How To Save And Invest For Retirement At 62

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Includes: AOS, BMY, COST, D, ENB, FDX, HD, HP, HRL, ITW, LMT, MDT, MMP, MO, MSFT, OHI, PEP, SPY, T, TLT, TROW, TXN, V, VBMFX, VFINX, VGR, VGTSX, VTI, WBA, WPC, XOM
by: Financially Free Investor
Summary

A million dollars is not the same as it used to be. Still, along with Social Security, it's enough for most people to retire on comfortably.

Setting your goals early in life, saving as much as possible and investing for the long term are some of the most important tenets of retirement planning.

We discuss how a couple at age 50 with modest savings can still aim and achieve a comfortable retirement.

It goes without saying how important it is to start saving at an early age. It makes retirement planning so much easy. However, most of us don’t get that wisdom in our 20s or even in 30s. So many folks don’t think or plan for retirement savings until they are well into their 40s. But it's okay since you could still achieve your goals, though the path will be a bit harder and may require more sacrifices.

For the purpose of this article, let’s assume a hypothetical couple - John and Lisa, both are 50 years old right now. They have saved about $200,000 in retirement savings in addition to some equity in the house. It is not bad at all. However, in a short 12 years from now, they will be 62. They may or may not retire at 62, but they would still like to make plans on what if they were to retire at 62 due to some forced situation. They would like to accumulate retirement assets worth $1 million or more by the time they are 62.

Why retire at 62?

Frankly, it's just a number. Besides so many people continue to work beyond 62 years of age. However, it's significant in many ways. At 62, you become eligible to draw on your Social Security benefits even though your benefits are 25% lower than if you were to wait until the full retirement age between 66 and 67. Moreover, once you are 59 and a half, you could withdraw money from your retirement saving vehicles like IRAs and 401Ks without any penalty. However, please note that one does not qualify for Medicare until the age of 65. So, for many, it may not be an option to retire prior to 65, just to have the medical benefits. If one does decide to retire at 62, he/she would have to buy their own medical insurance for the intervening period (from 62 to 65).

There may be other good reasons to plan for an early retirement even if you decide not to when the time comes. Many folks face situations like retrenchments or forced early retirements, and they find it difficult to find suitable employment. It may even be a voluntary retirement offer from your employer that's too good to pass up. So, it's just a matter of good planning to prepare for any eventuality.

Is $1 million good enough to retire?

In the 1990s and until the early 2000s, there used to be a consensus among financial planners that $1 million were sufficient to have a very comfortable retirement. However, not everyone agrees with this milestone anymore. Obviously, $1 million is not the same as it used to be 20 years ago. In spite of low inflation numbers during the last 20 years, $1 million in the year 2000 would be the same as $1.45 million in 2019 due to inflation. Sure, there would be folks who would argue that $1 million would not be enough to retire on in 2030. So, without a doubt, they would be better off to save more and keep some margin of error while setting their goals. That said, a one million dollar mark may not guarantee a very rich retirement, but with some prudent strategic planning, $1 million worth of savings can go a long way to fund a comfortable retirement for a couple provided we believe that the other pillars of retirement security like Social Security and Medicare will remain intact.

On the other side of the fence, there's an argument to be made that it's too high a target for so many folks who may have done everything right but invariably run into the tough times due to corporate layoffs, constant shifts in the job market and age discrimination in later years of life. This is why it's so important to have an emergency reserve of one year worth of living expenses.

Start saving early is critical, but it’s not the endgame

Still, we believe the most important factor that determines how rich you are going to be later in life has to do with how soon you are willing to start saving, and paying yourself first, in other words, start saving for retirement. The table below shows how early savings can impact the quality of life in later years. Steve starts contributing $6,000 a year ($500 a month) at age 30 and increases it by 3% every year until 62. However, Mark waits for another 10 years but starts saving the same amount as Steve at age 40. Assuming they both get 8% return annually, Steve would end up almost double what Mark would accumulate. To match Steve, Mark will have to contribute double the annual amount starting from age 40 to 62.

This is how their savings at age 62 stack up assuming 8% annualized return:

Steve contributes $500 a month (starting age 30), increase by 3% every year

Mark contributes the same amount as Steve (starting age 40)

Mark contributes double (2x) the amount as Steve (starting age 40)

At age 30

0

0

0

At age 40

$122,782

0

0

At age 50

$411,289

$154,181

$308,361

At Age 62

$1,299,000

$632,121

$1,264,000

You are 50 and have saved $200,000:

According to the Economic Policy Institute, the national average of retirement savings for 45-49 year-olds is $81,000 and $124,000 for 50-54-year-olds. So, 50 being right in the middle would be about $100,000. Considering that for a couple, it should be twice that figure, let’s assume that you have saved $200,000. Obviously, it is an average, and it is not enough. If you are already 50, you need to realize you cannot delay the retirement planning any further. Sure, you may have other pressing needs such as saving and paying for kid’s college tuition fees. If you can manage both, good for you. But saving for college tuition should not be at the cost of retirement savings. If needed, there are other ways to meet these needs like tuition loans at least partially. Also, kids can work part-time to fund their own education to some extent. At this stage, retirement savings have to become priority No. 1.

Let’s bring in our hypothetical couple: John and Lisa

Like in the past, we will use our hypothetical couple - John and Lisa, to help with the illustration.

This is where John and Lisa stand today. Both of them are 50-years-old. Their combined annual salary is modest at $130,000. They have $200,000 in their retirement accounts. John and Lisa want to be at least prepared to retire at 62, so they only have about 12 years left until retirement. Sure they can work longer, but that may not always be their choice. To be able to retire in 12 years, John and Lisa realize they will have to make some sacrifices in their current lifestyle to be able to have a comfortable retirement later.

John and Lisa decide to save 16% of their salary toward their 401Ks. These savings will be tax-deferred and reduce their tax liabilities. Until now they were saving only 6% of their incomes. They are fortunate to get a good match from their employers for their 401K savings. On average, it works out to be 80% of their first 6% of the contributions. They have had no IRAs until now. They will put away $10,000 ($5,000 each) toward IRAs. Since they qualify for tax-deductible IRAs, they will use this option instead of Roth IRAs. This will also help bring down their taxes. They will also open a college education fund for their kid and deposit $5,000 every year. However, this will be after tax, but the qualified tuition withdrawals including the growth will be tax-free. Their target is to reach $1 million in retirement savings, excluding the primary home.

With the above decisions, and after accounting for the tax savings (due to pre-tax contributions), their take-home monthly income will reduce by about $1,550, even though they will be saving an extra $1,920 every month.

Where to find an extra $1,550 a month?

There are several ways that they can cut down their monthly budget to save this extra $1,600. They are going to look at several options and choose the ones that are appropriate for them. Some of the options that they are going to look for are:

  • They could cut their spending budget drastically from every expense item and save $1,600 a month. Though doable, it may seem difficult to achieve at first glance.
  • Alternatively, sell the current house and move to a smaller but newer house. This will save quite a bit of money and reduce the need to cut down on other expense items.
  • Sure, there's a third way, though there is no guarantee of achieving it. They may look for new opportunities at work with added responsibilities and increase their earning power. Any success here will reduce their need to cut down the expenses.

With $130,000 combined income, their current take-home income is roughly as follows:

Gross income: $130,000

Minus SS/Medicare: -$9,945

Minus Federal Taxes**: -$8,000

(Assuming there are no state taxes)

401K deductions (6%) -$7,800

Minus other deductions: -$4,800

Net take-home income: $99,455

Net Monthly take-home Income: $8,287

**This is a rough estimate for this couple based on income and two dependents but it could vary a great deal based on the individual situation.

First Method:

Based on their monthly take-home income, they work out the new household budget to make for additional savings of $1550 a month.

Budget-Item

Before

After (new)

Savings

House mortgage:

1150

1150

0

Property taxes, Ins, HOA :

850

850

0

House maint.

250

150

100

House upgrades

400

100

300

Car Payments/ gas/ maint.

1200

800

400

Groceries/Food

1500

1200

300

College fund

400

600

-200

Kids misc expenses

1000

600

400

Eating out

400

200

200

Vacations

600

300

300

Discretionary/misc Spend

750

500

250

Sub-Total

8500

6450

2050

Emergency fund

0

500

-500

NET Totals

8500

6950

1550

Second Method:

Their house is worth about $350,000, thanks to rising home prices in recent years. However, they still have a mortgage balance of $150,000. After mortgage payout and commissions, they can get about $190,000 net. If they move a little further out in the suburbs and buy a much smaller but a newer house, they could get one for $250,000. If all that works out, they can take only about $100,000 new mortgage on a 15-year term, put 150,000 cash down on the house, put $25,000 away as an emergency fund, and still will be left with $15,000. They could use this $15,000 toward paying off one of the cars. Their monthly mortgage would be about $760. After adding property taxes, insurance, HOA, etc., their monthly expense would be approximately $1,400 to $1,450.

They save about $600 a month in house payments, plus they will immediately save $400 in car payments. Also, the house is new and smaller, so they would save about $150 a month in utilities.

They would still need to cut down their other budget items and save an additional $500 without much sacrifice. With the budgeted savings of about $1,550, they can fund the college savings as well as fund the 16% pre-tax contributions to 401K and $5,000 each to the IRAs.

Retirement Planning Part-II: Investing Successfully

The first very important part of retirement planning is to save enough and save early and regularly. It's best achieved when it's done on autopilot. Being on autopilot means your investment account always gets paid first before you get money into your checking account to spend on things that are essential and non-essentials.

The second part of retirement planning is how well you invest the money saved. This is equally important because after all, you cannot get rich by just sitting on cash. You have to protect your cash from inflation. You also need to compound it over time. Growth and compounding will do wonders to your investment capital over time.

John and Lisa decide to take charge of their investments and implement the following strategy:

Lisa’s 401K:

Lisa’s company provides a set of funds that she can choose from. Lisa decides the following combination of funds. Once this has been set up, rest would really be on autopilot. Every paycheck, her contributions will be invested in the proportions as selected by her. Since this portfolio is very balanced, she hopes to get growth of about 8% annual for the next 12 years.

  • 20% in S&P 500 fund,
  • 20% in the equal-weighted S&P 500 fund,
  • 20% in the Developed International fund,
  • 5% in Emerging Markets fund,
  • 20% in bonds,
  • 10% in Treasury funds.

John’s 401K:

John decides to deploy a risk-adjusted strategy to ensure that he gets most of the gains of the market, but at the same time, he will hedge the risks in case of this bull market turns into a bear market. This strategy is discussed in the later section.

IRAs:

Since both John and Lisa will be funding their IRAs every year to the extent of $5,000 each, they will self-manage these funds.

Lisa is a fan of DGI (Dividend Growth Investing) stocks and decides to implement a DGI Portfolio (described below).

Investment Portfolios:

Lisa’s DGI Portfolio for the IRAs:

This is the portfolio that Lisa will be building for John’s and her IRA. She decides to build a portfolio of about 20-30 blue-chip stocks, which in theory she could hold for the next 10-20 years. Obviously, things will change over time, and occasionally she may have to make changes. All the stocks will generally meet the following conditions. However, exceptions can be made sometimes:

  • Market cap > 20 Billion
  • The company is either a dividend champion or a contender. That means the company has paid and increased dividends for at least 10 years and never cut the dividend.
  • The yield at the time of buying is preferably 2%, but some exceptions will be made based on dividend growth. The average yield of the portfolio should be above 3%.
  • 50% of the positions must have had a high dividend growth in the last five and 10 years.
  • The “average” price of the portfolio is at least 10% below the 52-week high.

Keeping the above rules in mind, she shortlists the following 25 stocks to start with. The average dividend yield is roughly 4%, the past five-year dividend growth is 12%, and as a group, these stocks are trading roughly 12% below their 52-week highs.

Ticker

Price 04/17

52-Wk High

Distance from 52High

Div. Yrs Hist

Yield %

DGR 5-yr

DGR 10-yr

Name

Sector

(AOS)

55.94

66.21

-15.51%

25

1.65

27

19.9

A. O. Smith Corp

Industrials

(BMY)

46.02

63.69

-27.74%

10

3.44

2.7

2.6

Bristol-Myers Squibb Co.

Health Care

(COST)

245.34

247.09

-0.71%

15

0.94

12.9

13.5

Costco Wholesale

Consumer Staples

(D)

75.12

77.5

-3.07%

16

4.79

8.2

7.8

Dominion Energy Inc.

Utilities

(ENB)

37.11

37.69

-1.54%

23

6.18

10.9

12.8

Enbridge Inc.

Energy

(FDX)

197.23

266.67

-26.04%

17

1.43

31.7

18.3

FedEx Corp.

Industrials

(HD)

204.47

215.43

-5.09%

10

2.83

21.4

16.4

Home Depot Inc.

Consumer Discretionary

(HP)

61.83

74.36

-16.85%

46

5.11

16.8

31

Helmerich & Payne, Inc.

Energy

(HRL)

40.78

46.26

-11.85%

53

1.88

17.1

15

Hormel Foods Corp

Consumer Staples

(ITW)

157.75

160.21

-1.54%

44

2.79

16.4

11.3

Illinois Tool Works Inc.

Industrials

(LMT)

310.06

361.99

-14.35%

16

2.93

11.4

16.2

Lockheed Martin

Industrials

(MDT)

86.15

100.15

-13.98%

41

2.2

12.2

11.9

Medtronic PLC

Health Care

(MMP)

62.56

72.9

-14.18%

19

6.58

12.6

10.8

Magellan Midstream Partners

Energy

(MO)

56.39

66.04

-14.61%

49

5.57

9.7

9.5

Altria Group Inc

Consumer Staples

(MSFT)

120.77

121.65

-0.72%

17

1.56

12.1

14.1

Microsoft Corp.

Information Technology

(OHI)

36.08

40.3

-10.47%

16

6.92

7.3

8.3

Omega Healthcare Investors

Real Estate

(PEP)

122.41

124

-1.28%

46

3.03

9.4

8

PepsiCo, Inc.

Consumer Staples

(T)

32.25

35.82

-9.97%

35

6.51

2.1

2.3

AT&T Inc.

Communication Services

(TROW)

106.68

127.43

-16.28%

33

3.04

13

11.3

T. Rowe Price Group Inc

Financials

(TXN)

116.37

118.48

-1.78%

15

2.9

19.7

20.4

Texas Instruments

Information Technology

(V)

160.23

161.1

-0.54%

11

0.64

20.4

32.6

Visa Inc.

Information Technology

(VGR)

10.78

19.81

-45.58%

20

14.83

4.7

4.9

Vector Group Ltd.

Consumer Staples

(WBA)

54.84

86.31

-36.46%

43

2.78

7.3

15

Walgreens Boots Alliance

Consumer Staples

(WPC)

77.14

79.75

-3.27%

22

5.27

5.1

7.7

W.P. Carey Inc.

Real Estate

(XOM)

81.2

87.36

-7.05%

36

4.06

5.6

7.6

Exxon Mobil Corporation

Energy

Average

-12.02%

27

3.99

12.7

13.17

John’s Risk-Hedged Strategy (for 401K):

Since John is implementing this strategy within his 401K, the strategy needs to be simple and implementable. Most 401K accounts offer a limited number of funds that one has to choose from. John decides to implement one such strategy which rotates on a monthly basis.

The strategy will be invested in one of the following three securities (or equivalent funds), which are:

  • Vanguard 500 Index Investor (VFINX)
  • Vanguard Total Intl Stock Index Inv (VGTSX)
  • Vanguard Total Bond Market Inv (VBMFX)

VBMFX is the hedging asset and will be used only when the other two main securities are not performing well. By deploying this strategy, since 1997, it returned an annualized return of 13%. In the year 2008, it was down only -4.90% compared to -37% for the S&P 500. We would like to caution that back-testing results are no guarantee of similar results in the future because no two periods are going to be the same. However, the main advantage of using such a strategy would be to limit the downside and drawdowns during recessions and corrections.

Equivalent ETFs that can be used for the above mutual funds:

VFINX

(SPY)

VGTSX

(VEA) or (EFA)

VBMFX

(TLT)

Every month, the strategy will check the performance of the three assets for the previous three months or approximately 62 trading days and select the best-performing asset. The portfolio will be invested in the top-performing asset for the next month. The process will be repeated every month. Below are the back-testing results since 1997 and performance comparison with S&P 500. The model portfolio accumulated almost three times of the S&P 500, mainly because of smaller drawdowns during the bear markets of 2001-2003 and 2008-2009.

Year

Rotation Model Return

Rotation Model Balance

S&P 500 Return

S&P 500 Balance

Begin

$100,000

$100,000

1997

22.37%

$122,370

33.19%

$133,190

1998

32.58%

$162,238

28.62%

$171,309

1999

20.64%

$195,724

21.07%

$207,404

2000

-2.11%

$191,594

-9.06%

$188,613

2001

3.39%

$198,089

-12.02%

$165,942

2002

-4.91%

$188,363

-22.15%

$129,186

2003

35.11%

$254,497

28.50%

$166,004

2004

15.80%

$294,708

10.74%

$183,832

2005

9.90%

$323,884

4.77%

$192,601

2006

25.50%

$406,475

15.64%

$222,724

2007

9.37%

$444,561

5.39%

$234,729

2008

-2.17%

$434,914

-37.02%

$147,832

2009

40.86%

$612,620

26.49%

$186,993

2010

12.45%

$688,892

14.91%

$214,874

2011

9.19%

$752,201

1.97%

$219,107

2012

13.24%

$851,792

15.82%

$253,769

2013

21.62%

$1,035,950

32.18%

$335,432

2014

12.66%

$1,167,101

13.51%

$380,749

2015

2.83%

$1,200,130

1.25%

$385,508

2016

-2.10%

$1,174,927

11.82%

$431,075

2017

26.28%

$1,483,698

21.67%

$524,490

2018

2.21%

$1,516,488

-4.52%

$500,783

2019

3.48%

$1,569,261

13.62%

$568,989

Portfolio's Values at 62 years:

Assumed annual growth for Lisa’s 401K: 7.5%

Assumed annual growth for John’s 401K: 9.5%

Assumed annual growth for the IRAs: 10.5%

Lisa’s 401K

John's 401K

IRA

Total

Starting capital

Contribution

Ending Capital

Starting capital

Contribution

Ending Capital

Starting capital

Contribution

Ending Capital

(401K+IRA)

Growth %

7.50%

9.50%

10.50%

Year 1

100000

$13,520

$121,020

100000

$13,520

$123,020

0

10000

$11,050

$255,090

Year 2

$121,020

$13,520

$143,617

$123,020

$13,520

$148,227

$11,050

10000

$23,260

$315,104

Year 3

$143,617

$13,520

$167,908

$148,227

$13,520

$175,828

$23,260

10000

$36,753

$380,489

Year 4

$167,908

$13,520

$194,021

$175,828

$13,520

$206,052

$36,753

10000

$51,662

$451,735

Year 5

$194,021

$13,520

$222,092

$206,052

$13,520

$239,147

$51,662

10000

$68,136

$529,376

Year 6

$222,092

$13,520

$252,269

$239,147

$13,520

$275,386

$68,136

10000

$86,340

$613,996

Year 7

$252,269

$13,520

$284,710

$275,386

$13,520

$315,068

$86,340

10000

$106,456

$706,233

Year 8

$284,710

$13,520

$319,583

$315,068

$13,520

$358,519

$106,456

10000

$128,684

$806,786

Year 9

$319,583

$13,520

$357,071

$358,519

$13,520

$406,099

$128,684

10000

$153,246

$916,416

Year 10

$357,071

$13,520

$397,372

$406,099

$13,520

$458,198

$153,246

10000

$180,387

$1,035,956

Year 11

$397,372

$13,520

$440,695

$458,198

$13,520

$515,247

$180,387

10000

$210,377

$1,166,319

Year 12

$440,695

$13,520

$487,267

$515,247

$13,520

$577,715

$210,377

10000

$243,517

$1,308,499

Total Savings for both Lisa and John at 62 years of age:

Total Contributions

Growth

Total

Lisa 401K

$262,240

$225,027

$487,267

John 401K

$262,240

$315,475

$577,715

IRAs

$120,000

$123,517

$243517

TOTAL

644,480

$664,019

$1,308,499

Conclusion:

In the above model, John and Lisa exceeded their targets by about 30%. Even if they were to get slightly lower returns, they would still hit their target. Some may question the constant rate of return in the above portfolios. We agree it's almost guaranteed that some years, they would have negative returns but then have high returns in some other years. So, we do expect them to balance out. Please note that John and Lisa are not only diversifying in various stocks, but also in the form of three very different strategies. We particularly feel confident about the long-term performance of the DGI portfolio and the Rotational Portfolio using SPY/VTI/TLT.

There's no doubt about the importance of a high rate of savings. Besides, it's important to save early. Another message is the importance of the growth of investments. Growth is directly proportional to the time these investments have. Out of the final accumulated total $1.3 million, their own contributions were just about 50% at $644,000, besides $664,000 from growth. Savings and investing wisely are the two legs of the three-legged retirement stool, the third being the Social Security.

Disclosure: I am/we are long ABT, ABBV, JNJ, PFE, NVS, NVO, CL, CLX, GIS, UL, NSRGY, PG, KHC, ADM, MO, PM, BUD, KO, PEP, D, DEA, DEO, ENB, MCD, BAC, UPS, WMT, WBA, CVS, LOW, AAPL, IBM, CSCO, MSFT, INTC, T, VZ, VOD, CVX, XOM, VLO, ABB, ITW, MMM, LYB, HCP, HTA, O, OHI, VTR, NNN, STAG, WPC, MAIN, NLY, ARCC, DNP, GOF, PCI, PDI, PFF, RFI, RNP, STK, UTF, EVT, FFC, HQH, KYN, NMZ, NBB, JPS, JPC, JRI, TLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Please always do further research and do your own due diligence before making any investments. Every effort has been made to present the data/information accurately; however, the author does not claim 100% accuracy. Any stock portfolio or strategy presented here is only for demonstration purposes.