rest of your life.
The general rule is that you shouldn't have money that you'll need to spend within five years in shares. But if you're healthy, you'll likely live more than five years in retirement and should invest accordingly.
While the nest egg you'll be building is always nice to have, the real payoff for you at this point is the discipline enforced by putting yourself in the position to invest. Doing so will help you clarify what parts of your lifestyle are really important to you and which ones you're willing to live without.
Next, understand your priorities
As a later starter, you will be best served by figuring out what really matters to you and working toward a retirement that provides for your top priorities. For everything else, remember that retirement can also mean giving up the rat race, but not necessarily giving up all semblance of a pay cheque.
For instance, you'll need a place to live, of course. But once your kids are grown and on their own, do you have to stay in the same home where you raised them? Downsizing your living arrangements can free up cash currently trapped as equity in the home, lower your monthly expenses, and enable the rest of your nest egg to stretch further.
Likewise, does retirement have to mean you're completely done with working? Could you go part time or perhaps switch to a not-for-profit employer where your pay may decrease, but so would your stress? The general rule of thumb is that you can safely spend 4% of your assets in retirement annually. Flip that around and it means that every dollar you earn annually represents as much as $25 you didn't need to save.
Then, set your target
Using that same 4% safe spending guideline, you can figure out how much you need to tuck away to have your nest egg cover your living expenses. The table below shows how much you need to save each month (and at what return rate) to have your investments produce $1,000 of annual cash for your retirement:
| Years to Go | 4% Annual Return | 6% Annual Return | 8% Annual Return |
| 5 | $377.08 | $358.32 | $340.24 |
| 10 | $169.78 | $152.55 | $136.65 |
| 15 | $101.59 | $85.96 | $72.25 |
| 20 | $68.16 | $54.11 | $42.44 |
| 25 | $48.63 | $36.08 | $26.29 |
| 30 | $36.02 | $24.89 | $16.77 |
| 35 | $27.36 | $17.55 | $10.90 |
| 40 | $21.15 | $12.55 | $7.16 |
So, for instance, assume you have 20 years until retirement and need your nest egg to cover $15,000 per year of expenses. You'd need to invest $636.60 ($42.44 * 15) per month at an 8% return or $1,022.40 ($68.16 * 15) per month at a 4% return to reach that goal.
Remember, too, that the money you put away won't have to necessarily cover your entire current costs of living. Not only can prioritise your expenses, but remember that you hopefully have a super fund, and even under the worst likely scenario, the Age Pension will pay you something, even if the amount is relatively small.
Finally, work your plan
Once you've determined where you'd like to be when you're ready to retire, the rest is largely a matter of executing against your plan. But to have a chance of earning anywhere near the upper end of those returns, you need to invest a decent part of your money in shares.
Remember, over the long haul shares have been an incredible source of wealth generation. And since you're looking for your retirement nest egg to help fund the rest of your life, your anticipated time frame should extend well past your expected retirement date.
That makes you a potential long-term investor, so you need to balance your near-term need for income (cash) with your long-term need for growth (shares).
The easiest way to own shares is to buy shares in a broad index tracking ETF, such as the Vanguard Index Australian Shares Fund (ASX: VAS) which tracks the ASX/S&P 300. Doing so gets you an investment in 300 large, and in large part successful, companies such as BHP Billiton (ASX: BHP), Westpac Bank (ASX: WBC) and Woodside Petroleum (LSE: WPL).
Get started now
We want to help you ensure your golden years are as golden as possible. But the longer you wait, the tougher it will be to reach a comfortable retirement. If you've missed saving during the early years of your career, then you really should get started maximising the compounding power of the working years you have left.
